Under current EU VAT rules, the lease of goods can either qualify as a supply of goods or as a supply of services. In principle, a lease qualifies as a supply of services, unless the lease conditions are comparable to the conditions of a supply of goods.

This distinction is important for establishing, for example the taxable amount, moment when the VAT is due, place of supply and invoicing requirements. It is therefore important to carefully assess the VAT qualification of such agreements. The recent CJEU case Mercedes-Benz Financial Services UK Ltd (C-164/16) addresses the qualification of a lease as a supply of services versus being considered a supply of goods.


The case concerns the VAT treatment of specific lease agreements, so-called agility agreements. Under these agreements, the lessee can use a vehicle for a certain period by paying monthly instalments. The lessee has the option to obtain ownership of the vehicle at the end of the lease period by paying a relatively high final instalment (the so-called balloon payment).

It is unclear for the referring court whether in the case at hand in the normal course of events the conditions of the agility lease agreement constitute a regular lease with an option to buy at the end of the lease (being a lease service from a VAT perspective during the course of the agreed upon lease term). Alternatively the agility agreement would have to be considered to be a hire purchase agreement whereby from a VAT perspective a supply of goods is considered to take place, the VAT being due on the total presumed sales price at the start of the agreed upon term.


The CJEU considers that in case an agreement is a contract for hire which provides that in the normal course of events ownership is to pass at the latest upon payment of the final instalment via a purchase option, that will be considered a supply of goods (rather than a supply of services).This is the case if it can be inferred from the financial terms of the contract that exercising the option appears to be the only economically rational choice that the lessee will be able to make at the appropriate time if the contract is performed for its full term.

This may particularly be the case if the sum of the instalment corresponds to the market value of the leased good, including the cost of financing, and that the lessee will not be required to pay a substantial additional sum for exercising the purchase option.

Practical implications

Often companies will treat a hire or lease agreement that includes an option to purchase an asset after the ending of the lease term as the provision of services. As a consequence of this judgment, it is advisable for companies to review and potentially reclassify their supplies as supplies under existing lease agreements per jurisdiction and per agreement. In case such agreement would indeed be (re)classified as a hire purchase agreement for VAT then VAT will be payable on the total value of the assets at the time of execution of the lease agreement. In addition, reclassification of the transaction as a supply of goods might in an international context also shift the place of the supply itself. Of course, we are happy to discuss the possible implications of this judgment for your business or review specific agreements that might be affected by this judgment.

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