Borenius secures landmark ECJ ruling on VAT treatment of factoring fees

Borenius successfully represented a Finnish company in a preliminary ruling procedure before the European Court of Justice concerning the VAT treatment of factoring fees. In its judgment of 23 October 2025 in Case C-232/24, Kosmiro, the Court ruled that fees charged for both trade factoring and invoice factoring constitute consideration for a single and indivisible supply related to debt collection, which is subject to VAT, rather than an exempt financial service.

Factoring refers to a financial service whereby a business assigns debts on unpaid invoices owed to it by its debtors to a factoring company in order to obtain early payment. The service may take the form of invoice factoring, where the receivables are used as collateral, but legal ownership and the risk of debtor default remain with the client, or trade factoring, involving the outright sale of receivables, where the factoring company bears the risk of non-payment by the debtors.

In the case at hand, the company is a factoring company engaged in both invoice and trade factoring. The company charges various fees and commissions for its factoring services. Since Finnish legal practice on the VAT treatment of factoring fees has lacked clarity and consistency, we assisted the client in applying to the Central Tax Board for a preliminary tax ruling to confirm the VAT treatment of its fees. As the Central Tax Board considered that some of the fees were exempted, we are assisting the company with an appeal in the Supreme Administrative Court (“SAC”).

The SAC had doubts as to how the various fees charged for factoring are to be treated for VAT purposes considering the ECJ case law and VAT Directive. Consequently, it referred a request for a preliminary ruling to the European Court of Justice ("ECJ") in March 2024. The questions referred to the ECJ concerned only the factoring commission and the arrangement fee, since the SAC considered that the clarified VAT treatment of those fees is sufficient to enable it to determine how the other fees at issue should be treated.

Trade factoring is in the scope of VAT

The SAC had raised some doubts of whether in trade factoring, a factoring company that purchases receivables from its clients is also selling services to the clients, or whether, in the absence of such a service, the factoring fees fall outside the scope of the VAT Directive. These doubts expressed by the SAC stem from its interpretation of the judgments in Case C‑305/01, MKG and Case C‑93/10, GFKL.

Nevertheless, the ECJ held that where the factoring company relieves its clients of debt recovery operations and of the risk of the debts not being paid, both the factoring commission and the arrangement fees constitute consideration given in return for a supply of services falling within the scope of the VAT Directive.

Single taxable supply

The central question was whether the factoring commission and the arrangement fees in both trade and invoice factoring constitute consideration for a single and indivisible debt collection service that is subject to VAT, or whether they must, at least in part, be regarded as remuneration for a service exempt from VAT relating to the granting of credit.

In trade factoring, the factoring company provides the debt collection service described above. In invoice factoring, the factoring company undertakes the recovery and collection of debts which, whilst not transferred to the factoring company, are used as security for the financing provided by the factoring company to the client.

It is well established case law that a single supply from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system. Under these circumstances, the ECJ held that for both trade and invoice factoring, the fees paid constitute consideration for a single indivisible service of debt collection subject to VAT. The fees paid are consequently fully taxable.

Direct effect

Finally, there was the question of direct effect of the VAT Directive. The Finnish VAT Act provides that not only the granting of credit but also "any other provision of financing" is to be regarded as an exempt financial service, whereas the latter is not mentioned in the VAT Directive.

Therefore, the SAC had observed that it may not be possible to interpret the national law entirely in accordance with the VAT Directive. In such circumstances, it could become necessary to give direct effect to the provisions of the VAT Directive.

The ECJ held that the provision of the VAT Directive relating to debt collection is unconditional and sufficiently precise to be capable of having direct effect, so that it may be relied on before a national court to contest the application of a rule of national law contrary to it.

The judgment brings welcome legal certainty to the VAT treatment of factoring across the EU. The ECJ took a broad interpretation of "debt collection", an exception to the VAT exemption for financial services.

The judgment can be expected to have an impact on the VAT treatment of factoring services in those jurisdictions where the services are sufficiently similar to the ones discussed in the judgment and where they have (partly) been treated as VAT exempt. The main question now is what activities precisely constitute factoring for VAT purposes. The ECJ's approach suggests that a wide range of arrangements involving the collection of amounts due may fall within the scope of taxable supplies.

In Finland, the SAC will next consider the judgment in the pending appeal process and must also determine the VAT treatment of the other fees that were not referred to the ECJ for a preliminary ruling. In 2022, the SAC concluded in precedent KHO:2022:17 (available in Finnish) that the so-called ‘quasi-factoring’ – where the debts held by the client were not transferred to the factor but used as security for the financing provided – was partly considered VAT exempt granting of credit. The SAC's forthcoming decision in the pending appeal will clarify how the ECJ ruling impacts the VAT treatment of factoring in Finland.

Regarding the implications in Finland, it should also be noted that the principle of direct effect cannot be invoked against an individual. Treating factoring as a fully taxable service may not always be beneficial to factoring companies, particularly where their clients operate mainly in VAT-exempt sectors. Accordingly, there may still be grounds to treat certain factoring activities as “any other provision of financing” and thus VAT-exempt under national law, where such an interpretation operates in favour of the individual.