Court of Justice

In Raiffeisen Leasing C-235/21, the taxpayer, Raiffeisen Leasing, was counterparty to a sale and leaseback of land. The sale and leaseback agreement set out the amount of VAT payable for each instalment under the lease, but the taxpayer did not issue any invoice to the lessee with respect to those amounts. Even though the taxpayer did not declare or account for the related output tax, the lessee recovered the VAT in relation to the payments it had made under the lease agreement. The tax authorities later denied the lessee the right to recover that input VAT and the taxpayer was ultimately allowed to make the necessary corrections to reduce the amount of VAT due. However, despite the corrections made, the tax authority ordered Raiffeisen Leasing to pay interest with respect to the non-paid VAT. This was on the basis that the lease agreement could be regarded as an “invoice” as per local provisions, for it contained all the information required on an invoice (except the date of delivery and VAT rate) and the lessee could reclaim VAT on the basis of that agreement.

While the right to deduct input tax is in principle linked to an actual supply, the objective of the rule according to which VAT is payable by any person who enters VAT on an invoice is to eliminate the risk of loss of tax revenue for tax authorities. The Court noted that this risk can however be avoided if the tax authority has sufficient information to establish whether the material conditions for having the right to recover input tax are satisfied.

The view of the Court is that to be recognised as an invoice, a document must mention VAT and contain all the necessary information for the tax authorities to establish whether the material conditions for the right to recover VAT are met. It should also be noted that, for the Court, whether the parties intended that the document in question be treated as an invoice was not relevant.

The Court held that the sale and leaseback contract could therefore be regarded as an invoice in so far as it contained all of the information necessary for the tax authority to establish whether the substantive conditions for the right to recover input VAT are met.

DLA Piper comment: Generally, issuing an invoice for the supply of goods or services remains highly recommended to all businesses. However, decisions such as the one in the Raiffeisen Leasing C-235/21 case show that other documents, such as a contract, may be regarded as an invoice as a last resort if an invoice cannot be obtained. This may be good news when it comes to recovering input VAT. However, in some other instances, taxpayers may be considered to have charged VAT without having had the intention to do so.

In C-250/21 - Szef Krajowej Administracji Skarbowej, contrary to the Advocate General Opinion, the Court held that the services of a sub-participant under a sub-participation agreement fall within the exemption applicable to the granting of credit under the Principal VAT Directive.

The taxpayer (a securitisation fund) sought a ruling on a sub-participation agreement it intended to enter into. The agreement involved the fund paying a bank (the originator) the amount of a securitised debt, in return for the proceeds of that debt. While the cash flow and the risk would be removed from the originator’s balance sheet and transferred to the securitisation fund, the bank would maintain legal ownership of the debt.

First, the Court found that the fund was providing a service to the bank, the consideration for which was the difference between the financial contribution paid by the fund and the estimated proceeds to be received from the bank.

The Advocate General had earlier opined that the finance exemption could not apply to the service provided under the sub-participation agreement on the basis that the transaction had a two-fold purpose of (i) funding the principal loan and (ii) managing the original creditor’s credit risk.

While the Court also acknowledged that the transaction had a dual function – that of providing liquidity via a credit instrument and of providing a hedge to risks (the sub-participant had no recourse against the originator if the principal debtor defaulted), it nonetheless found that this did not affect the essential nature of the sub-participation agreement, which consisted in financing the initial debts.

The Court pointed out that the sub-participant being exposed to potential losses and bearing credit risk whether because of non-payment by the debtor or because of the insolvency of the originator, reflected the inherent nature of a credit. It also held that the supply was a supply of credit, notwithstanding that the taxpayer was not a bank and that the remuneration did not take the form of interest.

DLA Piper comment: This judgment comes as a relief, in particular for debt holders entering into sub-participation agreements and for which any incurred VAT would generally be irrecoverable. Although the Court provides some clarification, the securitisation of debts, and the various mechanisms that surround it, remain a complex area of VAT. Therefore, a review of the contractual agreements in place is always recommended to monitor VAT risks.