Flashback on ECJ Cases C-425/06 (Part Service) – Composite Supplies – Abuse of rights in case leasing contracts are split

On Feb 21, 2008, the ECJ issued its decision in the case C-425/06 (Part Service). The case dealt with teh issues of Composite Supplies and more specifically on the Abuse of rights in case leasing contracts are split.

Article in the EU VAT Directive

Article 11A(1) and 13B of the Sixth Directive

Article 11A(1) – Taxable amount

‘The taxable amount shall be:

(a) in respect of supplies of goods and services other than those referred to in (b), (c) and (d) below, everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies;

…’

Article 13B – Exemption

‘Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse:

(a) insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents;

…

(d) the following transactions:

1. the granting and the negotiation of credit and the management of credit by the person granting it;

2. the negotiation of or any dealings in credit guarantees or any other security for money and the management of credit guarantees by the person who is granting the credit;

3. transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection and factoring;

…’

Facts

Throughout 1987 Italservice and the leasing company IFIM Leasing Sas (‘IFIM’), both belonging to the same financial group, were involved together in leasing arrangement transactions in connection, for the most part, with motor vehicles.
Those transactions were carried out under the following terms:
IFIM concluded a contract with a customer for the use of a motor vehicle with an option to purchase, in consideration of lease payments, the setting up of a surety corresponding to the costs of the vehicle not covered by the lease payments and the provision of an unlimited security.
Italservice concluded a contract with the customer under which it insured the vehicle against all risks except civil liability and guaranteed – by financing the surety and providing the unlimited security – the fulfilment of the obligations, in favour of IFIM, undertaken by that customer. In consideration thereof the customer paid, in advance, to Italservice an amount which reduced the total of the lease payments agreed between the customer and IFIM, reducing that total, in the majority of cases, to an amount barely above the cost of the vehicle, as well as a commission of 1% paid to a consultant.
The customer instructed Italservice to pay the amount financed to IFIM, on his behalf, by way of the surety provided for in the contract for use of the vehicle.
Italservice entrusted the performance of the contract with the customer to IFIM.
IFIM, as an intermediary, received additional remuneration from Italservice, and, in the event of default by the customer, an amount equivalent to that promised by Italservice to the customer, by way of refund, in the event of the customer fulfilling his obligations to make the lease payments.
Pursuant to Article 3 of DPR No 633/72, IFIM levied VAT on the customer’s lease payments.
By contrast, on the basis of Article 10 of DPR No 633/72, the consideration paid by the customer to Italservice and by Italservice to IFIM was invoiced without VAT.
Following investigations carried out into Italservice the tax office held that, although the different agreements signed by the interested parties were contained in separate contracts, they together constituted a single contract concluded between three parties. According to that office, the consideration paid by the customer for the leasing arrangement had been artificially divided to reduce the taxable amount, as the role of lessor was split between Italservice and IFIM.

Questions

Does the concept of abuse of rights, defined in the judgment of the Court of Justice in Case C-255/02 as transactions, the essential aim of which is to obtain a tax advantage, correspond to the definition transactions carried out for no commercial reasons other than a tax advantage, or is it broader or more restrictive than that definition?

For the purposes of VAT, may there be considered to be an abuse of rights (or of legal forms), with the consequent loss of Community own revenue accruing from value added tax, where contracts for leasing arrangements (locazione finanziaria), financing, insurance and intermediation contracts are concluded separately with the effect that only the consideration paid in respect of the grant of the right to use the goods is subject to VAT, whereas a single contract of leasing in accordance with the practice and interpretation of national case-law would include the financing and would therefore make the whole of the consideration subject to VAT?

AG Opinion

None

Decision

1. The Sixth Council Directive 77/338/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common System of value added tax: uniform basis of assessment, must be interpreted as meaning that there can be a finding of an abusive practice when the accrual of a tax advantage constitutes the principal aim of the transaction or transactions at issue.

2. It is for the national court to determine, in light of the ruling on the interpretation of Community law provided by the present judgment, whether, for the purposes of the application of VAT, transactions such as those at issue in the dispute in the main proceedings can be considered to constitute an abusive practice under the Sixth Directive.

Source