VAT treatment of debt collection

At a glance

Important CJEU decision regarding the VAT treatment of debt collection

A closer look

On 23 October 2025, the Court of Justice of the European Union (“CJEU” or “the Court”) issued its decision in the case “Kosmiro” (C-232/24 - The name of the present case is fictitious. It does not correspond to the real name of any of the parties to the proceedings.) relating to the VAT treatment of debt collection/factoring services.

Kosmiro is a Finnish company which provides factoring services to its clients operating in sectors with low cash flow. Its services enable clients to access funds from their invoiced debts immediately—before the payment deadlines expire—and to outsource the collection and follow-up of those payments. The agreements that Kosmiro is entering into with its clients take either the form of financing guaranteed by invoices (invoice factoring) or the sale of debts (trade factoring).

In the case of invoice factoring, Kosmiro, acting as a factor, provides financing to its client by extending credit based on the client’s unpaid invoiced debts.  In such a case, the invoiced debts are not legally transferred but serve as collateral for the financing granted. By contrast, under trade factoring, Kosmiro purchases the invoiced debts from the client and it involves the transfer of the debts to Kosmiro. 

Both types of agreements allow Kosmiro to charge various fees for its services, the mains ones being the factoring commission and the arrangement fee.

The factoring commission is a charge levied in advance and expressed as a percentage of each invoiced debt covered by the agreement. It is calculated in the same way for both invoice and trade factoring, based on the payment terms of the  invoiced debts. The longer the invoice payment term and the lower credit rating of the debts concerned, the higher the amount of factoring commission charged.

The arrangement fee is a flat-rate charge which the clients pay to Kosmiro for activities associated with setting up and activating the factoring process, including compliance with obligations under money-laundering legislation.

Kosmiro and the Finnish tax authorities disagreed on the VAT treatment to be applied.  The dispute went up to the Finnish Supreme Court, which decided to refer the case to the CJEU.

The Court ruled that, in both invoice factoring and trade factoring, the financing commission and the arrangement fee constitute the actual consideration for the supply of services falling within the scope of the EU VAT Directive. These charges represent remuneration for one single and indivisible debt recovery service and are therefore fully subject to VAT, as debt collection is expressly excluded from the VAT exemption applicable to financial services.

This decision is significant for banks, specialized agencies, companies transferring debts for collection and entities such as securitization vehicles purchasing these debts.

An in-depth analysis of each transaction and proper documentation is more than ever necessary to apply the correct VAT treatment.

The Deloitte Luxembourg Indirect Tax team remains at your disposal to discuss the potential impacts on your organization.