Flashback on ECJ cases C-305/01 (MKG-Kraftfahrzeuge-Factoring) – Factoring qualifies as a service subject to VAT

On June 26, 2003, the ECJ issued its decision in the case C-305/01 (MKG-Kraftfahrzeuge-Factoring).

Context: Value added tax – Sixth Directive 77/388/EEC – Field of application – Factoring – Factoring company purchasing debts and assuming the risk of the debtors’ default.

Article in the EU VAT Directive

Articles 2, 4, 13B(d)(3), 17 of the Sixth VAT Directive (Articles 2, 9, 135(1)(d), 167, 168)

Article 135 (Exemption other activities)
1. Member States shall exempt the following transactions:
(d) transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection;

Facts

It is apparent from the papers in the case before the Bundesfinanzhof that MKG-GmbH, which brought the action giving rise to the main proceedings and is now the respondent to the appeal on a point of law before the Bundesfinanzhof, is the successor in title of MKG-Kraftfahrzeuge-Factoring GmbH and Co. KG (”Factoring KG”). The latter, together with MMC-Auto Deutschland GmbH (M-GmbH), formed part of the Trapp-Dries/Mitsubishi group. Over a period of time including 1991, the year in which the transactions at issue occurred, M-GmbH imported Mitsubishi vehicles and distributed them on the German market through its own dealer network. Factoring KG took on the factoring and financing operations for M-GmbH.
By a factoring contract of 27 June 1991, Factoring KG agreed with M-GmbH to purchase, within a framework laid down by it in advance in each case, the debts owed to M-GmbH by dealers arising from vehicle deliveries. So far as concerns the debts acquired by it in that way, Factoring KG assumed the risk of default without a right of recourse against M-GmbH. The del credere took effect if a dealer failed to pay the relevant invoice 150 days after it was due.
Factoring KG also agreed under the contract to recover the remainder of M-GmbH’s debts, but with a right of recourse against it, and to manage the debtor accounts and provide M-GmbH with documents allowing it to ascertain the position with regard to its business relations with each debtor.
Factoring KG had to pay to M-GmbH the face value of the debts purchased by it in each calendar week, less agreed charges, on the third working day of the following week. The agreed charges comprised factoring commission of 2% and a del credere fee of 1% of the face value of the debts.
M-GmbH agreed to pay, in addition to those charges, interest calculated on the basis of the daily outstanding debit balance of the dealers with Factoring KG. The interest rate was to be 1.8% above the average interest rate payable by Factoring KG in respect of refinancing.
Factoring KG took the view that it also made taxable supplies to M-GmbH where it engaged in true factoring, entailing assumption of the risk of loss in relation to the debts acquired, and it issued invoices for those supplies together with the corresponding charges and interest. In its value-added-tax declaration for 1991, it accordingly deducted the sum of DEM 1 028 100 in respect of input transactions which related to those supplies.
After carrying out a fiscal investigation, the Finanzamt, by notice of assessment of 11 April 1997, refused to grant MKG-GmbH, as the successor of Factoring KG, entitlement to the deduction provided for in Paragraph 15(1) of the UStG 1991. In accordance with the third sentence of Part 18, paragraph 4 of the UStR 2000, it treated MKG-GmbH as not being a business in so far as it had carried out true factoring.
MKG-GmbH then brought an action contesting that notice before the Hessisches Finanzgericht (Finance Court, Hesse, Germany).
The Finanzgericht found in MKG-GmbH’s favour. It agreed with MKG-GmbH’s analysis that, in the case of true factoring as in the case of quasi-factoring, the factor performs a number of taxable services for the client.
The Finanzgericht stated in particular that it could not concur with the view that, where the factor assumes the risk of loss, he does not effect a taxable supply but acts solely on his own account as a new creditor and that he cannot therefore be placed on the same footing as a trader. It therefore held that it would not be lawful to allow a deduction in the case of quasi-factoring and to refuse it in the case of true factoring.
In the present case, the Finanzgericht held that the activity engaged in by Factoring KG was, as a whole, a business activity. Even in the case of true factoring, the factor supplies numerous services and a deduction is not excluded under Paragraph 15(1) of the UStG 1991.
The Finanzamt brought an appeal on a point of law before the Bundesfinanzhof challenging the Finanzgericht’s decision.
According to the Finanzamt, in the case of true factoring, consisting in the purchase of debts with full assumption of the risk of loss, the factor solely receives a supply in the form of assignment of the benefit of a debt. In managing and recovering the debt which is assigned to it without a right of recourse, the factoring company does not make a supply for consideration to the other contracting party and does not therefore engage, in this connection, in a business activity. The Finanzamt relies in that regard on case-law of the Bundesfinanzhof.
At the hearing before the Bundesfinanzhof, the Finanzamt acknowledged that Factoring KG initially transferred the face value of the purchased debts (minus the agreed del credere fee and factoring commission) to M-GmbH’s account by way of a grant of credit (in the form of a loan) within the meaning of Paragraph 4(8)(a) of the UStG 1991, and finally transferred that sum to M-GmbH as the purchase price for the debts only once the conditions of the del credere were satisfied (150 days after the invoice had in each case fallen due). Since MKG-GmbH has waived the exemption of its transactions from tax, the Finanzamt also assumes that it is entitled to a further input-tax deduction. It continues to take the view, however, that the del credere fee and factoring commission do not constitute consideration in respect of a taxable supply by Factoring KG but that Factoring KG was, rather, in this regard merely the recipient of a supply, consisting in the assignment by its client of debts owed to it, and was therefore not a trader, so that to that extent it was not entitled to the deduction.
The Bundesfinanzhof entertains doubts as to whether the case-law hitherto developed by it in this connection should be upheld.
After observing, first, that account should be taken of the fact that the factor all in all carries out transactions concerning debts, in accordance with Paragraph 4(8)(c) of the UStG 1991 (by which Article 13B(d)(3) of the Sixth Directive is implemented), which may be taxed only once an option for taxation has been exercised in accordance with Paragraph 9 of the UStG 1991 (by which Article 13C of the Sixth Directive is implemented), and second, that the view may be taken that the factor’s transactions constitute factoring within the meaning of the final clause of the English version of Article 13B(d)(3) of the Sixth Directive, the Bundesfinanzhof states that, with regard to Article 17(2) of the Sixth Directive, it should be ascertained whether a factor engaging in true factoring uses goods and services for the purposes of his taxable transactions within the meaning of that provision.
In that regard it should, at the outset, be determined whether such a factor is actually a taxable person who carries out transactions or whether, as the Finanzamt submits, he is merely the recipient. In the opinion of the Bundesfinanzhof, the approach argued for by the Finanzamt, under which Factoring KG is treated as only partially taxable – in so far as it engages in quasi-factoring and grants credit – and is denied entitlement to deduct tax so far as concerns its true factoring unrelated to the grant of credit, is not compatible with the principle of neutrality of VAT. The national court therefore hesitates to deny entitlement to deduct in the present case on the sole ground that M-GmbH, instead of collecting its debts itself, entrusted that task to Factoring KG.
The Bundesfinanzhof adds that, should the Court hold that a factoring company uses the goods and services received by it for the purposes of its transactions even where it buys debts and assumes liability for the risk of loss in relation to those debts, it should also be decided whether those transactions constitute taxable transactions within the meaning of Article 17(2) of the Sixth Directive. The answer to that question depends on whether the transactions are liable to tax or exempt.

