CJEU: VAT on assignment of debt recognised in enforcement proceedings
The decision of the CJEU on the Portuguese case Paulo Nascimento Consulting (Case C-692/17) recently became available. Diogo Ortigão Ramos and Mário Silva Costa of Cuatrecasas explain the details of the case and the possible consequences of the decision.
This case dealt with whether an assignment, for consideration, of all the claimant’s rights and obligations in an enforcement proceeding triggered for the recovery of a debt/receivable recognised by a judgment, the recovery of which was secured by the attachment and award to the assignor of property belonging to the debtor, is VAT exempt under article 135(1)(b) of the VAT Directive [corresponding to article 9(27)(a) of the Portuguese VAT Code], as a transaction concerning granting, negotiating and management of credit.
Paulo Nascimento Consulting (PNC) is a Portuguese real estate agency. It agreed to provide its agency services for the sale of agricultural land. A purchase offer was presented by PNC but rejected by its client, the owner of the land, who subsequently refused to pay PNC for the service provided.
A civil action was initiated to collect the unpaid agency commission of €125,000. Consequently, PNC was awarded a claim of €170,859.62 (including the commission, VAT and default interest).
Since the debtor maintained the position of not paying the amount due, PNC started an enforcement procedure to collect the claim. Within this procedure, immovable property of the debtor was attached and awarded to PNC for €606,000, which corresponded to 70% of the market value thereof. As the value of the awarded property was higher than the outstanding claim, PNC was required to pay back €417,937.12.
Possibly due to liquidity constraints, PNC transferred its position in the enforcement proceedings to a third party (Starplant) for €351,619.90.
A dispute between PNC and the Portuguese tax authorities (PTA) then arose over the VAT treatment of the amount PNC received from Starplant. PNC considered that VAT should only apply to the amount corresponding to the services supplied to the debtor (i.e., €125,000) as the remainder was VAT-exempt as a transaction concerning the granting, negotiating and management of credit. However, the PTA were of the view that VAT should have been charged on the whole consideration received from Starplant as no VAT exemption would be applicable. Accordingly, the PTA issued an additional VAT assessment.
Upon referral, the Court of Justice of the European Union (CJEU) concluded that the assignment of PNC’s rights and obligations deriving from its position in the enforcement proceedings was a transaction made for consideration and within the scope of its business activity (“is a direct extension of PNC’s main activity”), making it a transaction subject to VAT.
Since the assignment encompassed several elements (i.e., a right to a receivable/debt, a potential right over an immovable property, and the obligation to repay a certain amount), the CJEU referred to case law on composite supplies and went on to determine whether the transaction is to be considered as a supply of goods or a supply of services.
The CJEU stressed that it would be artificial to split the transaction into two supplies of services: the assignment of debt/receivable and the assignment of a claimant’s position in an enforcement proceedings seeking the recovery of a debt. Although recognising that from the various elements of the transaction, the essential element would be the assignment of the immovable property, the CJEU stressed that nothing in the case indicates that before the assignment PNC had already been able to dispose of it as if it were the owner.
Nevertheless, the CJEU clarifies that if the assignment of PNC’s position in the enforcement proceedings had taken place when it could already dispose of the property as owner, then the assignment would qualify as a supply of goods. If not, the transaction would be an assignment of intangible property (i.e., rights over immovable property) and qualify as a supply of services.
The CJEU observed, however, that irrespectively of the assignment qualifying as a supply of goods or a supply of services, the transaction at issue is, by nature, different from that analysed by the CJEU in case GFKL (judgment of October 27, 2011 - C-93/10). In that judgment, the CJEU examined a situation where an operator purchased, at its own risk, defaulted debts at a price below their face value but reflecting their economic value at the time of the assignment. In that instance, the CJEU concluded that such transaction was outside the scope of the VAT, which is not the case of the assignment performed by PNC.
The CJEU further concludes that the assignment does not fall within the exemption provided for the granting and management of credit [article 135(1)(b) of the VAT Directive] as it does not entail any kind of loan/financing transaction. It also rules out the applicability in the case at hand of the VAT exemption provided for transactions concerning debts under article 135(1)(d) of the VAT Directive as it believes the elements being assigned are not limited to the transfer of a debt/receivable.
Implications of the case
Following the PNC decision, a broader discussion is likely to occur on the possibility of applying VAT to transactions that go beyond the mere assignment of debts/receivables or where the assignment of debts is made through the assignment of more complex realities.
As decided in GFKL, it is clear that if the debt remains unpaid and parties decide to transfer it at its economic value, before taking legal action, such a transfer would probably not be considered economic and thus outside the scope of VAT. The implication of the PNC case is that if legal actions have already started and the court has already taken action, the transfer of the debt may make the transaction subject to VAT.
Further to the PNC decision, when the assignment of the secured debt occurs (e.g., mortgage and asset-backed securities) after the debtor is in default, one may be tempted to ask (tax authorities included) what is really being transferred: the receivable or the underlying asset granted as collateral? And, if this is the case, will this assignment of debt no longer be VAT exempt/outside its scope?
We think the PNC judgement must be read narrowly. While more EU case law is being produced, there are still a lot of situations in which the VAT treatment of the transfer of debts/receivables remains uncertain, making this an interesting topic to follow. Meanwhile, the economic operators should continue to look at their transactions involving assignments of debts/receivables to mitigate the risks of unexpected VAT liabilities.
Diogo Ortigão Ramos
T: +351 21 355 38 00
Mário Silva Costa
T: +351 21 355 38 00