Advocate of CJEU on sub-participation in VAT
The Advocate General of the CJEU has delivered an opinion in Case C-250/21 regarding services provided by investment funds under a sub-participation agreement for VAT purposes, stating that they are not exempt from VAT. This surprising opinion will be relevant to all financial institutions that use or provide financing in this form.
In the jurisprudence hitherto, administrative courts in the majority of cases have assumed that sub-participation services provided by investment funds should be covered by the VAT exemption, pursuant to Article 43 (1)(38) or (39) of the VAT Act. In their opinion, sub-participation usually has a guarantee function, as well as a credit function. However, the lack of a uniform line of jurisprudence prompted the NSA to make a preliminary reference to the European Court of Justice.
In the opinion of the Advocate General of the CJEU, although the service of loan financing may fall within the scope of the granting of credit and benefit from the exemption provided for in Article 135(1)(b) of the VAT Directive, the services provided by the fund consisting in assuming the risk in the event of default of the principal debtor cannot be covered by the exemption. The transaction at issue in this case differs from a credit agreement in the following respects:
- The tripartite nature of the transaction is characterized by the fund’s lack of a claim against the underlying debtor because the sub-participant has no right to pursue the outstanding loan;
- In a classic credit agreement, it is common for the debtor to provide guarantees and collateral;
- in general, banks’ lending or borrowing decisions are usually based on the amount of collateral available. With the sub-participation analyzed, however, there are no guarantees to mitigate the risk of loss on the part of the fund in the event of default by the debtor.
The argumentation of the Advocate General raises significant doubts because the sub-participation transaction in the economic sense is aimed exclusively at providing financing, unlike factoring, which is not exempt from VAT. It seems that the CJEU in its previous rulings attached more importance to the economic sense of the financial transactions than to the legal differences between the agreements Therefore, the Advocate’s opinion comes as somewhat of a surprise.
Moreover, in her opinion issued in May, the Advocate General of the CJEU pointed out that it is the element of the agreement involving the transfer of the risk of default by the original debtor that makes it impossible to use the VAT exemption for the above sub-participation agreements. Therefore the conclusion of the opinion of the Advocate General of the CJEU comes down to the fact that sub-participation agreements do not constitute financial transactions consisting in granting credit, which are at the same time transactions exempt from VAT.
It is worth emphasizing, however, that the Advocate’s opinion is not binding for the CJEU. Nevertheless, most often the CJEU does in fact agree with the Advocate’s opinion, and this is likely to be the case here as well.
The argumentation of the Advocate General is interesting, but it raises important questions. In economic terms, a sub-participation transaction is aimed solely at providing financing, unlike factoring, which is not exempt from VAT (which may also include risk assumption or receivables management). It seems that the CJEU in its previous rulings has attached more importance to the economic sense of financial transactions than to the legal differences between individual agreements. Therefore, the Advocate’s opinion is somewhat surprising.
What if the CJEU upheld this approach? It would certainly be good news for those taxpayers who have deducted VAT from invoices for financing in this form. And bad news for those who provide this financing using an exemption. For both groups, therefore, the final decision of the CJEU will be very important.