Lease agreement with buyout option, from whose provisions it follows that buyout is the only economically viable option, is the supply of goods pursuant to the VAT directive.
This follows from the judgment of the Court of Justice of the European Union of 4 October 2017 regarding the case C-164/16 Commissioners for Her Majesty's Revenue & Customs v Mercedes-Benz Financial Services UK Ltd.
The case concerned the British company Mercedes-Benz Financial Service UK, offering its customers three types of model agreements financing the use of vehicles: a standard lease agreement, a lease agreement and a lease agreement with a buyout option that combines certain features of the first two agreements and is presented as a contract that allows customers to defer choice between leasing and purchasing until the time after the vehicle is released.
The dispute concerned qualification of agreements for the purposes of VAT regulations. The Court of Justice of the European Union had no doubts about the first two types of contracts entered into by the company, qualifying:
- a lease agreement as a service agreement, as a result of which it is subject to tax in relation to each monthly fee, and the basis of taxation is the fixed amount of the monthly fee,
- a lease agreement as a supply of goods, resulting in VAT being due in full at the time of handing over of the car, and the basis for its calculation is the total price of delivery.
The third type of agreement offered by the taxpayer raised doubts. In this agreement, monthly instalments are substantially lower than in the offered lease contract – their total amount accounts only for approximately 60% of the vehicle selling price plus financing costs. If a user wants to use the buyout option, they must pay approximately 40% of the selling price. The amount of the "final fee" corresponds to the average residual value of the vehicle at the end of the agreement. Almost half of the lessees choose to use the buyout option.
In fact, the essence of the dispute concerns interpretation of art. 14, section 2 (b) of Council Directive 2006/112/EC and whether the lease agreement with a buyout option concluded by the company fulfils the conditions for its acceptance as a supply of goods under the aforementioned regulation, whereby the supply of goods is deemed, apart from the right to dispose of goods as an owner, also the actual supply of goods according to the agreement of lease of goods for a fixed period of time or the sale of goods under conditions of deferred payment, which contains a clause on the transfer of ownership following normal events, no later than at the moment of paying the last instalment.
It can be concluded from the judgment that the lease agreement where buyout takes place together with payment of the last instalment or a small amount constitutes, in fact, the supply of goods. This also applies where the agreement gives a possibility of buyout, and using this option is economically viable for the taxpayer (i.e. the amount to be paid is relatively low in comparison with the market value of the leased asset). As a result, VAT on such transaction is due in full at the time of supply of the leased asset and the taxable amount is the total delivery price.
This judgment is of paramount importance for entities that are parties of operating lease agreements. It follows that the national regulations relating to VAT charged on lease are inconsistent with the VAT Directive and the judgment of the Court of Justice of the European Union. As a consequence, one may anticipate relevant amendments to the Polish VAT Act. At the same time it should be pointed out that qualification of the discussed type of agreement as a supply of goods will significantly affect financial liquidity of the entrepreneurs who will pay the entire VAT at the time of the delivery of the leased asset.
Barbara Otrzonsek, tax consultant, ATA Tax Sp. z o.o.