VAT, securitisations and management of credit

The EU General Court has held 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 disposed of the loans to a securitisation vehicle but continues to manage the loans: Veronsaajien oikeudenvalvontayksikko v A oy (Case T-184/25). The Court has held that, based on a purposive approach to the exemption, the exemption was confined to management by the current lender only.

The judgment is expected to have a significant impact on securitisation transactions in situations where the originator of the loans sells and transfers such loans to the issuer, and following the sale and transfer of these loans continues to service them in consideration for a servicing fee to be paid by the issuer to the originator. 

In particular, jurisdictions where the VAT exemption for credit management services is currently interpreted such that it applies to credit management services provided by the originator of the loans, such as the Netherlands, are expected to be affected, because typically the issuer is not entitled to recovery of VAT on costs incurred by it in view of its VAT exempt activities.   

Background

This Finnish case essentially concerns VAT on the securitisation of loans. A was part of a banking group which granted housing loans. It then entered into arrangements to transfer those loans to an SPV, B, a subsidiary of A but not part of the same VAT group. All the rights and obligations relating to the loans were transferred with the loans to B from the date of the transfer, requiring no action on the part of the borrowers. B was financed to a large extent by means of bonds and loans and guarantees granted to it by A. The transaction enabled the banking group to refinance its activities. However, since the SPV B only exists to refinance the loans, the management of the loans remained with A and it received payments from B in connection with that debt 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 referred to the CJEU.

General Court decision

Looking at the various language texts, the EU General Court noted that some texts used the present tense (current grantor) and some used the past tense (original grantor). Therefore, it was necessary to consider not only its wording but also the context in which it occurs and the objectives pursued by the rules.

As regards the context and objectives relating to the condition 'by the person granting it', the Court noted that the terms used to specify the exemptions covered by Article 135(1) of the VAT Directive are to be interpreted strictly provided that that interpretation does not deprive those exemptions of their intended effect, is consistent with the objectives pursued by those exemptions and complies with the requirements of the principle of fiscal neutrality.

In addition, the Court pointed out the obvious linkage between, 'the granting and the negotiation of credit' and, 'the management of credit by the person granting it'. That linkage indicates that the exemption provided for by that provision concerns the management of credit linked to the granting of that credit. The Court agreed with the AG that that linkage seeks to ensure that all the services provided in the context of the credit relationship are exempt from VAT.

That context and the restriction of the scope of that exemption to services carried out 'by the person granting it' indicate that it involves the relationship between the grantor of credit and the borrower and that that relationship does not cover services provided outside of that relationship. According to the Court, the strict interpretation of the derogation provided for in Article 135(1)(b) precludes the application of that exemption to any situation where that link has ceased to exist.

In this case, since the original lender transferred its loans to a third-party transferee, the management of those loans no longer forms part of the original legal relationship which gave rise to the right to benefit from the exemption, even though that management is substantively carried out by the original lender itself. The Court also agreed with the AG that, by restricting the personal scope of the exemption relating to the management of credit, the EU legislature did not intend to favour the outsourcing of that management to a third party. It follows that that exemption must be understood as covering the management of credit carried out in the context of the credit relationship between the original lender and the borrower.

That interpretation is also confirmed, according to the Court, by the objectives pursued by Article 135(1)(d). The purpose of the exemption for financial transactions consists in alleviating the difficulties connected with determining the tax base and the amount of VAT deductible and in avoiding an increase in the cost of consumer credit Those objectives do not require that the exemption provided for by that provision applies to the management of credit where that management is carried out by the person who granted the credit but subsequently transferred that credit to another person. Indeed, "there should be no difference in treatment for VAT purposes between services for the management of credit sold to a credit transferee according to whether the supplier of those services is the transferor who originally granted the credit or another person".

Credit guarantees and debts

The Court also considered the possible relevance of Article 135(1)(c) ("dealings in credit guarantees") and Article 135(1)(d) ("transactions concerning debts") in this context.

On the exemption for dealings in credit guarantees or other security for money, the Court has held that services consisting in management of credit cannot be classified as any dealings in credit guarantees or any other security for money within the meaning of Article 135(1)(c). Moreover, as noted by the AG, 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 Court noted that to fall within Article 135(1)(d) it was necessary that the relevant activities have the effect of transferring funds and bringing about changes in the legal and financial situation. There was nothing to indicate in this case that the debt management services consist in a transfer of the ownership of funds or have the effect of fulfilling the specific and essential functions of such a transfer, with the result that such services do not constitute a transaction concerning debts in Article 135(1)(d). In any event, the Court pointed out again that in order to prevent the restriction of the scope of the VAT exemption for the management of credit from being rendered redundant, Article 135(1)(d) cannot be regarded as applying to the management of credit.

Comment

The decision in this case will is extremely 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 AG in this case 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."

This was not something mentioned by the simply Court in its judgment, but 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. 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).