VAT treatment for the contract of forfeiting

Binding tax ruling V0116-17, issued by the Spanish General Tax Directorate on January 20 2017.

Consultant entity performs forfeiting contracts with other companies for which transfer without resources credits to the consultant.

Forfaiting contract although it is similar to factoring, is an atypical commercial contract whereby companies that perform it obtain immediate financing from a third party.

In this case, the consultant entity performs forfaiting contracts with third parties and also with related entities of the same group of companies. Through these contracts, the assignor entities transmit a commercial paper derived of its activity to the entity consultant (forfeiter) that it accepts without resource and that anticipates the amount of the commercial paper, discounting its fee. However, the management of the credits is still being carried out by licensors entities.

At this point, we would like to mention the provisions of article 20, paragraph one, number 18 of the Spanish VAT Law 37/1992 of 28 December, i.e., will be exempt, among others, the following financial operations:

“…
(c) the granting of credits and loans in money, either that is the way that they are done, including through commercial papers or other titles.

(d) other operations, including management, relating to loans or credits made by those who granted them in whole or in part.
…

(e) the transfer of loans or credits.
…”

With respect to the operation consisting on the management of a credit, according to the interpretation of article 135.b) of Directive 2006/112/EC, the transaction will be exempt from VAT provided that such management is carried out directly by the grantor of the credit and not by a third party.

So as this forfaiting contract it can be concluded that the transfer of the credits without resource is an operation subject but exempt from VAT, carried out by the assignor companies to the consultant (forfaiter). However the above, management services which will lend the assignor entities shall be considered as administrative services which will be subject to and not exempt from the VAT.

From the point of view of the assignor entities, operations of transfers of credits carried out by these, constitute a differentiated activity, in such a way that these transactions must be disconnected from the rest to limit the right of these entities to the deduction of VAT.

Finally, this body makes it clear that the consultant entity, as acquirer of credit rights to discount does not render any service to the assignor entities that may be subject to VAT because there is not a direct relationship between the amount of the fee and the service provided. This is because the deduction is mainly related to the risks inherent in the ceded credits. This uncertainty in the collection depends not only on the success of the activities of recovery of claims the consultant but also the evolution of the economy in general and other factors.

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