Leasing operations in the VAT and its qualification as provision of service or supply of goods. Judgment of ECJ of October 4, 2017


Traditionally there has been a problem in relation to leasing operations and their qualification for VAT purposes such as provision of services or delivery of goods, since that qualification will affect to the moment the VAT becomes due and payable, as from the moment of the supply of the goods, if it is classified as delivery of goods, or with each instalments, if it is qualified as service provision.

The article 14 of the Directive 2006/112/EC of VAT, qualifies as delivery of goods, in section 2.b) “the actual handing over of goods pursuant to a contract for the hire of goods for a certain period, or for the sale of goods on deferred terms, which provides that in the normal course of events ownership is to pass at the latest upon payment of the final instalment”.

Precisely is the wording and interpretation of this article 14.2.b) of the Directive what is questioned the European Court of Justice (ECJ) in the judgment with case number C-164/16, of October 4, 2017. In particular, the case is about an entity that has three standard contracts for financing the use of motor vehicles: Leasing, Hire Purchase and Agility. In all three cases the company maintains ownership of the vehicle for the entire duration of the contract and the lessee pays monthly instalments.

However, in the Leasing contract the transfer of the property is excluded, while the other two do establish a transfer of ownership. In the Hire Purchase the payments made represent the total sale price plus the financing cost, paying a small final amount that also does not depend on the exercise of the purchase option. As regard the Agility, monthly payments represent 60% of the sale price plus the cost of financing, so to exercise the purchase option the lessee must pay the remaining 40% and three months before the end of the contract is asked if he wants to exercise the option, where in most cases the answer is affirmative.

Of these three contracts, the Court is asked whether the third one (Agility) qualifies as delivery of goods or as service provision, in accordance with the interpretation of article 14.2.b) of the Directive. The qualification as delivery of goods of the other two contracts is not questioned.

The Court considers that the mere qualification of the contract as a financial lease does not allow classification of the operation in one way or another, but, as the article in question establishes, it must be determined whether the object is the lease of the property when in the normal course of events ownership is to pass at the latest upon payment of the final instalment. For this it is important that the contract meets two requirements:

– That it contains an express clause relating to the transfer of ownership of the property (not only the power of disposition but its full ownership). The same is understood contained when there is a purchase option in the contract.

– That the term “expiration” is used, which is not usual in lease contracts.

Thus the Court concludes that the provision of the Directive can only be interpreted in the sense that the payment of the last instalment entails the transfer of ownership of the property by right, which is incompatible with the existence, for the lessee, of a true economic alternative, allowing it to acquire it, or to return it or to ask for an extension of the contract. In this sense, the Court concludes that this article applies when the purchase option is presented as the only reasonable economic alternative for the lessee at the end of the contract.

Attached is a copy of the Judgment with case number C-164/16.

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ECJ C 164_16

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