Transfer of Defaulted Debts
On 27 October 2011, the European Court of Justice decided that an operator who, at its own risk, purchases defaulted debts at a price below their face value does not perform a supply of services for consideration and does not carry out an economic activity within the VAT scope when the difference between the face value of those debts and their purchase price reflects the actual economic value of the debts at the time of their assignment.
The European Court of Justice (the "Court") released its decision in the case C-93/10 (GFKL Financial Services AG) regarding the VAT treatment applicable to the transfer of non performing receivables on 27 October 2011.
The German Court who referred the case to the Court seeks an answer whether or not the purchase of defaulted debts at a price below the face value of the debts constitutes a supply for services against consideration. In case of positive answer to this first question, the German Court asked whether such supply should be considered as taxable or exempt from VAT and finally what should be the taxable basis of such supply if it does not benefit from a VAT exemption.
This case was notably referred to the Court with the objective to clarify the scope of the MKG case (C-305/01) where the Court held that an operator which purchased debts, assuming the risk of the debtor's default and which, in return, invoices a commission to its clients is performing a taxable debt collection activity. The services provided by the operator consist in this case essentially in relieving its clients from the debt-recovery operations and of the risk of the debtor's defaults. Lots of questions were raised after the release of this case surrounding the questions whether the conclusions of the Court should apply to all transfer of debts or if they should remain limited to certain circumstances as in the MKG case.
In the matter disputed, a German entity (GFKL), purchased from a bank mortgages on immovable property as well as debts related to loan agreements at a price fixed below the face value of the debts. Following the above MKG case, GFKL filed a provisional tax return it which it considered that the difference between the purchase price of the debts and their face value constituted a remuneration received in compensation for the provision of a taxable service. However, GFKL afterwards objected to this tax return before a German court (Finanzamt) who dismissed the objection. GFKL then brought the action before a higher German Court (Finanzgericht) who referred the case to the Court.