Questions

(1) Can a factoring company which buys debts and assumes liability for the risk of loss in relation to those debts be said to be using goods and services received by it for the purposes of its transactions?

(2) Do such activities involve taxable transactions or at any rate transactions for the purposes of Article 13B(d) of [the Sixth Directive] which may be taxed to the extent that the Member States have conferred on taxable persons a right to opt for taxation? Which of the transactions listed in Article 13B(d) of [the Sixth Directive] are involved?

AG Opinion

(1) on a proper construction of the Sixth Council Directive 77/388/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 a factoring company acts as a taxable person when it buys debts and assumes liability for the risk of loss in relation to those debts and may accordingly deduct from the tax which it is liable to pay tax which it has paid in respect of goods and services supplied to it for the purposes of its taxable transactions;

(2) such an activity constitutes ”debt collection and factoring” within the meaning of Article 13B(d)(3) of the Directive and is therefore excluded from the exemption laid down by that provision.

Decision

1. On a proper construction of the Sixth Council Directive (77/388/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, a business which purchases debts, assuming the risk of the debtors’ default, and which, in return, invoices its clients in respect of commission pursues an economic activity for the purposes of Articles 2 and 4 of that directive, so that it has the status of taxable person and thus enjoys the right to deduct tax under Article 17 thereof.

2. An economic activity by which a business purchases debts, assuming the risk of the debtors’ default, and, in return, invoices its clients in respect of commission, constitutes ”debt collection and factoring” within the meaning of the final clause of Article 13B(d)(3) of the Sixth Directive (77/388) and is therefore excluded from the exemption laid down by that provision.

Summary

Factoring – Factoring company that buys receivables and takes on debtor risk”

An economic operator who buys receivables, thereby assuming the debtor risk and charging his customers a fee in return, is engaged in an economic activity, so that he is a taxable person and is therefore entitled to a deduction.

An economic activity where an economic operator buys receivables and thereby assumes the debtor risk and charges its customers a fee in return is debt recovery and is therefore excluded from the VAT exemption.

Source