AGEFI Luxembourg - mai 2025

AGEFI Luxembourg 10 Mai 2025 Economie O ver the last twenty years, Luxem- bourg has been an attractive hub for structured financing and securitization, developing a flexi- ble regulatory and tax environment for operators of the financing sector. (1) Context In Luxembourg, the local VAT Law provides for the VAT exemptionof: - the granting and the negotia- tion of credit, the management of credit by the one having granted credit (2) - all transactions — including negotiation—concerningreceiv- ables, however “debt collection” is expressly excluded from the scope of thisVAT exemption (3) . Theconstantneedtoobtainimmediatecashflowand a prohibitive increase of the interest rates especially during these last four years, have made businesses progressivelydiscardstringentbankdebtsinfavorof —more affordable— intra-group private debts and structured financing options such as, inter alia , asset- backedsecurities,collateralizeddebtobligations,mer- chant cash advances, sub-participation agreements, factoring, etc. Non-recourse factoring is subject toVAT Factoringisnottheprimarycomponentofsecuritiza- tionbutiscloselylinkedtoit.Factoringisdefinedasa financial transaction where a business will assign its accounts receivable (e.g., loans, invoices) to a third party(calledafactor)atadiscount.Thisarrangement allows the business to receive immediate cash flow instead of waiting for the payment terms of the loans/invoices to be fulfilled. Factoring can be struc- tured as either recourse or non-recourse, depending on whether the factor assumes the risk of non-pay- ment by the debtor. In some cases, businesses simply intend to focus on their own activities, to relieve from the administra- tive tasks and to outsource the collection of their receivables (customers’ debts) toa specializedagent. Suchdebt collectionservices areobviouslyprovided for a fee and, there is undoubtedly a supply of ser- vices subject to VAT. Anotheroptionforbusinessesconsistsofsellingtheir customers’ debts to a “factor”, the risk of non-pay- ment by the debtor — loss — is transferred to the factor and the latter has no recourse against the sell- ing business. In this particular case, before 2003, the practice in all the EU Member States — with the exception of the Netherlands — was to apply the VAT exemption or simply to consider factoring as falling outside the scope of VAT. In 2003, the Court of Justice of the European Union (CJEU)gavearuling(in“MKG”case-law (4) )according to which VAT should in principle apply to non- recourse factoring: - By purchasing receivables, the factor renders a ser- vice which consists in relieving the seller of the debt- recoveryoperationsandtheriskofthedebtsnotbeing paid. - The term “debt collection” must be interpreted as encompassingallformsoffactoring.Servicesprovid- edby anon-recourse factor shouldbe subject toVAT. - In return for the services thus received, the remu- neration corresponds to the difference between the face value of the debts and the amount paid by the factor to the seller for the debts. This decision of the CJEU has clearly been subject to numerous comments and controversy. (5) Afewyearslater,duringthe2008financialcrisis,busi- nesses had tonavigate the liquidity challenges posed by the economic downturn. It was not uncommon for groups to assign “ toxic assets ” (e.g., securities and obligations)intospecialpurposevehicles:wearetalk- ing about factoring. Since themarket value of those assets haddrastically plummeted, the difference between their face value and their “purchase price” turned out to be quite material. Not tomention that thismaterial difference constitutes a “taxable basis” subject toVATas per the ruling of theCJEU. It is worth mentioning that “MKG” case-law is referred into the (non-binding) administrative foot- notes under the relevant provision of the LuxembourgVATLaw. (6) Despite thehugeamounts ofVATat stake, and thepotential irrecoverable input VAT for the clients of factors, the Luxembourg VAT Authorities ( Administration de l’Enregistrement , des Domaines et de la TVA ) did not take a global position, nor did they issue additional written guidelines on thisparticularquestionwhich, all of sudden, became quite relevant for operators of the financing and securitization sectors. Purchase of defaulteddebts at economic value is not subject toVAT