Flashback on ECJ Cases – C-438/13 (BCR Leasing IFN) – No deemed supply for VAT when leased cars cannot be repossessed

On July 17, 2014, the ECJ issued its decision in the case C-438/13 (BCR Leasing IFN).

Context: VAT — Directive 2006/112/EC — Articles 16 and 18 — Financial leasing — Goods under a financial leasing contract — Non-recovery of those goods by the leasing company after the termination of the contract — Missing goods

Article in the EU VAT Directive

Articles 16. 18 of the EU VAT Directive 2006/112/EC.

Article 16
The application by a taxable person of goods forming part of his business assets for his private use or for that of his staff, or their disposal free of charge or, more generally, their application for purposes other than those of his business, shall be treated as a supply of goods for consideration, where the VAT on those goods or the component parts thereof was wholly or partly deductible.
However, the application of goods for business use as samples or as gifts of small value shall not be treated as a supply of goods for consideration.

Article 18
Member States may treat each of the following transactions as a supply of goods for consideration:
(a) the application by a taxable person for the purposes of his business of goods produced, constructed, extracted, processed, purchased or imported in the courseof such business, where the VAT on such goods, had they been acquired from another taxable person, would not be wholly deductible;
(b) the application of goods by a taxable person for the purposes of a non-taxable area of activity, where the VAT on such goods became wholly or partly deductible upon their acquisition or upon their application in accordance with point (a);
(c) with the exception of the cases referred to in Article 19, the retention of goods by a taxable person, or by his successors, when he ceases to carry out a taxable economic activity, where the VAT on such goods became wholly or partly deductible upon their acquisition or upon their application in accordance with point (a).

Facts

BCR Leasing is a limited company whose main activity is financial leasing. It acquires from various suppliers cars in respect of which it fully deducts the input VAT paid. In addition, the company concludes financial leasing contracts, relating to the purchased cars, with natural or legal persons that are users of those goods throughout the duration of the contract, BCR Leasing remaining the owner of those cars.
As a result of late or non-payments, BCR Leasing terminated some of the financial leasing contracts concluded with the defaulting lessees. Pursuant to those contracts, the lessees were required, within three days after the termination of the relevant contract, to return to BCR Leasing the goods covered by the contract. Since a number of the lessees refused to return the goods in question, BCR Leasing instituted enforcement proceedings against them. However, in spite of its efforts, some of the goods in question could not be recovered within the time-limits set.
Since it did not receive any payments in respect of the terminated contracts, BCR Leasing stopped issuing invoices relating to those contracts and collecting the corresponding VAT.
During an audit carried out in 2011, the Agenția found irregularities relating to the manner in which VAT was indicated, recorded and declared for the period between 1 September 2008 and 31 December 2010. By tax notice of 30 August 2011 and tax audit report of the same date, it imposed an additional payment of 19 266 551 Romanian lei (RON) on BCR Leasing in respect of VAT, as well as a sum of RON 9 502 774 by way of penalty for delay.
In the above tax notice, the Agenția stated that a financial lease must be treated, for the duration of the contract, as a supply of services that may be followed by a supply of goods upon the expiry of the contract, depending on whether or not the lessee exercises the option to purchase.
Moreover, the Agenția considered that, in the case of goods missing for reasons other than those set out in Article 128(8)(a) to (c) of the Fiscal Code, it consisted of a supply of goods subject to VAT, the transaction having to be defined as a ‘self-supply’, in accordance with Article 125a(1)(16) of the Fiscal Code.
Consequently, according to the Agenția, BCR Leasing was required, at the end of the period prescribed in the financial leasing contract for the return of the goods by the lessor, to apply the provisions of Article 128(4)(d) of the Fiscal Code on self-supplies and the collection of VAT, and also to issue invoices to itself in respect of those supplies.
Taking the view that the national legislation underlying the tax notice referred to in paragraph 16 above was not compatible with the system introduced by the VAT Directive, BCR Leasing filed an action for the annulment of that notice, which was heard, most recently, before the Curtea de Apel București.

Questions

May a situation involving goods under a financial leasing contract which, following termination of the contract as a result of the lessee’s breach, have not been recovered from the lessee by the leasing company, even though that company has instituted and followed the statutory procedures for recovery and, after termination, has not received any further amount for the use of the goods, be considered a supply of goods for consideration within the meaning of Article 16 of [the VAT Directive] or, possibly, a supply of goods for consideration within the meaning of Article 18 of [the VAT Directive]?

AG Opinion

None

Decision

Articles 16 and 18 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that the impossibility, for a leasing company, of recovering from the lessee the goods let under a financial leasing contract following its termination as a result of the lessee’s breach, despite the steps undertaken by that company to recover those goods and despite the lack of any consideration following such termination, may not be treated as a supply of goods for consideration for the purposes of those articles.

Summary

The dispute in this case refers to the Romanian tax authorities’ decision to impose BCR Leasing IFN SA (“BCR Leasing” or the “Company”) with additional VAT liabilities as regards the vehicles that were not returned to the Company further to the termination of the lease agreements due to the lessee’s failure to fulfil their payment obligations.

The ECJ concluded that the impossibility, for a leasing company, of recovering from the lessee the goods let under a financial leasing contract following its termination as a result of the lessee’s breach, despite the actions undertaken by that company to recover those goods and despite the lack of any consideration following such termination, may not be treated as a supply of goods for consideration.

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