The Court of Justice of the European Union (CJEU) issued a
decision on October 4 2017 that clarifies the VAT treatment of
certain automobile leasing agreements.
The case before the court involved a UK auto financing
company that offers a lease agreement that includes monthly
payments that cover about 60% of the vehicle price (including
financing) and an option for the lessee to purchase the vehicle
for the remaining 40%, which is roughly its market value. This
type of lease is designed for customers who are unsure whether
they will want to purchase the vehicle at the end of the lease
(which is the case for about half of lessees).
The financing company took the position that the lease
agreement qualified as a supply of services for VAT purposes
for which VAT was due on each instalment. The UK tax
authorities disagreed, stating that the leasing transaction was
a supply of goods, with VAT being chargeable in full when the
vehicle is handed over to the customer.
To resolve this issue, the CJEU had to interpret Article
14.2b of the VAT Directive, which provides that a hire-purchase
agreement is treated as a supply of goods only if the agreement
provides that the property was transferred in the "normal
course of events" upon the payment of the final instalment.
Specifically, the court had to decide whether the existence of
an option is sufficient for such treatment, or whether it is
necessary to determine the economic purpose of the
The CJEU held that, for a lease agreement to qualify as a
supply of goods, it must include an option that allows the
transfer of ownership of the property to the lessee, and it
must be clear from the terms of the agreement, as objectively
assessed at the time it was signed, that ownership will be
transferred at the end of the lease or, in the words of the
CJEU, exercising the option is the "only economical rational
choice" for the lessee.
Based on the CJEU decision, it can be presumed that the
lease in the case did not qualify as a supply of goods. The
pricing structure and the fact that only 50% of lessees
exercise the option make it clear that the exercise of the
option is not the only rational choice for the lessee.
As an example of the impact of the CJEU decision, Luxembourg
law does not include the phrase "in the normal course of
events". Thus, any lease with an option to purchase, regardless
of its value and whether exercising the option is the "only
economical rational choice" of the lessee, would be treated as
a supply of services in Luxembourg.
The CJEU decision is a useful clarification of the VAT
treatment of leasing agreements, even in cases where it may not
be entirely obvious that exercising the option is the "only
rational economic choice" of the lessee.
Christian Deglas (firstname.lastname@example.org) and
Michel Lambion (email@example.com)
Deloitte Tax & Consulting Luxembourg