On 6th of October 2022 the Court of Justice of the European Union (CJEU) has handed down a ruling with signature C 250/21 in a dispute between the Director of National Fiscal Information (KIS) and a Polish closed-end investment fund concerning the VAT exemption of sub-participation services.
What is a sub-participation agreement?
In a sub-participation agreement, 3 parties are distinguished:
- the debtor,
- the originator (creditor),
- and the sub-participant, who buys the rights to the cash flows due under the receivables.
The sub-participant receives a remuneration, which is the difference between the funding to the originator and the amount it has received over the course of the contract. The sub-participation should be treated as a derivative of the credit facility and thus benefit from VAT exemption.
The substance of the dispute
In the case, the Polish fund requested an individual interpretation regarding the VAT taxation of the aforementioned agreement.
The applicant invoked the exemption in Art. 43 par. 1 point 38 relating to services “(…) granting credits or cash loans and intermediary services in the provision of credits or cash loans, as well as the management of credits or cash loans by a creditor or lender”.
Official positions of KIS, WSA and NSA
The tax authority disagreed with the Applicant’s argumentation and stated that sub-participation should be subject to VAT at the rate of 23%. The Voivodship Administrative Court (WSA) agreed with the applicant, while the Supreme Administrative Court (NSA) – having doubts as to the validity of the issued ruling – submitted a preliminary question to the CJEU.
The Court ruled that the service provided under a sub-participation agreement constitutes a ‘supply of services for consideration’, falling within the definition of the provision of credit in Art. 135 par. 1 letter b) of the VAT Directive.
Significance of the ruling
The ruling provides tax neutrality for this type of financing by increasing the pool of attractive debt financing options and the lack of restriction of the definition of the granting of credit to loans and credits granted by banking and financial institutions.
Aleksandra Philips, LL.B., VAT-specialist
Maciej Gryka, Junior tax consultant