Finanzamt Essen-NordOst v GFKL Financial Services AG. Judgment of 27 October 2011 in Case C-93/10. BDO VAT Centre of Excellence

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1 Finanzamt Essen-NordOst v GFKL Financial Services AG Judgment of 27 October 2011 in Case C-93/10 BDO VAT Centre of Excellence

2 Particulars Reference for a preliminary ruling from the Bundesfinanzhof (Germany) lodged on 17 February Opinion of AG Jaaskinen on 14 July Subject: Articles 2(1) and 4: supply of services effected for consideration and economic activity Sale of defaulted debts in case the remuneration is lower than the face value of those debts. Background GFKL concluded a purchase agreement with the Bank, pursuant to which it acquired mortgages on immovable property and debts arising from terminated and matured loan agreements with a face value of , in exchange for a purchase price of The objects sold were recorded or held for and at the risk of GFKL after the cut-off date set in the purchase agreement, GFKL was to be entitled to payments attributable to the objects sold made after the cut-off date. Under the purchase agreement, the bank selling the debt was explicitly excluded from liability for the recoverability of the debts and the economic value of the collateral securities. GFKL was of the view that an acquirer of the debts does not supply a service to the seller which is liable to VAT. The Bundesministerium der Finanzen intended to implement the judgment in MKG. Question referred Q1: Does the sale (purchase) of defaulted debts constitute, on account of the assumption of responsibility for debt recovery and the risk of loss, a service for consideration and an economic activity on the part of the purchaser of the debts even if the purchase price: is not based on the face value of the debts, with a flat-rate reduction agreed for the assumption of responsibility for debt recovery and the risk of loss, but is set by reference to the risk of loss estimated for the debt concerned, with only secondary importance attached to the recovery of the debt compared to the reduction for the risk of loss? Q2: If the answer to question 1 is in the affirmative for the interpretation of article 13B(d)(2) and (3) of the Sixth VAT Directive; Is the assumption of the risk of loss by the purchaser of defaulted debts at a purchase price significantly lower than their face value exempt from tax, as being the provision of a different security or guarantee? 2

3 If the assumption of the risk is exempt from tax, is the recovery of the debts exempt from tax, as part of a single service or as an ancillary service, or taxable as a separate service? Q3: If the answer to Question 1 is in the affirmative and no exempt service has been supplied, for the interpretation of article 11A[1](a) of the Sixth VAT Directive, is the consideration for the taxable service determined by the recovery costs presumed by the parties or by the actual recovery costs? Judgment ECJ Within the framework of the VAT system, taxable transactions presuppose the existence of a transaction between the parties in which a price or consideration is stipulated. Thus, where a person s activity consists exclusively in providing services for no direct consideration, there is no basis of assessment and the services are therefore not subject to VAT. In its judgment in MKG, the Court held that a factor s guarantee to a client of payment of the debts by assuming the risk of the debtors default must be considered to be the exploitation of the property. This exploitation in question regards obtaining income on a continuing basis, within the meaning of Article 4(2) of the Sixth VAT Directive,. However, it is to be observed that, in the context of the assignment of debts that was at issue in the case giving rise to that judgment, the assignee of the debts actually undertook to provide factoring services to the assignor, in return for which it received payment, namely a factoring commission and a delcredere fee. As regards the main proceedings, it must be noted that, in contrast to the facts of the dispute that gave rise to the judgment in MKG, the assignee of the debts received no consideration from the assignor, and therefore it is considered not to carry out an economic activity within the meaning of Article 4 of the Sixth VAT Directive or effect a supply of services within the meaning of Article 2(1) of that directive. In the underlying situation the difference between the face value of the assigned debts and the purchase price of those debts therefore constituted not the consideration for such a service, but a mere reflection of the actual economic value of the debts at the time of their assignment, which resulted from the fact that they were doubtful, considering the increased risk of default of the debtors. On those grounds, the Court hereby rules Articles 2(1) and 4 of Sixth VAT Directive must be interpreted as meaning that an operator who, at his own risk, purchases defaulted debts at a price below their face value does not effect a supply of services for consideration within the meaning of Article 2(1) and does not carry out an economic activity falling within the scope of that directive when the 3

4 difference between the face value of those debts and their purchase price reflects the actual economic value of the debts at the time of their assignment. Related judgements Note judgment of 26 June 2003 in Case C-305/01( MKG-Kraftfahrzeuge-Factoring) As opposed to AG Jaaskinen, the ECJ gave a pretty straight forward ruling in the underlying case. GFKL doesn t receive a remuneration and therefore no service is supplied or economic activity is been carried out by GFKL. The fact that the bad debts are sold/bought for a price (far) below the nominal value of the debts derives from economic circumstances such as the possibility of recovery and the time it would take to collect the debts. The price paid by GFKL therefore constitutes the actual value of the debts. GFKL did not receive a discount of some sort. Furthermore the difference between the price paid by GFKL and the nominal value does not constitute a remuneration for a service. The outcome of the GFKL case is completely different from the MKG case. In our opinion this can only be explained by differences in the nature of the underlying transactions. Based on the facts of both cases it is clear that the nature of the transaction in the GFKL case is the transfer of bad debts. In the MKG case however, the bad debts were transferred for the sole purpose of collecting these debts. For the collection of the debts and the transfer of the risk of non-payment a fee was agreed upon. As pointed out by the ECJ GFKL doesn t carry out an economic activity. GFKL therefore in principle doesn t have the right to deduct input VAT that it incurred whilst collecting these debts which will lead to additional costs, nor will it be considered to be taxable person for VAT purposes in view of the localization of services it acquires (if this would be its only activity). This additional VAT burden could be avoided if the buyer of the debts agrees to supply factoring services for consideration. Even in the situation in which debts are bought (far) below the nominal value, such services for consideration still can take place. Furthermore, in order to avoid these additional costs these debts could also be sold to or purchased by non-european entities which will collect these debts. The sale of the debts to a non-european entity could have a positive effect on the pro rata of the seller. However, the non-european entity could be confronted with several VAT consequences depending on the way in in which it chooses to collect the debts. Especially article 59 bis, sub b of Council Directive 2006/112/EC should be taken into account. 4

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