In its recently published decision of 26 January 2012, the Bundesfinanzhof (German Federal Tax Court) held that the act of purchasing a portfolio of Non-Performing Loans (NPL) should no longer be treated as taxable service. This follows the ruling of the European Court of Justice (ECJ) from 27 October 2011 (GFKL).
The decision finally abolishes the uncertainty of the VAT consequences of NPL transactions which has almost stalled the German market in these types of transactions. The uncertainty was created by the German tax administration's interpretation of a ruling of the ECJ and the follow-up decision of the Bundesfinanzhof from 2003 establishing that non-recourse factoring should be treated as a VAT-able service to the customer.
According to the interpretation of these decisions by the German tax authorities the perceived principles of that ruling should be applied to any acquisition of debt, including the purchase of NPL, i.e. the purchaser was deemed to render a VAT-able supply of service to the seller. The tax should be calculated on the difference between the purchase price and the nominal value; for NPL, the "economic value" could be applied instead of the nominal value. Due to the uncertainty, how to determine the "economic value" and the fact that many suppliers of NPL are not entitled to input-VAT credit, transactions on NPL became so unattractive, that since 2003 only a handful of these transactions were completed in Germany.
In light of the new decisions and the situation of many German banks this should change soon and we should see a substantial number of sales of NPL and other debts. According to the rulings, the purchaser of non-performing loans does not provide a supply of service, if the purchase price is determined by the economic value of the loans; in such situation the acquisition and collection of debts does not constitute an economic activity for VAT purposes. As a consequence the purchaser is also not entitled to claim input-VAT.
It remains to be seen if tax authorities will be questioning the (opposing) treatment of non-recourse factoring or if they, as the ECJ, adhere to the current treatment. Even though it may not be obvious why the ECJ treats NPL and non-recourse factoring differently for VAT purposes, the ECJ did not see a reason to qualify its earlier decision regarding factoring. In future, we expect that non-recourse factoring will continue to be treated as taxable service of a purchaser to a seller and a factor will have the right to deduct.