Finally, the ECJ has understood the factoring contracts (apparently), case C-801/19

In its judgment of 17-12-2020, case C?801/19, FRANCK, it seems that, finally, the ECJ has understood the factoring contracts.

It is described in the judgment that Franck, a commercial company dedicated to the processing of tea and coffee, made funds available to Konzum, a retail chain, through the simultaneous conclusion of three types of contracts:

a)      The first of them, called “financial loan agreement”, Konzum, classified as a lender, issued a bill of exchange to Franck, the borrower, who promised to deliver the amount indicated in the promissory note in cash.

b)     By the second contract, called the “contract for the assignment of trade receivables”, whose signatories were Franck, Konzum and a factoring company, Franck transferred the aforementioned bill of exchange to the latter, who, through an operation described as "reverse factoring", it paid between 95% and 100% of the amount thereof to Franck, who transferred said amount to Konzum's account, while acting as guarantor of its collection on the due date of the bill of exchange.

c)      Finally, through the contract known as the “commercial cooperation agreement”, Konzum undertook to return to Franck the interest and expenses invoiced by the factoring company and to pay him a remuneration amounting to 1% of the amount mentioned in the bill of exchange.

The Croatian tax authorities understood that the consideration received by Franck should be qualified as not exempted, so they carried out the corresponding tax assessment, which gave rise to the controversy.

The question put to the ECJ consisted of determining whether, according to article 135.1b) and d) of the VAT Directive, the VAT exemption established by those provisions, respectively, applies to an operation like the one described.

Recalling that whoever is already a VAT taxable person for an economic activity that he carries out on a permanent basis must be considered a “taxable person” with respect to any other economic activity carried out occasionally, provided that such activity constitutes an "activity" within the meaning of art. 9.1 of the VAT Directive (judgment of 17-10-2019, Paulo Nascimento Consulting, C?692/17), as was the case, it has been pointed out that the transaction carried out by the claimant is VAT taxable, although it does not coincide with her main activity.

Also by reference to its own jurisprudence (judgments of 4-9-2019, KPC Herning, C-71/18, or 8-12-2016, Stock '94, C-208/15), the ECJ has indicated the adequacy to make a joint analysis of the operations when there are several, but they have a common purpose, proceeding, in this case, to take into consideration both the economic objective of the operations and the interests of their recipients.

Given that the economic objective of the operation at issue in the main proceedings was to satisfy Konzum's capital needs, since Konzum was unable to borrow funds from financial institutions in Croatia, as a result of its level of indebtedness and the one of the group of which he was a member, the ECJ has deduced that, without prejudice to the verification that corresponds to the national court, Franck's main benefit was the making available to Konzum of the funds that Franck had obtained from a factoring company. The other services that it performed in the execution of the three types of contracts to which it was a party must be considered as ancillary to this main service, lacking a different purpose.

Regarding its treatment, and with regard to the granting of credits, the exemption of which is independent of the condition of lender or borrower, according to settled jurisprudence, the ECJ has referred to the judgments of 15-5-2019, Vega International Car Transport and Logistic, C-235/18, and 17-10-2019, Paulo Nascimento Consulting, C-692/17, to refer it to the making available of funds in exchange for remuneration.

With these premises, the fact that Franck is not a banking or financial entity does not exclude that a service such as the one it performed could constitute an exempt credit granting as such, adding that the fact that the funds made available were not returned to Franck, but to factoring companies, is irrelevant.

Regarding the exemption of operations related to “deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments”, the ECJ has admitted that the bills of exchange issued by Konzum are “other negotiable instruments” for these purposes, since which include the obligation for Konzum, as issuer, to pay the indicated amount to the holder at their maturity (in line with the judgments of 12-6-2014, Granton Advertising, C?461/12, and 22-10-2015, Hedqvist, C-264/14). The qualification made by the parties has been expressly qualified as irrelevant.

The service provided by Franck has been considered as exempt, insofar as it is intrinsically linked to the issuance of the bills of exchange, as far as, by transferring them to the factoring companies, Franck obtained from them the amounts that it had made available to Konzum. Since Franck was a party to the contracts relating to the bills of exchange, it turns out that it fulfilled the specific and essential functions of a transaction relating to the bills of exchange (judgments of 22-10-2015, Hedqvist, C-264/14 and 26-5-2016, Bookit, C?607/14), requirement for exemption.

It has been added to the above that the situation was different from that assessed by the ECJ in its judgment of 26-6-2003, MKG-Kraftfahrzeuge-Factoring, C?305/01, in which the ECJ declared that the operation through which an operator buys credits assuming the risk of non-payment in exchange for remuneration constitutes a credit collection service, excluded from the exemption.

This different conclusion has been based by the CJEU on the fact that, in the present case, Franck neither carried out that collection management operation nor acted as an intermediary in favour of the factoring companies in that context. On the contrary, it is clear from the order for reference that the remuneration he received was paid by Konzum in exchange for the provision of funds. In addition, Franck paid these factoring companies interest and expenses, which were later returned by Konzum.

Added to all of the above in the Franck judgment is the irrelevance of the fact that the disputed operation had the objective of circumventing Croatian banking regulations that prohibit banks from granting loans to companies such as Konzum, due to their debt ratio, recalling the inadmissibility of distinguishing, for the levying of VAT, between legal and illegal transactions (judgment of 11-10-2011, The Rank Group, C ? 259/10 and C ? 260/10, cited, as well as that of 7-7-2010, Curia, C-381/09, relative specifically to financial operations).

What is striking about the issue is not found so much in the judgment we are commenting on, but in the one corresponding to case C-305/01, referred to above. Indeed, in it the ECJ made two striking considerations: the first, that in an assignment of credits the service for VAT purposes is provided by the assignee, not the assignor, the second, that the service provided by said assignee is a collection management service, not exempted.

The first of these issues is a feasible but debatable re-qualification of operations, as in any other situation in which businesses are re-qualified for tax purposes in a way that is different from their legal nature.

The second one, relative to the nature of the operations, also debatable, as has now been shown, when it turns out that in this type of operation the financial component is always relevant. The next, which is the assumption of default risk, is equivalent, from a functional point of view (in my humble opinion), to a credit agreement. Collection management, which the ECJ considered the main one, can be so, as well as not be, as it seems to be recognized.

Additional information about some of those topics can be found in the book "ECJ case-law on VAT", also available electronically, which will be shortly updated and whose link is attached:

https://www.efl.es/catalogo/manuales-juridicos/ecj-case-law-on-vat