EU VAT and Financial Services: Sub-participations in loans - ECJ judgement of 6 October 2022 (C-250/21)

In its ruling of 06.10.2022 (C-250/21), the ECJ had to deal with the VAT exemption of sub-participations in loans. Sub-participations make it possible to pass on the income and risks of a loan to other parties who are not involved in the underlying loan. In the case at hand, an investment fund from Poland planned to participate as a sub-participant in loans granted by various financial institutions (originators). For this purpose, the sub-participant (the investment fund) and the respective originator were to enter into the following mutual obligations: The sub-participant should provide financing to the originator, and the originator should remit the proceeds of the loan receivables to the sub-participant, with the originator continuing to hold the debt instruments in its assets. If the debtor defaulted, the sub-participant would have no recourse against it. The sub-participant would only be entitled to the income that the originator could obtain by realizing collateral granted to it by the debtor. 

According to the question referred for a preliminary ruling, the ECJ should clarify whether such a sub-participation is to be regarded as the granting of a loan exempt from VAT pursuant to Section 135 (1) (b) of the VAT Directive (corresponds to Section 4 No. 8 (a) of the German VAT Act). 

According to the ECJ, the sub-participant provides a service for consideration to the originator, which already results from the mutual contractual obligations to provide the financing (service of the sub-participant) and the payment of a fee for this (revenue distribution by the originator). This already shows the proximity of the sub-participation to the "classic" granting of a loan, since the ECJ - in contrast to the position previously taken by the Advocate General - considers the question to be irrelevant, whose default risk the sub-participant actually bears economically: The bearing of a credit risk is inherent in any granting of credit, regardless of whether it is the risk of default by the original borrower or the originator. Ultimately, the other conditions, such as the absence of guarantees in favor of the sub-participant or the retention of the debt instrument by the originator, are not relevant to the ECJ's decision, which is why it considers sub-participations through which capital is provided in return for payment to be a VAT-exempt granting of credit within the meaning of 135 (1) (b) of the VAT Directive. The ECJ also considers such an interpretation to be in line with the principle of neutrality and the purpose of the VAT-exemption, inter alia, not to increase the cost of consumer credit. 

The decision is particularly pleasing for entrepreneurs from the credit industry, as the ECJ precisely did not follow the Advocate General's thoughts. These could have led to the fact that the services within the scope of the sub-participation would have had to be treated as subject to VAT. For companies with a possibly limited right to deduct input tax, this would inevitably have led to additional costs in the amount of the non-deductible input VAT amounts.

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