In2011, theCJEUhadanother occasion to rule on the purchases ofmortgages on immovableproperty and debts relating to seventy (70) loan agreements that had been terminated and declared mature. The risk of loss was also transferred to the purchaser in this case.TheCJEUspecifiedthatthepurchaserofdefault- ed debts does not provide a service on the condition thatthedifferencebetweenthefacevalueofthedebts and their purchase price reflects the actual economic valueofthedebtsatthetimeoftheirassignment.Such transaction should fall outside the scope of VAT. (7) This decision provided a very welcome clarification in Luxembourg, in reason of a growing number of transactions on “non-performing” and “unsecured” loans on the local market. However, this decision appears to be confined to circumstances where the purchaser pays only the economic value and takes fullriskonthecollection.Ifotherservicescanbeiden- tified, another VAT outcome should be considered. Unfortunately, no real criteria were given by the CJEU to assess the “economic value” of a portfolio of defaulteddebts. Making funds available by using a promissory note is not subject toVAT In 2020, the CJEU (8) dealt with a “reversefactoring”situation and the simultaneous conclusion of three types of contracts: 1. A “financial loan agreement”, where the lender issued a bill of exchange to the bor- rower, who promised to deliver the amount indi- cated in this promissory note, in cash. 2.A“contractfortheassignmentoftradereceivables”, whosesignatorieswerethelender,theborrower,and a factoring company. The borrower transferred the aforementionedbillofexchangetothefactoringcom- pany, who, through an operation described as “reverse factoring”, paid between 95% and 100% of the amount thereof to the borrower. The latter trans- ferredsaidamount to the lender’s account,while act- ing as guarantor of its collection on the due date of the bill of exchange. 3.A“commercialcooperationagreement”,thelender undertook to reimburse to the borrower the interest andexpensesinvoicedbythefactoringcompanyand to pay to the borrower a remuneration amounting to 1%of the amountmentioned in the bill of exchange. The issuewaswhether the proportional commission received by the borrower — in the third agreement —was subject toVATas consideration for adebt col- lection service or was VAT-exempt as consideration forthegrantingofcreditoratransactionconcerninga financial instrument. The CJEU stated that the main purpose of the trans- actionwas to satisfy the borrower’s capital needs (i.e., the latter wanted to circumvent a banking ban). The borrower had performed the specific and essential functions for a transaction relating to the bill of exchange. Accordingly, the remuneration received shouldfallwithinthescopeoftheVATexemptionfor grantingcreditandfortransactionsconcerningnego- tiable instruments. Invoice factoring and trade factoring, both subject toVAT? Themost recent case in relation to factoringhas been submittedthisyeartotheCJEU.ItconcernsaFinnish company which provides financial services, includ- ing factoring. The factoring agreements concluded take either the form of financing guaranteed by invoices (invoice factoring: granting of credit with underlyingdebts assignedas collateral) or the sale of debts (trade factoring: transfer of the risk of default to the acquirer). In both cases, the Finnish company charges fees and commissions as a consideration for its services provided: -Factoringcommission=percentageofeachinvoiced debt covered by the agreement, depending on pay- ment termand credit rating - Arrangement fee = flat rate charge associated with setting-up and activating the factoring process (e.g. AML compliance) The main question referred to the CJEU is whether these arrangements constitute a VAT-exempt grant- ing of credit. The Advocate General (AG) recently shared his conclusions (9) on this case and he took, unfortunately,averyextensiveapproachonthecon- cept of “debt collection”. Both the factoring commis- sion and the arrangement fee charged by a factor in connection with a factoring activity taking the form of a saleof debts or the formof financingguaranteed by invoices constitute the consideration for a single and indivisible supply relating to “debt collection”, which is subject toVAT. TheAGestablishes a full distinction between classic lending arrangements — VAT-exempt — and fac- toring arrangements — subject to VAT. Such inter- pretation might not contemplate the economic aim of a factoring transaction: to sell debts to obtain cash on an immediate basis. Further, the AG considers that VAT should apply not only to non-recourse factoring but also to recourse factoring —without transfer of the risk of default. Such interpretation seems to go beyond the CJEU Judges’ orders in the initial case-law (MKG) concerning factoring. AlthoughtheEuropeanJudgestendtofollowthecon- clusionsoftheAdvocateGeneralusually,itisdifficult to ascertain anything until theCJEUgives a final rul- ingonthiscase.AdecisionconfirmingtheAG’sopin- ion would of course be detrimental to the financing sector inLuxembourg. Impact of a “detrimental” decision inLuxembourg As mentioned, a proportion of structured financing transactions are carriedout via securitizationvehicles in Luxembourg. Several securitization vehicles out- source themanagement of their investment portfolio to external credit servicers.A typical servicing agree- ment can include several functions such asset man- agementservices,debtors’datamaintenance,financial reporting, loan administration, management of the debtor account and…collectionof debts. In principle, the VAT exemption applies to manage- mentservices(includingportfoliomanagement)ren- dered to securitizationvehicles andassimilatedvehi- cles. (10) Uncertaintymight arise on the servicer agree- mentswhichincludedebtcollectionasprimaryfunc- tion,evenifthedebtcollectiondoesnottakeaconsid- erable effort in the economic reality. Obviously, all this calls formore clarity andmaybe a modernizationofthedefinitionofVAT-exemptfinan- cial services. There is aneed to establisha framework that ensures legal certainty regarding the VAT treat- ment of financial services. Benjamin DRAI, Partner, Indirect Tax Papa Saliou DIOP, Partner, Banking & Capital Markets, Luxembourg Securitization Leader EY Luxembourg 1) See Lawof 22March 2004 on Securitization vehicles, Lawof 15 July 2024 on the transfer of non-performing loans 2)Article 44,1,c) Luxembourg VAT Law 3) Cf. footnote 2 4) CJEUCase-law“MKG”, C-305/01, 26 June 2003 5) Walter van der Corput, “Who Makes What Supply? – The InvertedWorld of MKG”, International VATMonitor 6 (2003), p. 465 6) Cf. footnote 2 7) CJEUCase-law”GFKL”, C-93/10, 27October 2011 8) CJEU case-law”Franck”, C-801/19, 17 December 2020 9)AGOpinionCase C-232/24 “Kosmiro”, 03April 2025 10) Cf. footnote 2 The fine line between taxable and VAT-exempt financing services: assessment of the impact in Luxembourg D ans le cadre d'une mis- sion financière avec Luxembourg for Finance (LFF), le ministre des Finances, Gilles Roth, s'est rendu à Londres du 7 au 8 mai 2025. Un partenariat de longue date Gilles Roth y a rencontré Emma Reynolds (cf. photo), secrétaire d'État au Trésor, ainsi que des représentants d'ac- teursmajeursdusecteurfinancier britan- nique ayant également une présence au Grand-Duché. Gilles Roth a déclaré : « Le Luxembourg estleplusgrandmarchéd'exportationde services financiers pour leRoyaume-Uni au sein de l'UE. De plus, 17% des actifs sous gestiondans nos fondsproviennent de promoteurs britanniques. » Le ministre a également participé à un déjeunerd'affairesorganiséparlaCityde Londres afin d'échanger avec des repré- sentantsdusecteurfinancierbritannique. Gilles Roth a souligné : « Le Royaume- Uni et le Luxembourg entretiennent un partenariat de longue date dans le domaine des services financiers, fondé sur la complémentarité et des valeurs communes. Ensemble, nous défendons l'ouverturedesmarchés et lemultilatéra- lisme, garantissant ainsi lesmeilleurs ser- vices pour nos entreprises et nos clients en cette période de volatilité. » « Un ami, un partenaire et un allié important » Le ministre des Finances a aussi visité le Musée impérial de la guerre (IWM), où il a été accueilli par le curateur SimonOfford. Cette visite s'inscrit dans la commémoration du 80 e anniversaire de la fin de la Seconde Guerre mon- diale en Europe. Etdeconclure:«Nousn'avonspasoublié l'engagementduRoyaume-Unienfaveur de notre liberté. Aujourd'hui, la Grande- Bretagneresteunami,unpartenaireetun allié important pour notre sécurité com- mune en Europe et au-delà. » Source : ministère des Finances Gilles Roth en mission financière à Londres : «Unis pour des marchés ouverts » ©MFIN