Case C‑93/10 - VAT Treatment of Transfer of Portfolio of Debts

Trudy Marie Attard | 11 Nov 2011

Ccmalta Default
Case C-93/10, Finanzamt Essen-NordOst v GFKL Financial Services AG, decided by the Court of Justice of the EU (CJ) relates to a supply of debt collection services, a notion broader than factoring. It clarifies the position taken by the CJ in MKG-Kraftfahrzeuge-Factoring. In that case, the CJ had held that 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 a supply of service forming ‘debt collection and factoring’. The activity was thus excluded from Article 13B (d) (3) and not exempt.
 
The supply of services is a residual category which has been interpreted broadly by the CJ. Article 6 of the Sixth VAT Directive states that supply of services may include, inter alia, assignments of intangible property whether or not it is the subject of a document establishing title. In his Opinion, Advocate General Jääskinen held that the assignment of intangible property concerns a situation where the assignor assigns the debt to the assignee so that the assignor is considered as providing a service to the assignee.
 
This case, however, concerned a service provided by the assignee to the assignor, a service which is not covered by Article 6(1). The assignor, Finanzamt Essen-NordOst (the Bank) transferred a portfolio of numerous debts together to GFKL with the related mortgages and other securities, documentation and ancillary claims. On the other hand, GFKL was engaged to collect the debts during a predefined period of time. The bank thus bought a service from GFKL. Since there was a provision of a service, there necessarily arose an economic activity.
 
The CJ has consistently held that the concept of the ‘supply of services effected for consideration’ within the meaning of Article 2(1) of the Sixth Directive requires the existence of a direct link between the service provided and the consideration received. In contrast to the MKG-Kraftfahrzeuge-Factoring case, in this case the assignee of the debts received no consideration from the assignor. This means that there was no economic activity within the meaning of Article 4 of the Sixth Directive or a supply of services within the meaning of Article 2(1) of that Directive.
 
The difference between the face value of the assigned debts and the purchase price of those debts does not constitute a payment intended to provide direct remuneration for a service supplied by the purchaser of the assigned debts. It is instead a reflection of the actual economic value of the debts at the time of their assignment which results from the fact that they are doubtful and from the increased risk of default of the debtors.
 
Therefore, the CJ decided that an operator who, at his own risk, purchases defaulted debts at a price below their face value does not effect a supply of services for consideration within the meaning of Article 2(1) of the Directive. Consequently, the operator does not carry out an economic activity falling within the scope of the Directive when the difference between the face value of those debts and their purchase price reflects the actual economic value of the debts at the time of their assignment.
 


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