Court of Justice of the EU

The Court of Justice of the European Union in Franck d.d., Zagreb C 801/19 held that the payment of a fee in exchange for funds provided by a nonfinancial institution was exempt because the transaction as a whole was considered "the granting and the negotiation of credit". The transactions which took place in this case were aimed at circumventing Croatian banking regulations prohibiting banks lending to heavily indebted companies but resulted in the taxpayer (a trading company which processed tea and coffee) making funds available to Konzum, a retail chain.

The ‘reverse factoring’ arrangements involved three agreements: (i) a financial loan agreement pursuant to which Konzum issued a bill of exchange to Franck which undertook to pay the sum referred to in the bill of exchange to Konzum; (ii) a contract for the assignment of trade receivables which also involved a factoring company to which the taxpayer transferred the bill of exchange in return for a payment of 95-100% of the amount referred to in the bill of exchange. The taxpayer transferred the sum it received from the factor to Konzum and guaranteed that Konzum would repay the factor; and (iii) a commercial cooperation agreement under which Konzum undertook to reimburse the taxpayer for the interest and costs charged to it by the factoring company as well as 1% of the amount referred to in the bill of exchange.

The issue was whether the amount received by the taxpayer was subject to VAT as consideration for a debt collection service or was exempt as consideration for the granting of credit or a transaction concerning a financial instrument. The Court noted that the fact that the transaction was not the taxpayer’s main activity did not preclude a finding that it had acted within the framework of its economic activity. The Court also said that the taxpayer could be carrying out an exempt supply of credit notwithstanding that it was not a financial institution, and notwithstanding that the funds made available to Konzum were not reimbursed to the taxpayer but instead to the factoring company. It also made no difference to the characterisation of the transactions for VAT purposes that they might have been unlawful.

It was clear to the Court that the service of providing funds supplied by the taxpayer was ‘intrinsically linked’ to the issue of bills of exchange, and, subject to the referring court checking, it appeared that the taxpayer had performed the specific and essential functions for a transaction relating to the bills of exchange. Accordingly, the Court held that the supply should (subject to the factual check required by the referring court) fall within the exemption for granting credit and for transactions concerning ‘negotiable instruments’.

DLA Piper comment: This case shows the nuance of applying the VAT exemption when it comes to factoring arrangements. In the MKG-Kraftfahrzeuge-Factoring case (C 305/01), the CJEU held that the VAT exemption does not apply to an operator buying credits and assuming the risk of non-payment in exchange for remuneration as such services constitutes a credit collection service. The different outcome of the Franck case is because Franck neither carried out that collection management operation nor acted as an intermediary in favour of the factoring companies in that context.

The Court of Justice held in in WEG Tevesstrabe C-449/19 that a supply of heat by an association of property owners to members of the association was standard rated. The taxpayer was an association of property owners in Germany which managed a mixed-use property estate consisting of 20 rental apartments, a public authority department and a municipal building. The property owners themselves were a private company, a public authority and a municipality and therefore each a legal person. The taxpayer association constructed a combined heat and power unit on the estate from which it generated electricity, sold electricity to a power company and supplied heating services to the property owners.

The German tax authority disallowed the taxpayer’s claim for an input tax deduction in respect of the costs of generating the heating on the basis that, under German law, the supply of heating by associations of property owners to property owners is exempt from VAT. The German court however referred to the Court of Justice the question of whether the Principal VAT Directive permitted German law to exempt such a supply.

The Court held that the supply of heating fell outside the scope of the exemption for the leasing of immovable property in the VAT Directive which the Court noted was normally a relatively passive activity. The Court rejected the argument of the German government that the principle of fiscal neutrality should mean that the supply of heating by an association of residential property owners belonging to that association should be treated in the same way as home owners simultaneously leasing a house and heating system. The Court said that the fact that those two groups of consumers were treated differently was merely a consequence of the choice made by the persons belonging to those groups to own or not to own a dwelling in a building under co-ownership.

Consequently, the German national legislation exempting the supply of heat by an association of residential property owners to the property owners belonging to that association, was precluded by the VAT Directive. Unlike the Advocate General, the Court did not consider the possible factual situation of heat being provided for the common areas of the estate (in which case, according to the Advocate General, there would likely have been no supply (see our earlier briefing) but seems to have assumed that heating was being provided to specific occupiers for their respective properties).

DLA Piper comment: At first sight, this case would appear to be interesting for associations of residential property owners. Following the Court considerations, supplies made by such associations would not benefit from a VAT exemption and making the supplies VAT taxable allowing for input VAT recovery. However, also for other taxpayers this case can be useful. The Court insists on the exclusion of the principal of neutrality to contracts with arguably similar results but with two "clearly distinct groups of consumers". The fact that those groups are treated differently is according to the Court merely a consequence of the "choice made" by the concerned parties. When setting up structures and concluding arrangements, it is therefore prudent to assess the VAT implications as reliance on the principal of neutrality may be restricted.

The Court of Justice case of Y-GmbH (C-346/19) concerned an EU refund claim for a taxpayer established in another member state and whether it could be rejected by reason of containing the invoice reference number rather than the invoice number itself.

The Austrian established taxpayer made a German EU VAT refund claim and in the application form put the invoice reference number instead of the sequential number of the invoice. The refund was refused on the grounds that it had not been submitted on time, since the Federal Tax Office had, on three occasions, prior to the expiry of the time limit, informed the taxpayer that the invoice numbers referred to in its application did not comply with the relevant legal requirements.

The Court held that where a refund claim does not contain a sequential invoice number, but an invoice reference number which allows that invoice, and thus the relevant goods or services to be identified, the tax authority must consider the application to have been submitted and review the claim. In reviewing the claim, assuming the original invoice is not already available to the tax authority, it may request that the applicant produce a sequential number which uniquely identifies the invoice, and if that request is not satisfied within the one month deadline, it is entitled to reject the claim.

DLA Piper comment: The CJEU reaffirms that material requirements supersede formal requirements (such as invoice requirements) when it comes to a taxpayer's right to recover VAT. That said, the tax authority may require the taxpayer to provide additional information to support its recovery claim. For the case at hand, the taxpayer may be requested to produce a sequential number which identifies the invoice. If the taxpayer does not meet this request, the refund application can be rejected.

It goes to show that VAT compliance is of particular importance when requesting VAT refunds from tax authorities. Irrespective of this case, it is recommended to perform periodical review of any business' internal/administrative processes to ensure VAT compliance.