On 22 March 2024, the Supreme Administrative Court issued a ruling (KHO 2024:38) seeking a preliminary ruling from the CJEU regarding the VAT treatment of factoring financial arrangements.
According to the Finnish Value Added Tax Act, VAT is not levied on financial services. Such financial services include e.g. the provision of credit and other financial arrangements, as well as the management of credit by the lender.
The ruling concerned a company engaged in both invoice factoring and trade factoring. The company provided financing to its customers by granting credit against their outstanding invoices within a specified overall limit. Once the receivable was accepted within the scope of credit, the company disbursed the customer an amount corresponding to the agreed-upon credit ratio, minus the company’s fee. The customer’s outstanding invoices served as collateral for the financing provided by the company.
In trade factoring, the company committed to purchasing the customer’s outstanding invoices. After the receivable is accepted under the agreement, the company makes payments to the customer based on the terms of the contract, either for the full nominal value of the invoice or a portion thereof. In the trade factoring, the ownership of the receivables was transferred to the company along with the credit risk associated with the debtors’ potential insolvency.
In the earlier proceedings of the matter, the Central Tax Board ruled that the fees charged by the company to their customers for factoring are subject to VAT to the extent that they relate to receivables and serve as compensation for invoice management and collection services.
The Supreme Administrative Court stated that in both types of factoring, there is a component similar to interest. Based on this, trade factoring could be considered as consideration for financial services in the same manner as stated by the Central Tax Board. On the other hand, in trade factoring, it can be seen that the financial commission is not a fee charged from the customer for VAT purposes, but rather an adjustment item. This adjustment item is defined in such a way that the purchase price of the receivable corresponds to its discounted present value, i.e., its true economic value.
The Supreme Administrative Court stated that although invoice factoring is considered a compensated service falling within the scope of the VAT Directive (2006/112/EC, as amended), it is unclear how the provisions regarding VAT exemptions in the Directive should be interpreted in relation to the various fees charged for such services. The Supreme Administrative Court decided to postpone the matter and request a preliminary ruling from the CJEU regarding the application of the VAT Directive and its immediate legal effect. A particular ambiguity arises in determining whether a factoring company, that buys receivables from its customer is also considered to supply to the customer some of the services covered by the Directive.
The current legal scope in Finland appears uncertain, and the VAT treatment of financial services remains subject to interpretation. We are aware that several similar cases are currently pending in the Supreme Administrative Court, and we are closely monitoring the developments.
If you wish to discuss these topics, please contact:
Castrén & Snellman
