A Finnish company was providing factoring services that consisted in "invoice factoring", which took the form of a credit granted that corresponded to the factored debts, but limited to an amount determined on the basis of the level of risk represented by the activity of the clients. The Factor was also providing "trade factoring", that consisted in purchasing invoices from its client for an amount also defined in accordance with an assessment of the risk inherent to the activity of the client. The factor was receiving a factoring commission, paid in advance and that represented a percentage of the debt, based on the credit rating of the client and an arrangement fee to cover various other services provided by the factor.
The Finnish tax authorities considered that the factoring commission and some other services were to be viewed as VAT exempt financial services, in particular the granting of credit.
The Court held that all services provided by the factor were to be viewed as debt collection services or services ancillary thereto, and – as a result – should be treated as taxable services. This was regardless of the fact that the consideration for those services was based on the debts payment terms and on the level of risk corresponding to the activity of the factor's client.
Key takeaway / recommendation
Drawing the line between transactions concerning debts or other financial services, which are normally VAT exempt and debt collection that is not, can be a difficult exercise. More difficulties arise when both types of services are rendered altogether. A careful analysis of the correct VAT treatment of those services is always recommended as it can have a direct impact on businesses' liabilities and VAT recovery position.
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