On October 12, 2017, the ECJ issued its decision in the case C-404/16 (Lombard Ingatlan Lízing). This case covers a financial leasing with definite transfer of ownership where the lessor may no longer claim payment of the leasing instalments because the lessor has terminated the agreement due to breach of contract by the lessee. The Court states that such a situation is covered by the concepts of ‘cancellation’ and ‘refusal’ (article 90(1) of Directive 2006/112/EC). As a consequence, the lessor may obtain a reduction of the VAT taxable basis, even if the applicable national law does not allow the taxable amount to be reduced in the case of non-payment (article 90(2) of Directive 2006/112/EC).
Context: Reference for a preliminary ruling — VAT — Directive 2006/112/EC — Article 90(1) — Direct effect — Taxable amount — Reduction in the case of cancellation or refusal — Reduction in the case of total or partial non-payment — Distinction — Financial leasing agreement terminated for non-payment of public charges
Article in the EU VAT Directive
Article 90 of the EU VAT Directive 2006/112/EU
Article 90
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
- Lombard, a Hungarian company providing financing services, concluded three financial leasing agreements with definite transfer of ownership concerning various immovable assets. At the time when possession was taken of the assets concerned, in April 2006, February 2007 and May 2008 respectively, the company invoiced the lessees for the full amounts of the leasing instalments, including VAT, and, at that point in time, its VAT liability arose.
- In November 2007, December 2008 and November 2009, Lombard terminated the financial leasing agreements in question as a consequence of partial non-payment of the amounts payable and recovered the assets concerned. Consequently, in 2010 and 2011, Lombard issued corrected invoices in which it reduced the taxable amount as against the initial invoices and deducted the resulting shortfall from the VAT payable in February, March and May 2011.
- In the context of a verification of VAT returns for the period from January to July 2011, the first-level tax authority found a tax shortfall payable by Lombard, imposed a penalty and calculated default interest.
- Lombard brought the matter before the Appeals Directorate, which upheld the decision, holding that, in accordance with Paragraph 77 of Law No CXXVII of 2007 on Value Added Tax, in its version applicable to the dispute in the main proceedings, it was possible to reduce the taxable amount only by means of the self-correction mechanism. According to the Appeals Directorate, that requirement complied with Article 90(1) of the VAT Directive since that provision confers on Member States the possibility of determining the conditions in which the taxable amount may be reduced. In any event, the termination of an agreement for non-payment or late payment may be considered to be a case of non-payment within the meaning of Article 90(2) of the VAT Directive, which allows Member States to exclude the reduction of the taxable amount in that situation.
- In its action against the decision of the Appeals Directorate, Lombard submits that, in the case of refusal of an agreement for the supply of goods, Article 90(1) of the VAT Directive does not allow Member States to deny the right to reduce the taxable amount. In fact, for the purposes of the application of that provision, which, in addition, has direct effect according to Lombard, the ground for refusal of the agreements in question, namely, in the present case, non-payment of consideration, is irrelevant.
- The referring court notes in that respect that Lombard concluded financial leasing agreements with definite transfer of ownership that provided that, upon expiry, the lessees would acquire ownership of the assets in question. Therefore, those transactions fell within the meaning of ‘supply of goods’ for the purposes of VAT, which became payable at the date on which the lessees took possession of the assets in question.
- Moreover, the referring court explains that if the lessee cannot or will not continue paying the leasing instalments, the transaction will fail. In such a situation involving continuing contracts, it is not possible to reconstruct the situation that existed before the transaction was concluded because the right of possession of the leased asset has been transferred and cannot be transferred back, but the parties may agree that, in such a case, they will regard the agreement as having had effects until the transaction failed. As to the financial lease agreements at issue in the main proceedings, the lessees took possession of the leased assets but, because that agreement was terminated, the property right under civil law was not transferred.
- In that regard, the referring court takes the view that it follows from the judgment of 15 May 2014, Almos Agrárkülkereskedelmi (C‑337/13, EU:C:2014:328, paragraph 28), that Article 90 of the VAT Directive does not preclude a national provision which, in accordance with the derogation set out in Article 90(2) thereof, excludes the reduction of the taxable amount for VAT in the event of non-payment of the price.
- That said, the referring court wonders whether the concept of ‘refusal’ in Article 90(1) of the VAT Directive includes a situation in which the lessor may no longer claim payment of the leasing instalment because the financial leasing agreement has been terminated owing to breach of contract by the lessee. It asks whether, where appropriate, the derogation set out in Article 90(2) of the directive may nevertheless apply.
- In addition, the referring court is of the opinion that the national rules governing the implementation of the right to reduce the taxable amount are contrary to the principle of fiscal neutrality. Indeed, the referring court argues that those rules provide for a limitation period that does not take account of the fact that the termination of a long-term financial leasing agreement may occur after expiry of that period. In such a situation, the part of the tax that has already been invoiced, declared and paid, and that the lessee has not reimbursed, constitutes a real cost for the lessor, which is inconsistent with the very principle of fiscal neutrality.
Questions
Is the concept of refusal in Article 90(1) of Directive 2006/112/EC 1 of 28 November 2006 on the common system of value added tax (‘the VAT Directive’) to be interpreted as including a situation in which, under a closed-end financial leasing agreement, the lessor under the lease (‘the lessor’) may no longer claim payment of the leasing instalment from the lessee under the lease (‘the lessee’) because the lessor has terminated the agreement owing to breach of contract by the lessee?
If the answer is in the affirmative, may the lessor, in accordance with Article 90(1) of the VAT Directive, reduce the taxable amount, even if the national legislature, availing itself of the option provided in Article 90(2) of the VAT Directive, has not allowed reduction of the taxable amount in the event of total or partial non-payment?
AG Opinion
None
Decision
1. The concepts of ‘cancellation’ and ‘refusal’ in 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 including a situation in which, under a financial leasing agreement with definite transfer of ownership, the lessor may no longer claim payment of the leasing instalment from the lessee because the lessor has terminated the agreement owing to breach of contract by the lessee.
2. Where a financial leasing agreement has been definitively terminated because of non-payment of the lease instalments payable by the lessee, the lessor may rely on Article 90(1) of Directive 2006/112 against a Member State with a view to obtaining a reduction of the taxable amount for value added tax, even if the applicable national law considers that situation to be a case of ‘non-payment’ within the meaning of Article 90(2) of the directive and does not allow the taxable amount to be reduced in the case of non-payment.
Summary
In this case request was made to the Court in proceedings between a Hungarian company called ‘Lombard’ and the ‘Appeals Directorate’ concerning the latter’s refusal to allow the correction of invoices which Lombard had made with a view to obtaining a reduction of the taxable amount for VAT following the termination of several financial leasing agreements owing to breaches of contract by the lessees.
In this case the ECJ ruled that the concepts of ‘cancellation’ and ‘refusal’, which under the Directive confer a right to a reduction in the taxable amount, must be interpreted as including a situation in which, under a financial leasing agreement with a definitive transfer of ownership, the lessor may no longer claim payment of the leasing instalment from the lessee because the lessor has terminated the agreement owing to breach of contract by the lessee. The Court justified this ruling by reference to the definitive nature of the reduction in consideration due to the lessor in this case and pointed out that Member States may only derogate from the provisions of the Directive in cases of total or partial non-payment which are characterised by inherent uncertainty stemming from the difficultly in establishing the non-payment or that it may only be temporary non-payment.
Source
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