VAT, securitisations and management of credit

The AG has opined that the management of credit by the original lender of credit does not fall within the exemption for the “management of credit by the person granting it” where that original lender has sold the credit to a securitisation vehicle but continues to manage the credit: Veronsaajien oikeudenvalvontayksikko v A oy (Case T-184/25). The AG considered that, based on the fundamental principles of the VAT system, the exemption was confined to management by the current lender only.

In addition, the AG has also called into question whether the sale of debts to the securitisation vehicle in this scenario should be regarded as an exempt transaction within Article 135(1)(d).

Background

This Finnish case essentially concerns VAT on the securitisation of housing loans. A was part of a banking group which granting housing loans. It then entered into arrangements to transfer those loans to an SPV, B, under which B issued bonds secured on the loans in order to buy the housing loans from A. The transaction enabled the banking group to refinance its activities. However, since the SPV only exists to refinance the loans, the management of the loans remains with A and it receives payments from B in connection with that management activity.

A sought a ruling from the Finnish tax authorities that the fees it received from B for the management of the credit were exempt from VAT on the basis that they fell within Article 135(1)(b) as the “management of credit by the person granting it”. A dispute arose as to the correct ruling in this case and the matter has now been referred to the CJEU.

AG opinion

Firstly, the AG considered whether the exemption for the management of credit by the person granting it applied in the circumstances of this case. According to the AG, there were two possible interpretations: either the exemption applied to the original grantor of the credit; or it applied to the current grantor of the credit.

Looking at the various language texts, the AG noted that some texts used the present tense (current grantor) and some used the past tense (original grantor). In addition, the AG could find no basis for distinguishing between these two interpretations based on the purpose of the provision. The context and history of the provision provided no basis for determining the question.

Accordingly, the AG considers that, since it is not possible to determine the position based on the purpose of the provision, it is necessary to have regard to the fundamental principles of the VAT system. Inferring the correct interpretation from those fundamental principles lead the AG to the conclusion that the management of credit should not be exempt from VAT unless it is a service ancillary to the granting of credit provided by the current lender. The provision is intended to ensure that all services provided in the context of a credit relationship are exempt from VAT, while excluding the possibility of outsourcing credit management to a third party free of VAT.

Accordingly, the AG has opined that credit management provided by the originator of the loans at a time after it has sold those loans does not qualify for VAT exemption.

Credit guarantees and debts

The AG also considered the possible relevance of Article 135(1)(c) (“dealings in credit guarantees”) and Article 135(1)(d) (“transactions concerning debts”).

On the exemption for dealings in credit guarantees or other security for money, the AG has opined that it is clear from the context of that provision that it does not apply to the management of credit. Management of credit is specifically dealt with in Article 135(1)(b) and that exemption would be devoid of practical effect if the management of credit also fell within the scope of other exemptions allowing for the circumvention of the restriction of the personal scope of the exemption.

In relation to the exemption for transactions concerning debts, the AG considered whether, in principle, the debt management services might be seen as ancillary to an exempt sale of the debts originated by A. However, in the first place, the AG again suggested that such an analysis would circumvent the clear objective of the restriction in Article 135(1)(b). In addition, the AG suggested that it seems unlikely that the management of credit in such a situation would constitute a service ancillary to the sale bearing in mind the CJEU case law on single and multiple supplies.

However, perhaps more concerningly, the AG also questioned whether the sale of the debts to the securitisation vehicle would be correctly viewed as an exempt transaction. Referring to the earlier decision of the CJEU in Swiss Re Germany Holding (Case C-242/08), the AG said:

“In the present case, the sale of credit involves the transfer of all the rights and obligations of the credit agreements and not simply the loans. In a similar situation, the Court has already held that the sale of reinsurance contracts does not fall within the scope of the exemptions for financial services. It found, inter alia, that the transfer of a portfolio of reinsurance contracts could not be exempted as a combination of dealing, within the meaning of the provision now Article 135(1)(c) of the VAT Directive, and a transaction concerning debts, within the meaning of the provision now Article 135(1)(d) of the VAT Directive. Thus, by analogy, I have doubts as to whether the sale of credit may be exempt from VAT on the basis of Article 135(1)(d) of the VAT Directive.”

Comment

The decision in the CJEU in this case will be important in the context of the VAT treatment of securitisation vehicles in particular, and perhaps more widely. Different jurisdictions currently take different approaches to the scenario where the originator continues to manage the debts following sale to the SPV. In the UK, HMRC currently accept that the management of credit by the original creditor would fall within the scope of the exemption in a typical securitisation involving an assignment of receivables. However, in circumstances where legal title to the debts has been transferred to a third party, HMRC consider that it is the management by that third party that qualifies as exempt (VATFIN3240).

The suggestion by the AG that a straightforward sale of a portfolio of debts by the originator to an SPV would not be an exempt sale of debts within Article 135(1)(d) is particularly surprising, but, since that is not a matter directly referred to the Court, it is unlikely that the CJEU will pick up and comment on that observation.

Again, in the UK, HMRC treat the sale of debt to an SPV as an exempt transaction for VAT purposes. However, HMRC guidance currently distinguishes between a sale and an assignment of receivables, taking the view that the assignment of receivables to the SPV under such arrangements does not amount to a supply at all (VATFIN3215).