AGEFI Luxembourg - novembre 2022

AGEFI Luxembourg 10 Novembre 2022 Economie / Banques By Erwan LOQUET & Dimitrios KAROUTIS, BDOLuxembourg (1) O ver the years, Luxembourg became a leading center for securitization and struc- turedfinance transactions, thanks to a reliable and investor-friendly legal and tax framework. Indeed, the applicable provisions (Lawof 22 March 2004 as recently amended & EU Regulation 2017/2402) provide for a flexible approach regarding the se- curitization’s definition, the range of assets that can be securi- tized (movable or immov- able, tangible or intangible), the legal form of the vehicle(s) that can be used for structuring the transaction, or the ability to use compartments to segregate the assets and li- abilities within the securitization vehicle (SV). Inparticular, theLuxembourg legislationdefines se- curitizationas the transactionbywhicha securitiza- tionundertaking: 1) acquires or assumes, directlyor indirectly through another undertaking, risks relat- ing to claims, other assets, or obligations assumed by third parties or inherent to all or part of the ac- tivities of thirdparties, and2) issuesfinancial instru- ments (e.g. debt or equity securities) or contracts, for all orpart of it, any typeof loan,whosevalueor yield depends on such risks. From a VAT standpoint, SVs are commonly consid- ered as VAT taxpayers (assujetti) per se, usually not entitledtoanyinputVATrecovery.However,anypo- tential VAT leakage is mitigated by the VAT exemp- tionthatappliestothemanagementservicesprovided tosuchSVs,providedtheymeetthecriterialaiddown by the European Court of Justice (ECJ) in terms of “ being specific to and essential for the activity of managing special investment funds”. As regards the transfer of the risks to the SV, theLux- embourg legislative framework covers different sce- narios,withtheSVacquiringthelegaltitletotheassets directly (true sale), by using credit derivatives (syn- thetic securitization) or by committing itself in any otherway. It is in the case of synthetic securitization that the EJC recently issued a decision in the case “O. Fundusz” (2) which isworth taking intoconsiderationwhenstruc- turing a newsecuritization transaction. How to qualify the transfer of proceeds of receivables to the SV? The dispute with the Polish tax authorities in the above case originates from the request of Fund O., a Polish based securitization fund, for a tax ruling on the VAT treatment of the transfer of all the proceeds fromthereceivablesoftheoriginator(i.e.thebanks/in- vestment funds) in exchange for a contractually agreed financial contribution. For the sake of clarity, the debt securities remained in the assets of the origi- nator. The difference between the financial contribu- tionpaidbyFundO.totheoriginatorandtheamount obtained by Fund O., during the term of the agree- ment, constitutes the FundO.’s remuneration. The mechanism thus fulfils a dual function, namely, first, that of a credit instrument, the originator receiv- ing liquidity in advance in exchange for the commit- ment to transfer the proceeds from the receivables concerned to FundO. and, second, that of risk cover, insofarasthatliquidityisreleasedfromthecreditrisk attached to those receivables. In its decision, the ECJ confirms that in the case at hand, FundO. provides a service“for consideration” to theoriginator. It is irrel- evantthattheremunerationdoesnottaketheformof a commission, an interest or a specific fee. Regarding the qualification of that service, from a VATperspective,theCourtdidnotfollowtheconclu- sionsofAdvocateGeneralMedinaandfoundthatthe agreement between Fund O. and the originator is madeupof a single supply“ which consists, essentially, inapaymentofcapitalinreturnforremuneration ”.There- fore, for the Court, the features of this transaction are similar to the granting of a credit: Fund O. bears the risk of credit in so far as the debt securities remain in the originator’s assets and it is exposed to the insol- vency of the debtors of the receivables, whereas the absence of guarantee (from the originator) is not de- cisive for the qualification of this supply as a credit transaction. Applying the exemption of article 