The General Financial Directorate (hereinafter as the “GFD”) recently expressed its views on the application of VAT on lease back during Coordination Committee No. 592/23.03.22 (hereinafter as the “Committee”), which definitively changed many years of deep-rooted practice when financial lease back was considered to be two separate, mutually-provided transactions.
A lease back is generally understood a situation in which one entity, usually a leasing company, purchases the subject of a lease from another entity, whereas it leases the property back on the basis of a lease agreement.
In the past, the situation was addressed by the Court of Justice of the EU in its decision C-201/18 Mydibel SA (hereinafter as the “Decision”), the conclusions of which are further detailed in the following text. It is very important to know the conclusions of the Decision because, according to the GFD, VAT payers are obliged to adhere to these rules for contracts concluded after the date of publication by the Committee at the latest, after which no other approach is tolerated.
The company Mydibel SA (hereinafter as “Mydibel”), as the owner of several real estates, entered into a contract with a financial institution for the establishment of an emphyteutic right (similar to the Czech right of construction) for a period of 99 years after the immediate payment of the agreed amount, whereas it also entered into an agreement for the lease back of the real estate with the financial institution. Mydibel thus had the right to use the real estate in question for a fixed period of time for quarterly rent, which in the total sum of the individual instalments corresponded to the agreed amount for the establishment of the emphyteutic right plus interest and fees. After the end of the lease agreement, Mydibel had the opportunity to buy the real estate back.
Although the CJEU primarily dealt in the Decision with the adjustment of the previously claimed input VAT from the technical improvement of the real estates in question, it also commented on the VAT issue for the financial lease back.
Following previous case law, the CJEU first remarked that the concept of supply of goods is not equivalent to the transfer of ownership under national regulations, but includes any transfer of tangible property by one party empowering the other party actually to dispose of it as if he were the owner.
In the context of the term “supply of goods”, the CJEU examined whether the granting of an emphyteutic right and the granting of a lease back must be assessed separately or jointly. It stated that the transaction of a financial lease back, from the perspective of the interested parties, exclusively constitutes a financial operation for the purpose of increasing the funds of Mydibel, since the real estate in question remained in its possession continuously and was continuously used for the purposes of taxable transactions, both before and after the financial lease back. It can therefore be deduced that a financial lease back is the only transaction in the given case and cannot be classified as a supply of goods since the financial institution could not dispose of the real estate as the owner (subject to verification of the given facts by the referring court).
In accordance with the conclusions of the CJEU, it can be concluded that for financial lease back operations it is always necessary to assess individually whether there is a reciprocal transaction between the future lessee and the leasing company, or there is only one transaction where the leasing company provides a financial service to the lessee (exempt without the entitlement to claim input VAT).
The incorrect qualification of VAT for financial lease back has significant implications for both involved parties, i.e., both the leasing company and the lessee.
If you have any questions about the information given above, we are ready to discuss your particular situation.
Radka Dubnová, Tax Manager
Petr Drahoš, Senior Tax Manager