1. Context
The factor charged a financing commission (depending on risk and duration) and a set-up fee (to cover onboarding and compliance obligations). The Finnish tax authority treated these fees partly as exempt (credit granting) and partly as taxable (collection). The factor considered its services fully taxable.
The case concerned a Finnish company, A Oy, acting as a factor for business clients.
These clients used factoring both to improve liquidity and to outsource the management and recovery of their trade receivables.
The factor offered two models:
- Factoring through assignment of receivables, where the factor purchases the receivables and assumes the insolvency risk;
- Factoring through pledge (invoice financing), where the factor grants credit secured by the receivables but also performs debtor management and collection.
The factor charged a financing commission (depending on risk and duration) and a set-up fee (to cover onboarding and compliance obligations). The Finnish tax authority treated these fees partly as exempt (credit granting) and partly as taxable (collection). The factor considered its services fully taxable.
2. Preliminary questions
The referring court asked the Court of Justice to clarify:
- whether the financing commission and the set-up fee fall within the scope of VAT as services for consideration;
- whether these services are exempt as credit granting (Article 135(1)(b)) or taxable as debt collection (Article 135(1)(d), which expressly excludes collection from exemption);
- and whether Article 135(1)(d) is sufficiently precise to have direct effect.
3. Assessment of the Court
3.1. Factoring through assignment of receivables
The Court held that this model constitutes a service for consideration falling within the scope of VAT.
The financing commission reflects remuneration for assuming both the collection and debtor risk. This distinguishes Kosmiro from GFKL (C-93/10), which concerned the purchase of overdue, doubtful receivables at their economic value – there, no service was present.
The set-up fee, covering the organisation of the factoring process (including KYC and compliance costs), is likewise subject to VAT.
3.2. Factoring through pledge (invoice financing)
Here too, the Court identified one single economic transaction. Although a financing element is present, it remains ancillary to the collection function.
Making funds available is merely a logical consequence of the factoring service, not an independent credit-granting activity.
The Court stressed that economic reality is decisive: whatever its legal form, factoring primarily aims at the recovery of receivables. Splitting the operation into an exempt credit component and a taxable collection component would be artificial.
3.3. Demarcation from credit-granting
An exemption for credit-granting applies only when there is a distinct activity consisting in making funds available against remuneration.
In the case of assignment, no loan exists because the client definitively transfers the receivable.
In the case of pledge, a loan exists, but it is functionally subordinate to the collection activity.
3.4. Scope of the exclusion and direct effect
Article 135(1)(d) expressly excludes debt collection from the exemption for financial services. That exclusion must be interpreted broadly and has direct effect. National courts must apply it even where national law provides a wider exemption.
4. Commentary
After Kosmiro, the dividing line has become sharper. As soon as the collection of receivables forms the essential element of the service, VAT is the rule – regardless of whether the structure is legally organised through assignment or pledge. The Court thereby follows its established approach of interpreting the exemption for financial services strictly.
Does this mean that the Court “disregards” the financing function in certain forms of factoring? In reality, the Court does acknowledge that component but considers it functionally subordinate to the collection activity. The decisive factor remains the economic reality: is the primary purpose financing or collection? Only where the credit component has an independent economic objective, separate from collection, can an exemption still be defended.
In Belgium, this reasoning is largely consistent with the existing administrative position, which already distinguishes between collection of receivables (in principle taxable) and the granting of advances or loans (which may be exempt under certain conditions).
The question now is how the Belgian tax administration and courts will interpret Kosmiro. Will the current nuance between credit and collection be maintained, or will the stricter reading of the Court prevail?
To be continued.