135(1)(b)oftheDirective2006/112/EC(VATDirective) to that transaction is, according to the Court, consis- tentwiththeobjectiveofthatprovisionwhichconsists inavoidinganincreaseinthecostofconsumercredit. Transfer of receivables – some VAT points of attention It is not the first time that the ECJ examines similar securitization transactions, where receivables are transferred in one formor another. The analysis of such transfers has always been chal- lenging considering that, from a VAT standpoint, a commercially singe economic transaction might be comprisingtwopotentialdistinctsuppliesthattrigger different VAT implications for the parties involved. As an example, the sale of a non-performing loan (NPL)mightcomprise,forVATpurposes,thefollow- ing two supplies: i) from the point of view of the seller,asupplyofservicestothepurchaserconsisting in theassignment of intangiblepropertyand ii) from the point of viewof the purchaser, a supply of serv- ices to the seller, consisting in freeing the seller from debt-recovery operations and the risk of the debts not being paid, with a view for the purchaser to re- cover the debt in the future. In addition, given that in these transactions the par- ties involvedmight not agree ona specific remuner- ationormightagreeonaremunerationthatdoesnot take the regular formof commissions/ fixed fees, the assessment on whether these transactions are ef- fected“ in return for a consideration ”and thus shall fall within the scope of VAT is far fromobvious. For in- stance, in the above scenarioof aNPL, it couldbe ar- gued that the consideration received by the purchaser consists in thedifferencebetween the face value of such loan and the purchase price. As regards, the specific issue of the VAT treatment applicable to the acquisition of defaulteddebts, the ECJ has already issued two notable decisions: - In case MKG-Kraftfahrzeuge-FactoringGmbH (3) (MKG), the Court held that a transaction by which a business purchases debts, assuming the riskof the debtors’ default, in return for a consideration (4) , con- stitutes debt collection and factoring services, ex- cluded from the VAT exemption for financial services and therefore taxable. In MKG, the Court did not examine whether MKG, when purchasing the debts fromthe seller,made available any capital to it for consideration. The main difference proba- bly lies in the fact that inMKG case, the debts were transferred to the factor, together with the risk of the debtors’ default. By contrast, in Fund O. case, even if Fund O. had no recourse against the origi- nator, thedebts remainedon the originator’ balance sheet, only the proceeds of the receivables were transferred to Fund O. Therefore, in case of a “true sale” type of securitization, one shouldpay specific attention to the risk that the transaction be rather seen as (taxable) debt collection services provided to the originator. - In case GFKLFinancial ServicesAG (5) (GFKL), the Court examined a purchase of defaulted debts by GFKL fromaGermanbankonanon-recoursebasis. It held that an operator, who at his own risk pur- chases defaulted debts at a price below their face value, does not performa supplyof services for con- sideration and does not carry out an economic ac- tivity falling within the scope of VAT when the difference between the facevalue of thosedebts and their purchase price reflects the actual economic value of the debts at the time of their assignment. In her opinion, AGMedina points out a number of differences between the factual circumstances of GFKL and those of FundO (6) : - In FundO., the situation is not related to the acqui- sition of a debt, let alone a defaulted debt, by the in- vestment fund, but rather a transfer of the proceeds related to the receivables. Fund O. does not acquire defaulted debts at a price below their face value. Moreover, there is no change in the claim itself, meaning that, under the agreement, the originator remains a creditor of the principal debtor, while Fund O. acquires from the originator solely a claim for the payment of the amounts transferred to the originator by theprincipal debtor under the original loan relationship; - Not only does Fund O. purchase the products (the