New rulings on the Danish VAT treatment of factoring arrangements

The case law from the Court of Justice of the European Union

The MKG-Kraftfahrzeuge-Factoring case (C-305/01) from the Court of Justice of the European Union showed that if factoring is structured so that the transferee is paid a fee in connection with a transfer of a debt claim (the case used terminology such as factoring fee and del credere fee), such fee may be considered consideration for assuming the risk of non-payment of the debt claim and therefore constitutes a transaction subject to VAT.

On the other hand, the later GKFL Financial Services case (C-93/10) showed that if factoring is structured so that the price paid for a transfer of defaulted debt claims is below face value, where the difference between the face value of the debt claims and the actual price paid reflects the actual economic value of the debt claims at the time of assignment, then there is no supply of services for VAT purposes.

Distinguishing the two cases, the Court of Justice of the European Union emphasized that in the first case, the transferee of the debt claims undertook to provide factoring services to the transferor, in return for which it received a payment, namely a factoring commission and a fee for taking over the default risk. It would appear that the Court took a rather formalistic approach when reaching the conclusion that if no factoring commission or del credere fee is charged, then no services have been agreed that are relevant for VAT purposes.

The new Danish rulings

The arrangement in both cases could – according to the Danish Tax Agency – be summarized as follows:

• A creditor sold goods and/or services on credit to a debtor, whereby the creditor obtained a debt claim against the debtor for the invoice amount.
• A factoring company then purchased these debt claims from the creditor against payment of the invoice amount minus a discount fee.

Pursuant to section 13(1)(11) of the Danish VAT Act, which implements Article 135(1) of the VAT Directive (2006/112/EC), several financial services are exempted from VAT, including for example transactions concerning debt claims. However, debt collection is not covered by the VAT exemption. Further, the granting and negotiation of credit and the management of credit by the person granting it are also exempted from VAT.   

In both cases the taxpayers argued that the transactions should be exempted from VAT since they concerned the granting and management of credit. The Danish Tax Council could not confirm the taxpayers' position and found in both cases that it was not a question of granting credit as the transactions between taxpayer and creditor were carried out as purchases of debt claims.

Further, it was assessed in both cases whether the transactions constituted transfers of debt claims or debt collection. As indicated above, the distinction is important since services considered debt collection are subject to VAT, whereas the transfer of a debt claim is not. It was the opinion of the Danish Tax Council that the discount fee should be considered as consideration for assuming the risk of loss on the claims and thus be included in the taxpayer's VAT basis.

Our comments   

In both cases before the Danish Tax Council, the Danish Tax Agency seems to place emphasis on the terminology used by the parties: discount fee. The Tax Agency stated in both cases that the discount fee was consideration for assuming the risk of loss. This statement would appear to go in line with the guidelines issued by the VAT Committee from the 108^th meeting of 27-28 March 2017:

"The VAT Committee almost unanimously confirms, in accordance with settled case-law of the CJEU, that the transfer of an non-performing loan at a price below face value, where the difference between the face value of the non-performing loan and the actual price paid does not reflect the actual economic value of the debt at the time of its assignment but makes up consideration for the transferee, shall constitute a taxable supply of services by the transferee to the transferor consisting in assuming the risk of the debt not being paid."

A question that seems fair to ask in this regard is whether the outcome of the cases had been different if the parties had not agreed on a discount fee but had simply agreed on a lower purchase price for the debt claims.

Our tax team is available if you have any questions in relation to the binding ruling or need any other assistance or advice.