Recent ECJ decisions impacting Romanian financial leasing companies
Ramona Jurubita of KPMG analyses two recent decisions of the Court of Justice of the European Union (ECJ) which impact taxpayers performing financial leasing activities.
Although financial leasing companies are subject to a high level of regulation in Romania and although financial leasing services have received a significant amount of attention in the various amendments which have taken place to the Romanian Fiscal Code, unclear aspects and problematic issues regarding the VAT treatment of operations carried out by leasing companies continue to exist. In this respect, the ECJ has recently issued two decisions (in C-438/13 BCR Leasing and C-183/13 Banco Mais SA) which could bring additional guidance to Romanian companies performing financial leasing activities.
BCR Leasing - VAT assessed for non-recovered goods subject to cancelled financial leasing contracts
According to Romanian VAT legislation in force before January 2013, non-recovered goods further to cancelled leasing contracts were classified as missing stock and were consequently treated as deemed supplies of goods for consideration, for which the leasing company had the obligation to assess VAT.
This topic gave rise to numerous discussions between the Romanian tax authorities and representatives of the business environment, taking into account that leasing companies in Romania encountered a growing number of situations in which they could not recover goods subject to financial leasing contracts in the years following 2008. The provisions mentioned above also almost led to an infringement procedure being initiated by the European Commission against Romania, on the grounds that they were contrary to those laid down by the EU VAT Directive. Starting from January 2013, however, the requirement that leasing companies had to assess output VAT for non-recovered goods related to cancelled leasing contracts was removed from the Romanian Fiscal Code (to avoid a possible infringement procedure being started).
The July 17 2014 decision issued by the ECJ concerns a Romanian leasing company - BCR Leasing IFN SA which, further to a VAT audit performed by the tax authorities in 2011 on the company, was informed that it was required to pay additional VAT obligations and late payment penalties because it had failed to assess output VAT related to leasing contracts which had been cancelled for non-payment due to the impossibility of recovering the goods for the period September 2008 - December 31 2010.
The arguments of the tax authorities for imposing additional VAT obligations on BCR Leasing were in accordance with Romanian VAT legislation at that time, which, as we mentioned above, stated that non-recovered goods related to cancelled leasing contracts were treated as deemed supplies of goods for consideration, and, consequently, subject to VAT.
In this respect, the ECJ was asked whether the situation in which a leasing company has failed to recover from the lessee the goods let under a financial leasing contract, following its termination as a result of the lessee’s breach, despite steps undertaken by that company to recover those goods and despite the lack of any consideration following such termination, may be treated as a supply of goods for consideration.
As expected, the ECJ’s ruling was in favour of BCR Leasing, arguing that the non-recovered goods cannot be considered as applied to the private use of the company or for that of its staff nor can they be considered as applied for purposes other than the company’s economic activity. Consequently, the ECJ ruled that the impossibility for a leasing company to recover goods from a lessee, under the conditions detailed above, cannot be treated as a supply of goods for consideration.
Although Romanian VAT legislation was amended starting from January 2013 and non-recovered goods related to cancelled leasing contracts are no longer treated as deemed supplies of goods for consideration, the ECJ’s decision in C-438/13 BCR Leasing could generate certain opportunities for Romanian financial leasing companies.
More specifically, companies which assessed VAT for non-recovered goods subject to cancelled financial leasing contracts in accordance with the provisions applicable before January 2013, in the light of this recent decision, should consider the possibility of recovering or adjusting these overpaid VAT amounts, especially bearing in mind the high volume of problematic contracts/receivables that Romanian leasing companies dealt with in the years following 2008.
C-183/13 Banco Mais SA - VAT deduction right for companies performing leasing services as well as other financial services
The ECJ’s decision in this case concerns a Portuguese bank this time - Banco Mais SA, which performed leasing services in the automotive sector, as well as other financial services.
Considering that Banco Mais performed both operations giving rise to a VAT deduction right (leasing services) as well as operations for which VAT is not deductible (other financial services), the company determined the VAT deductible proportion for its acquisitions performed for the purposes of carrying out both transactions in respect of which VAT is deductible as well as transactions in respect of which VAT is not deductible on a pro-rata basis.
