EU VAT Committee's findings on VAT treatment of transactions involving non-performing loans
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On 9 February 2017 the EU VAT Committee published its vision of how to charge VAT on transactions involving non-performing loans (NPLs), including the selling and servicing of such loans, from both the seller’s and buyer’s point of view. Given that such transactions are on the increase, the Committee believes there is a need to adopt a uniform approach to VAT treatment across the EU.
We have put together the Committee’s main findings, which are based on the provisions of the VAT Directive (2006/112/EC) and on the case law of the Court of Justice of the EU.
The Committee’s recommendations can be used by tax authorities and taxpayers when it comes to analysing VAT treatment where the national laws of member states fail to lay down clear rules for such transactions.
It is important to note that no official interpretations of the VAT treatment of selling or servicing debts are available in Latvia as yet. The VAT treatment of debt sales is based on a practice established by Cabinet Regulation No. 933 effective until 2013: the assignment of receivables is outside the scope of VAT. After the regulation was abolished, the Latvian State Revenue Service confirmed their established practice in the “Questions and Answers” section of their website. We might therefore conclude that sales of debts (including NPLs) in Latvia are treated as supplies falling outside the scope of VAT. Yet the points made above imply that the Latvian approach is not consistent with the EU VAT Committee’s findings.
The Committee’s findings
The sale of an NPL would constitute a taxable supply of services from the seller to the buyer of that NPL consisting in the assignment of intangible property under Article 25(a) of the VAT Directive. This supply could be exempt under Article 135(1)(d) as a transaction concerning debt.
Based on the GFKL Financial Services case, it is confirmed that the acquisition of an NPL by a buyer assuming the risk and at a discount price is not a taxable supply (from the buyer’s point of view), as long as that price reflects the lower value of the loan at the time of purchase. Whether the difference between the NPL’s face value and purchase price reflects the actual economic value of the debt at the time of assignment should be assessed on a case-by-case basis.
Where the difference between the NPL’s face value and purchase price does not reflect the actual economic value of the debt, the buyer could be said to assume the risk of the debtor’s default in exchange for a consideration, and the transaction would constitute a taxable and non-exempted supply of services qualifying as “debt collection” supplied by the buyer to the seller.
NPL servicing services that are supplied to the creditor of an NPL, consisting in the management of the loan and involving multiple activities whose essential aim is the recovery and collection of debts, would constitute a taxable supply of services qualifying as “debt collection” and would therefore be excluded from the exemption under Article 135(1)(d) of the VAT Directive.