The Court of Justice of the European Union (CJEU) issued a judgment in a case concerning whether a lessor can recover the amount of value added tax (VAT) that it paid to the Bulgarian tax authorities on all lease installments because the lessor did not receive payments for all lease installments from the lessee and also did not receive the contractual compensation that would have replaced the unpaid amount of lease installments.
The CJEU concluded that this situation presented a “non-payment” and that, in the event of a non-payment that was “reasonably likely,” the EU Member States must refund amounts of VAT already paid, even if the EU Member State had made use of the option offered by the VAT Directive not to grant a refund in the event of a non-payment.
The case is: UniCredit Leasing EAD (no. C-242/18 (3 July 2019))
In certain instances (for example, in the Netherlands), tax professionals noted that the CJEU confirmed that compensation that would replace or compensate for all unpaid lease installments in the event of premature termination of the lease agreement must be regarded as VAT-able payments for the lease supply and not as non-taxable compensation for damages. In the Netherlands, under a provision of the VAT law, there is a right to a refund of VAT in the event of cancellation, termination, total or partial non-payment or in the event the price is reduced after the supply took place. The right to a refund arises on the date when the cancellation, termination, dissolution, total or partial non-payment or the price discount is established, with an understanding that in the event of (partial) non-payment, the right to a refund is deemed to have arisen no later than one year after the date on which the refund has become due and payable. The legal options to reclaim amounts of VAT from the tax authorities in the event of non-payment are thus greater in the Netherlands than in Bulgaria. In the Netherlands, the VAT that has become due by way of a VAT assessment can also be reclaimed from the tax authorities for these reasons if the conditions have been met.
For the Dutch practice, note that, according to the CJEU, the compensation that replaces the outstanding lease installments must be regarded as VAT-able payment for the lease performance and (thus) not as non-taxable compensation. In practice, it is not easy to determine whether compensation is taxable for VAT purposes. When compensation is agreed in advance, recent CJEU case law points towards VAT-able payment in the event of early termination of an agreement. This will nevertheless need to be determined on a case-by-case basis.
Read a July 2019 report prepared by the KPMG member firm in the Netherlands
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