VAT on leases (Tax Alert – 2/2013)
Ruling of the CJEU – VAT on leases
Judgment of the CJEU – VAT on leases
On January 17th, 2013, the Court of Justice of the European Union (the “CJEU”) made a judgment in a case No.C-224/11 (BGŻ Leasing sp. z o.o.) on classification of services in respect of insurance of lease objects and leasing services for VAT purposes. In the judgment, the CJEU answered the question whether leasing services supplied together with insurance of the lease object should be classified as two separate services or a single complex service. In addition, the court considered the issue of exemption of insurance of a lease object from VAT if the services are treated as two separate services in accordance with the EU regulations.
The aforesaid judgment is a result of a dispute between the leasing industry and tax authorities. Recently, the latter began applying a restrictive interpretation of the regulations, stating that insurance of a lease object should be subject to VAT at the same rate as the rate for the leasing service, i.e. 23%. Consequently, some leasing companies began adding VAT to the insurance of lease objects, incurring additional expenses. Many leasing companies also tried charging their customers with those expenses.
In the judgment in case No. C-224/11 the Court objected to the tax authorities’ interpretation of tax law. CJEU ruled that as a principle, leasing services and insurance of the lease object constituted two separate services for VAT purposes. The Court stated however that it should be up to an administrative court to determine whether these services, considering the circumstances of a given case, could be considered as one complex service or as two separate services. The Court pointed out that if the seller of services charged the lessee with the exact cost of insurance of the lease object, the service should be considered as separate and exempted from VAT.
Justification of the CJEU’s judgment on taxation of insurance in leasing
In the justification of the judgement the CJEU used strong arguments for considering the two types of services as separate services. In particular, the Court stated that each insurance transaction, by its very nature, was related to the object it covered. Nevertheless the Court emphasised that such a relationship did not provide sufficient grounds for determination of the complexity of a service for VAT purposes, and proper classification of a service should be based on all the circumstances of a given transaction.
Consequences of the judgment of the CJEU
The arguments used in the aforesaid judgment can constitute the basis for challenging the negative decisions issued by tax authorities as a result of incorrect interpretation of tax law, and provide leasing companies with legal avenues to regaining the overpaid VAT. It should be remembered however that such decisions have to be challenged within 30 days from the date of publication of the CJEU’s judgment.
On the other hand, one should take into consideration the risk resulting from the challenging of VAT deductions made in relation to the insurance of a lease object. Tax authorities can try to challenge the legality of VAT deductions made even if previously they decided that a given type of service was subject to an exemption.