According to the judgment of the Court of Justice of the European Union in the Belgian company Mydibel, reverse leasing should be regarded as a single financial transaction. The judgment is important in that it is likely to result in a complete change in the approach of tax authorities to the accepted clearing practice.
In addition to operating and financial leasing contracts, there is also a so-called reverse leasing. Such a contract is that an entrepreneur sells its own asset to a leasing firm and then concludes a lease agreement with it under which it continues to use it.
The main objective of such an agreement is to improve the financial liquidity of the entrepreneur and to release funds frozen in purchased assets. Under the Services Goods Tax Act, return leasing is recognised as two the different taxable activities – the supply of goods and services.
Therefore, one the sales invoice is issued by the existing owner of the fixed measure in favour of leasing provider, other leasing provider former owner under the lease agreement. Under the terms of such settlement, both parties have the right to deduct input tax resulting from invoices issued.
This practice is widely accepted by tax authorities. However, it appears that this approach to clearing back leases may soon change.
All due to the March judgment of the CJEU, which sheds new light on the way VAT is settled for back-leasing leasing, both for entrepreneurs and leasing companies (judgment of the day from 27 March 2019, in Mydibel v État belge, reference no. C-201/18).
It remains to be hoped that a possible change in the approach of tax authorities to this issue will have effect on the future and will guarantee taxpayers that their current accounts will not need to be corrected
The case concerned the Belgian company Mydibel, which leased back its properties. The Belgian tax credits disputed the company's accounts and the case was ultimately hung before the Court of Justice of the European Union.
In its ruling, the TEU considered that the sale and lease back (sale and return leasing) transactions concerned by the main proceedings were purely financial transactions aimed at increasing the financial liquidity of Mydibel and the properties in dispute in the main proceedings remained in the possession of the latter, which used them continuously for the purposes of its taxed transactions.
These facts appear to indicate, subject to verification by the referring court, that each of these transactions constitutes one transaction. The establishment of the lease right on the main properties concerned is inextricably linked to the leasing of the same properties.
It follows that, subject to the verification to be carried out by the referring court, any sale and lease back (sale and return leasing) referred to in the main proceedings constitutes one transaction. In this situation, those transactions cannot be considered to be a ‘supply of goods’ because the rights transferred as a result of those transactions to financial institutions in the main proceedings, namely the civil right of lease, reduced by Mydibel’s rights under the lease of immovable property, do not entitle them to dispose of the disputed properties as the owner.
The consequences of this judgment for taxpayers would be significant, as financial transactions are, in principle, exempt from VAT. In this regard, taxpayers are not entitled to deduct the resulting input tax. The Ministry of Finance does not exclude a general interpretation in this respect. It remains to be hoped that any change in the approach of tax authorities to this issue will have effect on the future and will guarantee taxpayers that their existing accounts will not need to be corrected.
Author:
Marcin Kołkowicz
Tax adviser, tax consultant At Russell Bedford Poland Sp. z o.o., a graduate of the Administration, Management and Marketing of the Catholic University of Lublin named after John Paul II. The subject of tax law deals with from 2012. He gained experience in Lublin and in Warsaw tax advisory offices. Author and co-author of many tax publications, in particular for the legal and tax portal TaxFin.pl. In his career, he dealt with both direct and indirect taxation issues, with particular emphasis on VAT.