In this respect, the pro-rata used by Banco Mais, in accordance with Portuguese VAT legislation, as well as with the provisions of the EU VAT Directive, mentioned:
as numerator - the turnover obtained from (financial) services giving rise to a VAT deduction right, including the turnover obtained from leasing services;
as denominator - the turnover related to all types of financial services, including the turnover obtained from leasing services.
It is also important to mention that, for the company’s acquisitions of goods or services used exclusively to carry out operations giving rise to a VAT deduction right, Banco Mais deducted the entire related VAT. This included the purchase of vehicles to be used in financial leasing contracts.
Further to a VAT audit performed on the company, the Portuguese tax authorities considered that Banco Mais’s method of determining the VAT deductible proportion for its acquisitions performed to carry out both transactions in respect of which VAT is deductible, as well as transactions in respect of which VAT is not deductible, was not appropriate and that it led to a significant distortion of the VAT payable by the company.
The tax authorities did not agree with including the entire turnover from leasing services in the pro-rata used by the company, as the leasing instalments also contained the cost of the leased vehicles. In this respect, they argued that the acquisition cost of the leased vehicles did not reflect the part of the goods or services acquired to carry out both transactions in respect of which VAT is deductible as well as transactions in respect of which VAT is not deductible that may be attributable to the taxable operations.
Consequently, the question referred to the ECJ was whether companies carrying out leasing operations that are required to determine their deductible VAT using a pro-rata should include the entire turnover from the leasing instalments in the pro-rata, or only the part of the instalments corresponding to the interest, as this is, in fact, the consideration received by the leasing company.
The decision was in favour of the Portuguese tax authorities as the ECJ argued that the acquisitions of goods and services performed by a bank which are used to performed operations giving rise to VAT deduction rights, as well as operations not giving rise to VAT deduction rights, are mainly a consequence of the financing and managing of leasing contracts and not of the provisions of the vehicles. Consequently, the ECJ’s decision was that member states are allowed to require a bank that also performs leasing services to include in its VAT pro-rata calculation only the part of the leasing instalments corresponding to the interest, where the use of the goods and services acquired to carry out both transactions in respect of which VAT is deductible as well as transactions in respect of which VAT is not deductible is primarily caused by the financing and management of leasing contracts (the latter being a matter for the national courts to establish).
Taking the above into account, as well as the fact that current Romanian VAT legislation states that the Romanian Ministry of Public Finance, based on proposals received from tax offices, is entitled to require a taxable person to determine its VAT deductible amounts using a special pro-rata, we believe that the principles laid out in this decision of the ECJ should be carefully analysed by Romanian companies providing leasing services together with other financial services. In this respect, the methods of determining VAT deductible amounts should be revised by these companies to make sure that they accurately reflect the operations giving rise to a VAT deduction right.
To conclude, the two ECJ decisions analysed throughout the article shed some light on certain opportunities (the possibility of adjusting or recovering the output VAT assessed by financial leasing companies for non-recovered goods subject to cancelled financial leasing contracts, in accordance with Romanian VAT legislation in force before January 2013), as well as exposing certain risk areas (pro-rata calculation for companies carrying out leasing activities together with other financial services) for Romanian financial leasing companies. The implications of both these decisions could have a significant impact on the activity of companies undertaking financial leasing activities in Romania and should, therefore, be thoroughly analysed by them.
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Ramona is a partner at KPMG and head of the indirect tax services practice of KPMG in Romania. She is also a member of the Romanian Association of Chartered Accountants, a member of the Association of Certified Chartered Accountants (ACCA) and of the Romanian Chamber of Fiscal Consultants.
With more than 11 years of experience at KPMG, Ramona is responsible for managing and developing the Romanian indirect tax practice. She also has relevant experience on practical issues regarding tax planning, fiscal compliance and tax audits, among other issues, as well as serving for three years as a tax director for a multinational company acting in the FMCG sector.
She is also involved in various litigation projects with significant indirect tax implications. Ramona coordinated and attended debates and consultations with the fiscal authorities responsible for fiscal control mainly in the area of indirect taxes, concerning the improvement of legislation and the procedures for accomplishing this. She is also a regular speaker at various conferences and training sessions inside and outside KPMG on tax issues.