proceedsofthereceivables)ofaportfolioofloans,but it also undertakes to bear the risk of the principal debtor’s failing to pay, at the same time having no right to claim against the originator for that failure. Consequently, it appears that the originator obtains an advantagewhichgoes beyond themere receipt of the nominal value of the receivables of a portfolio of loans; - The claims at issue inGFKL consti- tuteddefaulteddebts,whiletheob- ject of the agreement inFundO. are loans that are not yet due and thus whose recovery cannot be deter- mined at the time of the execution oftheupfrontpaymentbyFundO. For the above reasons, AG Medina was of the opinion that in Fund O., as opposed toGFKL, there is a supplyof a service towards the originator, which enters the scope of the VAT. Never- theless, for the sake of com- pleteness, it should be noted that AG Medinaconsid- ered that this supply shall not benefit from the VAT exemption ap- plicable to the granting ofcreditpursuanttoarti- cle135(1)(b)oftheVATDirective. As onemight see fromthishigh-level comparisonof those three cases, some slight differences in the fac- tual circumstances and the way a securitization transaction is structuredmight lead to totally differ- ent results in terms of VAT impact. Qualification of the services as granting of credit & input VAT deduction right issues Thequalificationof services suppliedbySVs toorig- inators as a granting of credit that benefits from the VATexemptionof article 135(1)(b) of theVATDirec- tive could have a significant impact on the input VAT deduction right of the SVs depending on the place of establishment of the originators (banks/in- vestment funds). Article 169 (c) of the VAT Directive theoretically en- titles a VAT taxpayer for an input VAT recovery when it provides VAT exempt financial services to counterparts established outside the European Union. Therefore, in case the originator is located outside the EU, it could in theory be argued that the SVperforms aVATexempt activity consisting in the granting of credit and it may be entitled to deduct the input VAT incurred on costs that are directly linked to this activity. Nevertheless, it should pointed out that in practice the Luxembourg VAT authorities tend to deny the recovery of the input VAT to any of the investment vehicles cited under article 44(1)(d) LVL, including securitization vehicles. Given that the qualification of the services supplied by SVs are completely fact sensitive, a VAT assessment on a case-by-case basis is absolutely needed. Depending on whether a SV could inpracticehave an input VATdeduction right or not, different VAT compliance obligationswould also be triggered. Andwhat about theVAT treatment of the servicing fees? This particular issue was not examined by the Court inthecaseFundO.,butisfrequentlyraisedinpractice when structuring a securitization transaction. In par- ticular,whentheSVassumestheriskofnon-payment, it will seek to get those receivables paid by the third partiesdebtors.Itwillthusappointaserviceprovider (whichmight be the originator or a specialized third party) to “service” the debt. Therefore, a key compo- nent of the serviceprovided to theSVconsists indebt recovery services, which are, as a principle, subject to VAT.Indeed,article135(1)(d)oftheVATDirectiveex- empts from VAT “ transactions, including negotiation, concerning (…) debts (…), but excluding debt collection ”. In the context of a SV, which, inLuxembourg, is con- sideredas an investment fund in themeaningof arti- cle135(1)(g) of theVATDirective, onemight question whetherthedebtrecoveryservicesprovidedtotheSV shall be nevertheless VAT exempt for the reason that theyare“ specifictoandessentialfortheactivityofmanag- ing special investment funds ”. Two different provisions of the VAT Directive, under the same heading of the VATexemptions,seemtocontradicteachotherinthis specific context of a securitization transaction. Intheauthors’opinion,inthecontextofaSV,itmakes very little doubt that the debt recovery services are essential for the management of the portfolio of the vehicle and thus inprinciple shouldmeet this condi- tion.Nevertheless,astheECJwithitssettledcase-law has set out certain criteria