By Dr. Martin Krause Partner Linklaters Oppehoff & Radler, Frankfurt am Main, Germany
In its decision of Sept. 4 (see V R 34/99 at www.bundesfinanzhof.de), the Federal Fiscal Court (Bundes- finanzhof or BFH) implemented the decision taken in the preliminary ruling procedure of the European Court of Justice ("ECJ") dated June 26, 2003 in the matter of MKG-Kraft- fahrzeuge-Factoring GmbH. The court confirmed that a factoring company also qualifies as an enterprise under German tax law in the case of non-recourse factoring and granted the company the right to deduct input tax for services received. This decision is in line with prior ECJ rulings and is therefore not surprising.
The decision, however, also contains an obiter dictum (i.e. a general statement not strictly necessary with a view to the decided case), which could be misinterpreted if regarded separately and thus have an adverse effect on securitizations. But regarding the concrete facts and the ECJ decision, it is to be assumed that the BFH did not want to make a general and abstract statement, which would inevitably lead to a changed view on the treatment of VAT in respect to securitizations.
The BFH decision determines the relationship between the factoring enterprise (factor, purchaser of receivables) and the factoring client (seller of receivables). The preceding ECJ decision did not define or comment on the services rendered by the purchaser. The possible alternatives were the assumption of the collection risk and the management or collection of receivables. In the most unfavorable case, the BFH could now be understood as construing the assumption of the collection risk for VAT purposes as a deemed (fictitious) collection of receivables, since "a commercial activity where a party purchases receivables and simultaneously assumes the default risk ... constitutes a collection of receivables..."
If this sentence of the BFH were generalized and applied outside the factoring case decided, the result would no longer make sense.
Regarding a standard sale of receivables, in the future, every purchaser would render a service to the seller by assuming the default risk (being requalified into a fictitious collecting of receivables), since an assumption of the collection risk is necessarily connected with the purchase of receivables. If the BFH had really wanted to make the fundamental statement that, going forward, any sale of receivables must be regarded as a service of the purchaser to the seller, the BFH would certainly have more clearly emphasized such a fundamental change of jurisdiction.
As for the ECJ decision, however, there is no need to apply it outside the factoring sector, and the decision puts the misleading obiter dictum into perspective. The ECJ ruled that the collection of receivables under recourse factoring is a service subject to VAT - and concluded, on such basis, that the (additional) assumption of the collection risk in non-recourse factoring does not change this result. In our opinion, this is to be interpreted as follows: An (additional) assumption of the collection risk can be legally requalified as a (fictitious) collection of receivables only if the collection of receivables as an (actual) service is dominant to the parties. However, in the case of a standard sale of receivables or a securitization, the collection of receivables as a service does not dominate, so that - in the absence of an actual collection service - the assumption of the collection risk cannot be requalified as a (additional) service subject to VAT. In this case, the assumption of the collection risk does not constitute a service but remains - as an effect automatically arising from the transfer of beneficial title to the receivables - not relevant in terms of VAT. We think that, as a result, even the most recent BFH decision will not change the nature of securitizations.