Judgment summary
This is a preliminary ruling requested by the Korkein hallinto-oikeus (Supreme Administrative Court, Finland) by decision of 28 February 2025, received at the Court on 28 February 2025 [1]. The Court of Justice transmitted the request to the General Court on 18 March 2025 pursuant to the third paragraph of Article 50b of the Statute of the Court of Justice of the European Union.
The request concerns the interpretation of Article 135(1)(b) to (d) of Council Directive 2006/112/EC on the common system of value added tax [1].
The proceedings are between the Veronsaajien oikeudenvalvontayksikkö (Tax recipients' legal services unit, Finland) and company A Oy, and concern the VAT treatment of credit sold to a third company and services for the management of credit and of credit guarantees relating to that credit [2].
The General Court answered all three questions in the negative, holding that the exemptions in Article 135(1)(b), (c) and (d) of the VAT Directive do not apply to the management services provided by the original lender after it has transferred the credit to another financial institution [46], [52], [59].
Background
A is the main establishment of Bank X and the representative of the VAT group in Finland of Group Y. Group Y primarily sells financial and insurance services that are exempt from VAT [12].
B is a wholly owned subsidiary of A, but they do not form part of the same VAT group [13].
A large proportion of the property loans granted by A are sold to B at the market price after the drawdown of the loan. The consideration consists in the amount of the loan unpaid by the borrower and the unpaid interest which has accrued at the date of the transfer. The loans are, in essence, sold to B from the date on which they are granted, when no interest has yet accrued, in which case the price corresponds directly to the nominal value of the loan. Where the loan is drawn down by instalment, it can be sold after the first instalment has been drawn down. B does not itself grant property loans, but purchases them from A [14].
All the rights and obligations relating to the loans are transferred with the loans to B from the date of transfer, which does not require any action on the part of the borrower [15].
B is not itself involved in the canvassing of customers, customer service or the management of purchased loans. Although the loans are transferred to B, A remains responsible for their management and deals throughout the duration of the loan with all questions arising between the borrowers and B [16].
The management of the loans sold and the associated guarantees consists in ensuring management of services to customers holding those loans and the monitoring and depositing of the transferred loans, such as the calculation of rates, interest and commissions, amendments to the loans and, if necessary, debt collection services. A takes decisions such as the renewal of a loan or extension of the loan period. The scope of the management services is the same as A would offer had it retained the loans [17].
B was financed to a large extent by means of covered bonds and loans and guarantees granted to it by A. A also carries out all tasks relating to the issue of a bond and sells those services to B. The majority of the loans sold to B serve as a guarantee for a bond at least at a given point in time of their duration [18].
The services for the management of credit and the management of credit guarantees sold by A to B are remunerated on the basis of the actual costs incurred each month plus an agreed profit margin. A invoices B on the basis of actual costs incurred plus a profit margin [19].
A applied to the Keskusverolautakunta (Central Tax Board, Finland) for a tax ruling on the VAT treatment of the loans sold to B and the related management services [20]. In its ruling, the Central Tax Board found the sales of loans to be financial services exempt from VAT, the debt collection services to be subject to VAT, and the services for the management of credit and credit guarantees to be exempt financial services as the management of credit by the lender [21].
The Tax recipients' legal services unit brought an action before the referring court seeking annulment of the ruling in so far as it held that the management services sold by A to B are not subject to VAT [22].
Core dispute
The referring court was uncertain whether the services for the management of credit and of credit guarantees provided by A, in respect of loans it granted and then sold to another company, may be regarded as the management of credit by the person granting it, exempt under Article 135(1)(b) of the VAT Directive. If not, it asked whether the services must be exempt as any dealings in credit guarantees or any other security for money under Article 135(1)(c), where the loans serve to secure a bond issued by another financial institution. If not, it asked whether the services must be exempt as financial services under Article 135(1)(d) concerning transactions in debts [23], [24].
Court findings
On the first question, the Court noted that the wording 'by the person granting it' in Article 135(1)(b) does not give a clear answer as to who benefits from the exemption, and that different language versions of the provision diverge [28], [29]. Terms specifying the exemptions in Article 135(1) must be interpreted strictly as exceptions to the general principle that VAT is levied on all services supplied for consideration [31].
The Court held that Article 135(1)(b) links the granting of credit with its management, indicating that the exemption concerns management linked to the granting of that credit and involves the relationship between the grantor of credit and the borrower, not services provided outside that relationship. A strict interpretation precludes applying the exemption to any situation where that link has ceased to exist [32]. Since the original lender transferred its loans to a third-party transferee, the management no longer forms part of the original legal relationship, and constitutes services supplied for consideration directly for the benefit of the transferee [33]. The EU legislature did not intend to favour outsourcing of management to a third party [34].
The Court referred to the two objectives of the financial exemptions, namely alleviating the difficulties connected with determining the tax base and the amount of VAT deductible, and avoiding an increase in the cost of consumer credit [36]. It found that the first objective is not relevant where management is a separate service invoiced on the basis of actual costs and an agreed profit margin, as difficulties in distinguishing the consideration are missing [38], [39]. On the second objective, the management services are invoiced to the purchaser company and not the borrowers, so the VAT is not paid directly by the borrowers, and any effect on financing costs is not automatic [41], [42]. Any outsourcing may increase costs whether the services are subject to VAT or not [43].
The Court applied the principle of fiscal neutrality, holding that there should be no difference in treatment for VAT purposes between management services sold to a credit transferee according to whether the supplier is the transferor who originally granted the credit or another person [44], [45].
On the second question, the Court held that services consisting in the management of credit for the benefit of the purchaser cannot be classified as any dealings in credit guarantees or any other security for money within Article 135(1)(c). The only management activity exempt under that provision concerns the management of credit guarantees by the person granting the credit. Applying the provision to the management of credit would render redundant the restriction of the exemption in Article 135(1)(b) to the person granting the credit [50], [51].
On the third question, the Court held that the transactions in Article 135(1)(d) fall within the field of financial transactions and concern payment instruments involving a transfer of money. The test is whether the transaction causes the actual or potential transfer of ownership of funds or fulfils the specific, essential functions of such a transfer [55], [56]. Nothing in the file showed that the management services involved a transfer of ownership of funds, and to apply the provision to the management of credit would again render the restriction in Article 135(1)(b) redundant [57], [58].
Outcome
The General Court ruled that Article 135(1)(b) of Directive 2006/112 does not apply to the services for the management of credit provided by the person who granted that credit, subsequently transferred it and continues to manage it for consideration for the transferee [46].
It ruled that Article 135(1)(c) does not apply to those management services relating to credit used as a guarantee for a bond issued by another financial institution to which the credit was transferred [52].
It ruled that Article 135(1)(d) does not apply to those management services relating to credit transferred to another financial institution [59].
Since the proceedings are a step in the action pending before the referring court, the decision on costs is a matter for that court [60].
Major issues / areas of contention
- Whether the exemption for the management of credit by the person granting it under Article 135(1)(b) of the VAT Directive applies where the original lender transferred the credit but continues to manage it for consideration for the transferee.
- Whether the exemption for any dealings in credit guarantees or any other security for money under Article 135(1)(c) applies to such management services where the credit secures a bond issued by another financial institution.
- Whether the exemption for transactions concerning debts under Article 135(1)(d) applies to the management by the transferor of credit transferred to another financial institution.
- The relevance of the principle of fiscal neutrality to the VAT treatment of outsourced or transferred credit management services.
- The strict interpretation of VAT exemptions and the effect of divergent language versions of Article 135(1)(b).