that should be further as- sessed to determine whether services can qualify as essential for themanagement of an investment vehi- cle and, as such, be VAT exempt, a thorough review of the underlying agreements is also required. In practice, akeyelementwouldbe toconfirmwhether the debt recovery constitutes an isolated service or a component of a composite supply of services that as awholeamounts to themanagement of theportfolio assets of the vehicle. As regards the second condition, the Court held in DBKAG (7) that“ bycontrast,serviceswhicharenotspecific to the activity of a special investment fund but inherent in any type of investment do not fall within the scope of that concept of ‘management’ of a special investment fund ”. Therefore, unless specific circumstances, debt recov- eryservicesprovidedtoaSV,consideredinisolation, shouldnot differ toomuch fromdebt recovery serv- icesprovidedtoothertypesofcustomers,andinthat respect, donot seemto fulfill prima facie this charac- ter of being “specific” (8) to themanagement of an in- vestment fund. Conclusion Securitization transactions remainquite complex op- erations, which require an in-depth analysis from a regulatory,legalandtaxperspective.OntheVATside, thisnewECJcaseoutlinestheimportanceofaproper analysis of the project, to anticipate anypossibleVAT leakagethatmightarisewhensettingupthestructure or during its lifetime. 1) Erwan Loquet is Head of Tax&Advisory, Partner at BDOLuxem- bourg,andlectureronindirecttaxationattheUniversityofLuxembourg (MasterIIinInternational&EuropeanTaxLaw).Hecanbecontacted atErwan.Loquet@bdo.lu.Dimitri osKaroutisisManageratBDOLux- embourg and can be contacted at Dimitrios.Karoutis@bdo.lu . 2) ECJ, Case C-250/21, Szef Krajowej Administracji Skarbowej v O. Fundusz Inwestycyjny Zamknięty reprezentowany przez O S.A, De- cision of 6October 2022. 3)ECJ,CaseC-305/01,MKG-Kraftfahrzeuge-FactoryGmbH,Decision of 26 June 2003. 4) In fact, the consideration consisted in the face value of the debts, less agreed charges. The agreed charges comprised factoring commission of 2%and a del credere fee of 1%of the face value of the debts. 5)ECJ,CaseC-93/10,GFKLFinancialServicesAG,27October2011. 6) See points 37-39 of the Opinion ofAGMedina. 7)ECJ,JoinedCasesC-58/20&C-59/20,KandDBKAGvFinanzamt Österreich, Decision of 17 June 2021. 8)Regardingtheinterpretationoftheconceptof“specific”,seealso,ECJ, Case C-231/19, Blackrock, Decision of 2 July 2020. There, the CJEU foundthatasupplyofmanagementservices,providedbyasoftwareplat- form belonging to a third-party supplier for the benefit of a fund man- agementcompany,whichmanagesbothspecialinvestmentfunds(SIFs) and other funds, does not fall within the scope of the VAT exemption. Thisisbecausetheseservicesweredesignedforthepurposeofmanaging investments of various kinds and theymay be used in the same way for themanagementofSIFsasforthemanagementofotherfundsandthere- fore cannot be regarded as specific for the management of SIFs. VAT& securitization vehicles, why proper structuring is key S elon le dernier décompte duministère de la Justice/STATEC, 675 entreprises ont été déclarées en faillite et 573 ont étémises en liquidationpendant les neuf premiersmois de 2022. Faillites Lenombredefaillitesprononcéesentrejanvieretsep- tembre 2022 (750) baisse de plus de 21%par rapport àlamêmepériodedel’annéeprécédente.Lessociétés holdingetfondsdeplacementreprésentent26.2%des faillitespendantlapériodesousrevue,alorsque20.1% desentreprisesenfaillitesontclasséesdanslabranche du commerce. Liquidations Au cours des neufs premiers mois de 2022, les tribu- naux luxembourgeois ont prononcé la liquidationde 573 sociétés, ce qui correspond à une baisse de 25% parrapportàlamêmepériodedel’annéeprécédente. Les sociétés les plus impactées par les liquidations sont celles de type holding et les fonds de placement (45.2%dutotal)etcellesissuesdelabrancheducom- merce (16.1%du total). Lesstatistiquessur les faillitessebasentsur lerelevédesdécisions judi- ciaires,issuduRegistredecommerceetdatantdu17octobre2022pour les données les plus récentes. Source : STATEC Les faillites et liquidations toujours en baisse en 2022

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