Legal Alert – Factoring Services Deemed Subject to Value Added Tax by the Finnish Supreme Administrative Court
On 19 August 2013 the Finnish Supreme Administrative Court issued a judgment (SAC 2013:129) which may have material effects on the financing of receivables created in customers’ business activities. In the case at hand the business activities of the company in question mainly consisted of purchasing of receivables from its customer companies and sending of the purchased invoices to the original customers in its own name. Consequently, it was intended that an original customer pays the invoice to the company instead of the original seller. The company carried the credit risk and received an administration fee based on the number of invoices, a percentage fee based on the sum of invoices and an annual fixed fee from the original seller as a consideration.
The essence of the case was to see whether the consideration received by the company was subject to Finnish VAT or not. The majority of the Supreme Administrative Court shared the opinion of Helsinki Administrative Court and deemed the described activity as transactions subject to VAT, whereas the minority would have classified the transactions partially as financial services exempt from VAT with regard to the percentage fees determined based on the sum of invoices.
Prior to this precedent, tax practice and guidance issued by tax authorities have treated factoring services and collection activities relating thereto as financial services exempt from VAT. This has often been justified by the neutral treatment among different kinds of financial services. By contrast, e.g. collection activities not relating to factoring have been subject to VAT. Therefore, the judgment issued by the Supreme Administrative Court is expected to have significant effects on the financing of receivables as well as on collection services related thereto. Furthermore, as the VAT treatment of factoring varies considerably in different EU Member States, it is very crucial to ensure the correct VAT treatment in cross-border factoring arrangements. In addition, the right to deduct VAT from purchases relating to factoring services as well as possible allocation of purchases between financial transactions which are exempt from VAT and which are subject to VAT shall be evaluated as a consequence of this judgment.