On 3 July 2019, the European Court of Justice gave its judgment in Case C-242/18 (UniCredit Leasing). The case deals with the VAT exemption for financial services.
Article in the EU VAT Directive
Article 90 of the VAT Directive
Article 90 (Taxable amount)
1. In the case of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States.
2. In the case of total or partial non-payment, Member States may derogate from paragraph 1.
Facts
‘BA Kreditanstalt Bulus’ EOOD (hereinafter ‘Bulus’ or ‘the lessor’), whose rights came from Unicredit, entered into a lease-purchase agreement with ‘Vizatel’ OOD (hereinafter ‘the lessee’) under which the lessor undertook to purchase land designated by the lessee, to construct a building on the land and to make it available to the lessee.
This contract was concluded for a period of eleven years beginning at the beginning of the month following the physical delivery of the object of the contract, in return for a monthly rent. It stipulated that the lessor could terminate the contract early in the event of non-payment of at least three rents by the lessee and demand the payment of compensation equal to the sum of all rents not paid for the entire duration of the lease.
Bulus issued VAT invoice for the lease. However, the lessee ceased to pay these invoices, and therefore Bulus unilaterally terminated the lease agreement because of improper performance of its obligations by the lessee.
Bulus applied to the Bulgarian tax office for reimbursement of the VAT calculated on its invoices to the lessee. The Bulgarian tax authorities denied this request.
Questions
The Bulgarian Supreme Administrative Court decided to refer the following questions to the Court of Justice for a preliminary ruling:
‘(1) Does the VAT Directive allow, in the event of the termination of a financial lease, a reduction in the taxable amount and a refund of VAT calculated in a corrective notice which came into force using the sum of the monthly rents for the full duration of the contract as the tax base?
(2) If the answer to the first question is in the affirmative, in the event of the termination of a financial lease because of partial non-payment of the rent due, which of the following is the case referred to in the VAT Directive can the lessor invoke against a Member State in order to obtain a reduction in the taxable amount of VAT of the amount of rents due but not paid for the period from the cessation of payments the termination of the contract, since this termination has no retroactive effect, this being confirmed by a clause of the contract?
(3) Does it follow from the interpretation of Article 90 (2) of the VAT Directive that a situation such as that in this case does indeed derogate from paragraph 1 of that Article?
(4) Does the interpretation of Article 90 (1) of the VAT Directive mean that the term ‘termination’ used in that provision includes situations in which, in the context of a contract lease without option, the lessor can no longer claim the rent payment from the lessee because he has terminated the said contract for culpable non-performance by the lessee, but, in accordance with the contract, he is entitled to compensation corresponding to the sum of all unpaid rents that will become payable by the end of the lease term?’
AG Opinion
None
Decision
1) Article 90 (1) of Council Directive 2006/112 / EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that it allows, in the event of termination of a leasing contract, a reduction in the tax base for value added tax calculated on a flat-rate basis by a corrective notice on all the rents due over the entire duration of the contract, even though this corrected opinion would have entered into force and thus constitute a “stable administrative act” establishing a tax debt under national law.
2) Article 90 of Directive 2006/112 must be interpreted as meaning that, in a situation such as that at issue in the main proceedings, the failure to pay part of the rents due from a credit agreement lease for the period from the end of payments to the non-retroactive termination of the contract, on the one hand, and the absence of payment of compensation due in the event of early termination of the contract and corresponding to the sum of all rents not paid until the end of this contract, on the other hand, constitute a case of non -payment likely to fall under the exemption from the obligation to reduce the tax base for value added tax, provided for in paragraph 2 of this article, except where the taxable person indicates a reasonable probability that the debt is not honored, which is for the referring court to verify.
Summary
Unicredit Leasing agreed to buy land and develop a building in Bulgaria for Vizatel. On completion, Vizatel would pay rent of €110,000 over an 11-year period, followed by an option payment to buy the property. VAT was accounted for in full upfront at the start of the lease.
After a few years, Vizatel defaulted on the rent payments, and eventually Unicredit exercised its right to terminate the lease. Upon termination of the lease, Unicredit became entitled to the net present value of the remaining rental payments as compensation.
The court, applying its recent MEO (C-295/17) judgement, ruled that the receipt of compensation would be consideration for Unicredit’s supply. Therefore, Unicredit was not entitled to adjust the VAT originally accounted for on the supply, but rather had to apply for bad debt relief should Vizatel be unable pay the compensation.
While Bulgaria had not formally implemented a bad debt relief scheme, the court considered that some form of relief should be permitted where no payment had been made for almost 10 years and it was highly improbable that Unicredit would actually receive additional amounts.
Source:
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