CJEU AG considers factoring with debt collection VAT taxed

07/04/25

On 3 April 2025, Advocate General Rantos (AG) issued an opinion in the case of Kosmiro (C-232/24). This opinion follows preliminary questions as raised by the Finnish court on the VAT treatment of certain factoring activities. The AG is of the opinion that the fees associated with factoring services, including financing commissions and arrangements fees, should be considered as the VAT taxed consideration for ‘debt collection’ services. It remains to be seen whether the Court of Justice of the European Union (CJEU) will follow the opinion of the AG.

Background

This case concerns a Finnish company (A) providing financial services, mostly factoring activities. The clients of A are businesses with a certain level of outstanding receivables. These clients make use of A’s factoring services to improve their liquidity and relieve themselves of the efforts connected to the collection of payments. Factoring agreements are concluded between A and their clients either via (1) financing guaranteed by invoices (‘invoice factoring’) or (2) the sale of receivables (‘trade factoring’).

In the case of invoice factoring, A grants financing to its client based on the details of its receivables, up to a total amount determined by A. In this scenario, A takes the responsibility of sending reminders for the debts assigned to it and their extrajudicial collection. These receivables are not legally transferred to A and the risks remains at the level of the client. Any subsequent payment by debtors reduces the credit as provided by A to its client.

In the scenario of trade factoring, A purchases selected receivables from its client in return for payment of an agreed amount. This involves assignment of the relevant receivables and the transfer of the related risks to A.

The questions referred to the CJEU focus on two types of fees as received by A in return for these factoring services: 1) the factoring commission, which is a percentage of each receivable covered by the agreement based on the credit rate and payment terms; and 2) the arrangement fee, which is a fixed amount to cover the setting up and compliance of the factoring process

Opinion of the AG

In short, the AG concludes that for both invoice factoring and trade factoring, both the factoring commission and the arrangement fees are subject to VAT. According to the AG, these fees should be considered the consideration for a ‘debt collection’ service, which is excluded from the VAT exemption for transactions concerning payments, transfers and debts. The AG clarified that ‘debt collection’ captures all forms of factoring, under the assumption that all factoring is aimed at the recovery and collection of debts owed by a third party.

The AG is of the opinion that the factoring services should be considered as one single, composite supply because they are economically unified and interdependent, with the financing component being ancillary to the principal service of debt collection and management. The various services provided under factoring are closely linked and form a single economic supply, reflecting the contractual and economic reality of a single complex transaction.

In response to the final preliminary question, the A-G argues that the exception to the VAT exemption relating to ‘debt collection’ has direct effect and may be relied upon by taxable persons at their national court of law in all EU member states to disapply rules of national law which are incompatible with that provision.

What does this mean for your organisation?

Factoring is a marketing term that is used for a broad spectrum of services which in general offers a solution for the short term liquidity needs of a company based on the accounts receivable of that company. In practice, businesses in the financial sector are often engaged in various types of factoring arrangements. As a result, this term is prone to ambiguity and determining the VAT treatment is of factoring activities is not straightforward, as transactions regarding inter alia debt and the granting of credit are considered VAT exempt, whilst debt collection and services of a more administrative nature are subject to VAT. In some scenarios, such arrangements do not relieve the company of debt collection activities but instead primarily aim to provide a certain level of liquidity and certainty on short term.

If broadly interpreted, the conclusion of the AG suggests that all types of factoring services should be subject to VAT as it considers debt collection. It should however be noted that both forms of factoring brought forward to the CJEU in the Kosmiro case relieve the company of the collection of debts regarding the selected receivables, either as a service (in the case referred to as ‘invoice factoring’) or as a result of the sale of the receivables (‘trade factoring’). As only these two types of factoring were referred to the CJEU in the Kosmiro case and the CJEU typically limits itself to the specific questions as referred, it does not seem likely that the CJEU will provide clarity on the VAT treatment of the full spectrum of factoring services. In our view, regarding all types of factoring as VAT taxed debt collection services would be too simplistic. Instead, it likely remains relevant to determine the VAT consequences of factoring services on a case by case basis.

Further, factoring activities are often comprised of various service components which may or may not include activities such as debt collection, transfer of the default risk, financing, certain administrative and other related activities. The fee structure is also typically based on various parameters, such as in the case at hand. The question that will inevitably arise is whether these fees constitute the consideration of a single supply relating to ‘debt collection’ or whether these fees are (at least in part) regarded as relating to VAT exempt supplies. According to the AG, the fees associated with factoring generally constitute the consideration for a single VAT taxed supply if the principal aim is debt collection. If followed by the CJEU, this would be welcome and practical guidance. This also seems in line with the Dutch Decree on factoring, which mentions that arrangements to transfer certain receivables on a continuous basis are subject to VAT as their principal aim is debt collection and not the mere granting of credit. In this Decree, an exception is made for the incidental transfer of receivables e.g. following a bankruptcy, as this is not based on a continuous agreement.

It remains to be seen if the CJEU will follow the opinion of the AG. This could be favorable for businesses engaged in similar factoring activities for VAT taxable clients. After all, the provision of VAT taxed factoring services would justify the right to recover the corresponding input VAT.

In case of any questions on this topic, please reach out to your PwC contact person.