The Court of Justice of the European Union (CJEU) issued a judgment in a case concerning the value added tax (VAT) treatment of the assignment of a debt that had been recognized in enforcement proceedings.
The CJEU held that such an assignment was subject to VAT.
The case is: Paulo Nascimento Consulting, no. C-692/17 (17 October 2019)
In 2006, the taxpayer performed property agency activities. Because the customer refused to pay for these services, the taxpayer initiated debt collection proceedings before a district court in Portugal to collect the agency commission of €125,000 increased with VAT and default interest. The court awarded the taxpayer a claim of €170,859.62.
Because the debtor refused to pay, an attachment of immovable property was ordered to secure payment of the amount due. The district court awarded the attached property to the taxpayer for an amount of €606,000—that corresponded to 70% of the market value. Because the taxpayer’s claim was lower, it was obliged to repay €417,937.12—that corresponded to the difference between the €606,000 and the interest that had since accrued on its claim.
The judgment was to become final and irrevocable on 30 September 2010, after which it could be executed in full without any impediment. However, on the day before this, the taxpayer chose to transfer its position in the enforcement proceedings to a third party for an amount of €351,619.90. In this regard, the taxpayer entered €125,000 in its accounts as a fee for its VAT-taxed services on which it paid VAT of €26,250. It recorded the remaining amount (€200,369.90) as “other unspecified income” on which it paid no VAT. The Portuguese tax authorities disputed the VAT treatment of this amount.
As part of the legal proceedings arising from this dispute, the referring court asked the CJEU for a preliminary ruling on whether the assignment for a consideration of a position held in enforcement proceedings falls under the exemption for transactions concerning the granting, negotiation, and management of credit pursuant to Article 135(1)(b) of the EU VAT Directive.
Judgment of CJEU
The transaction examined by the CJEU was the transfer of all the rights and obligations deriving from a position in enforcement proceedings to recover a debt. This debt was recognized in a judgment and its collection was guaranteed.
The CJEU first addressed the question whether the taxpayer acted in the capacity of a VAT-taxable person in the sale of the position in the enforcement proceedings, or whether the incidental nature of the sale precluded this. The CJEU held that the taxpayer acted in the capacity of a VAT-taxable person, given that the sale was a direct extension of its economic activity.
The CJEU then turned to address the VAT treatment. The CJEU noted that the reference for a preliminary ruling did not make clear whether the taxpayer could dispose of the immovable property as owner at the time of the transfer of the position in the enforcement proceedings (29 September 2010). If that were the case, then the transfer must be regarded as the supply of tangible property. If that were not the case, the transaction must be regarded as the transfer of intangible property (i.e., a right to immovable property) and would qualify as service. The CJEU did not address this any further (and it also does not appear relevant to the outcome of the case).
The CJEU noted that, irrespective of the qualification, the outcome of the judgment in the GFKL case (no. C-93/10) did not apply here. The GFKL case concerned a business that acquired default debts at its own risk at a price below their face value. The CJEU held in this judgment that the assignee of the claim did not perform a service for a consideration (to the assignor) and that the assignee did not perform an economic activity. According to the CJEU, the nature of the transfer by the taxpayer in the instant case of its position in the enforcement proceedings differs from the transaction at issue in the GKFL case.
Lastly, the CJEU found that the assignment of the position in the enforcement proceedings is not VAT-exempt by virtue of the VAT exemption for transactions concerning the granting, negotiation, and management of credit pursuant to Article 135(1)(b) VAT Directive.
Tax professionals consider that the CJEU correctly held that the present case does not involve the granting of credit. Even more interesting is the fact that the CJEU found that the assignment of the position in the enforcement proceedings does not relate to a transaction concerning debt. The application of the VAT exemption for transactions concerning debts (Article 135(1)(d) VAT Directive) thus fails.
Implications for taxpayers in the Netherlands
In Dutch practice, the assignment of debts is not subject to VAT. Simply put, such an assignment involves “cash for cash.” The assignee pays an amount in order to enter a monetary claim from someone else in the accounts. This can thus involve a non‑economic activity or a VAT-exempt assignment of a debt.
The judgment in the Paulo Nascimento case may provide nuance to this. Apparently, there is a moment when the recovery of a debt is so far advanced that there is no longer a debt, but a more comprehensive claim / position in legal proceedings. Moreover, the facts in this case seem rather specific and probably determined the outcome. In particular, the fact that the position in the enforcement proceedings was transferred one day before the judgment became final and irrevocable, may have contributed to the CJEU’s decision.
Nevertheless, the case does raise questions for current Dutch practice. Of particular interest is the question when the assignment of a debt that falls outside the scope of VAT or is VAT-exempt turns into an assignment of a claim that is subject to VAT, as in the Paulo Nascimento case. An undisclosed assignment (when a debt is only transferred for economic purposes) is thus more likely to remain outside the scope of VAT than a full assignment (when the legal rights and obligations of the claim are also transferred).
A question that still has not been completely answered is what is the tax base. The Portuguese tax authorities appeared to assume that the tax base is the amount that was paid to the taxpayer (€351,619.90). However, this amount is made up of, on the one hand, the right to an immovable property and, on the other, an obligation to repay an amount. Query whether it is correct to net these amounts and if it makes a difference whether the taxpayer has the right to dispose of the immovable property.
It is also unclear whether there is some risk of paying double VAT. Normally, a property agency such as the taxpayer will issue an invoice with VAT for its services and remit the VAT. The taxpayer is finally paid for this at the end of the proceedings; thus, there is ultimately no bad debt, which means that, in principle, the VAT remains payable. It appears that at the time of the assignment of the claim, a new transaction took place that is again subject to VAT. If this is indeed the case, then VAT is, in principle, charged twice on the €125,000 that was received.
Tax professionals have said that they are inclined to interpret the scope of the judgment in this case narrowly because it involved quite specific facts and circumstances. The position was assigned at a price that was higher than the face value of the underlying debt, whereby the referring court had already established the supply was for consideration. Furthermore, the debt was recognized in a judgment and its collection was actually guaranteed. Moreover, the assignment took place one day before the position in the enforcement proceedings would become final and irrevocable. Taking economic reality into account, the CJEU Advocate General had already argued in an opinion that there was no assignment of a debt but the assignment of (the right to) an immovable property.
Read an October 2019 report prepared by the KPMG member firm in the Netherlands
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