VAT: management of credits by the financial institution that granted them
The General Court of the European Union has been asked by a Finnish court to give preliminary rulings on unprecedented issues concerning the treatment, for VAT purposes, of services provided by a financial institution in a situation – common in this sector – where the lending institution (A), which granted a loan, sells the contracts to another institution (B), on whose behalf the transferor (A) continues to manage the loans for consideration. In the case at hand, the transfer covered all the rights and obligations relating to the loans at stake.
Basically, in the situation in dispute, institution A continues, following the transfer of the contracts to B, to manage the loans it had initially granted.
The Court ruled that such services, although carried out by the bank which had initially granted the credit to the borrower, do not fall within the scope of the VAT exemption covering ‘the granting and the negotiation of credit and the management of credit by the person granting it’ (Directive 2006/112/EU, Article 135(1)(b)).
The Court notes that the wording of the condition ‘by the person who granted them’ does not provide a clear answer to the question of who are the persons who must benefit from the exemption relating to the management of credit in a situation where the taxable person providing that service is the one who originally granted the credit. However, in its view, it follows from the context and the objectives pursued by this exemption that it is intended to ensure that all services provided in the context of the credit relationship are exempt, to the exclusion of services provided outside that relationship.
Therefore, the Court concludes that the exemption must be understood as covering the management of credit carried out in the sole context of the credit relationship between the original lender and the borrower.
When also asked about the possibility that the credit management services in question might be exempted on the basis of one of the other exemption provisions covering certain banking or financial transactions, the Court held that those services cannot be exempted on the basis of either any dealings in credit guarantees or any other security for money, or transactions concerning debts referred to in points (c) and (d) of Article 135(1) of the Directive.
The implications of this judgment warrant careful consideration.
