Leasing business at risk?

EU court ruling and Slovak amendment to the VAT act bring legal uncertainty to leasing agreements with an option to purchase

The judgment of the EU Court of Justice ("EU CJ") C-164/16 Mercedes-Benz may bring a significant change in assessing the chargeable event from the point of view of VAT instalments by financial leasing with the option of purchase for both lessor and the lessee.

The Mercedes-Benz judgement

In this judgment, EU CJ decided whether leasing contracts with an option to purchase, by which the lessee may or may not acquire ownership of the subject of the leased object with the final instalment (the lessee postpones the decision whether the leased subject is to be acquired or returned), can be considered from the VAT point as supply of goods pursuant to Article 14 (2) of the VAT Directive or as supply of services pursuant to Article 24 (1) of the VAT Directive.

Article 14 (2) of the VAT Directive defines as provision of goods a leasing agreement that fulfills the following characteristics:

• the leasing agreement expressly contains a clause on the transfer of ownership of the leased object from the lessor to the lessee
• it is apparent from the provisions of the contract in question that the ownership of the goods is to be transferred to the lessee automatically if the performance of the contract is normal until the end of its duration

CJ stated that the leasing contract with a purchase option does not meet the conditions for the supply of goods within the meaning of the above article, because the second condition is not met under the EU CJ.
 

However, the EU CJ has made exceptions to such an assessment, which would imply that the handover of the subject of the lease to the lessee under the lease option would be considered a supply of goods, if the leasing contract implied that i) the sum of the contractual instalments corresponds to the market value of the goods including financing costs, and (ii) the exercise of the option is not conditional on the payment of a considerable additional amount.

In the light of the above, the EU CJ decided that if the application of the lease option regarding the leased object (considering the financial terms of the leasing contract) were in fact the only economically rational choice the lessee could make, handover of the leased object to the lessee based on a leasing contract with option to purchase would constitute supply of goods and not services. The said decision would therefore mean that the VAT obligation would be made at the time of the transfer of the leased object and not gradually in installments.

The draft amendment to the Slovak VAT Act

The current draft amendment to the VAT Act responds to the aforementioned EU CJ ruling by excluding the rule (the respective sentence will be deleted) for cross-border finance leasing, by which the acquiring party adjusts the taxation of the leasing in question, depending on how this transaction is assessed under the VAT Act applicable in lessor’s Member State.
 

From our point of view, however, the draft amendment to the VAT Act does not adequately reflect the conclusions of the above-mentioned judgment. This may lead to legal uncertainty, since by deleting the rule on cross-border finance leases, the option of purchase can, based on the amendment to the VAT Act as well as the usual practice, be interpreted as a delivery of services and not goods. That interpretation of the provision resulted from the explanatory memorandum to the amendment to the VAT Act with effect from 1 January 2008, which inserted the provision into the VAT Act.
 

If the intention of the legislator was to introduce the conclusions of the aforementioned judgment in the VAT Act, the situation can be addressed by the legislator by (i) adjusting the draft amendment to the VAT Act, which would directly state that the handover of the leased object based on the leasing contract with the option to purchase is also considered as delivery of goods, or (ii) by issuing a guiding document to the existing Article 8 (1) (c) of the VAT Act, which explains the new interpretation of that provision in the light of this judgment.