1. Facts
The plaintiff was a company whose primary business activity was purchasing electronic information systems from Company X and then leasing them immediately back to X. On 27.12.2006, the plaintiff and X concluded a purchase and loan agreement, a lease agreement and a repurchase agreement. They agreed to a purchase price in the amount of EUR 960,000 plus VAT. Furthermore, they agreed to a lease term of 48 months and a monthly lease payment of EUR 23,500 plus VAT. X also granted an interest-bearing loan to the plaintiff for 48 months in the amount of EUR 640,000. At the plaintiff’s request, X was obliged to repurchase the information systems at the conclusion of the lease agreement.

In an invoice, dated 05.03.2007, the plaintiff invoiced X for the lease amount, including VAT at the rate of 19%. The invoice referred to the whole contract period. Invoices for individual installments had not been issued. X’s response was to only make one lease payment in the amount of EUR 23,500. For this reason, the plaintiff terminated the lease agreement.

The plaintiff paid VAT on one lease payment and deducted input VAT from the cost of legal advice. The tax office denied the input VAT deduction, because – in the tax authorities’ view – the sale-and-lease-back scenario qualified as a VAT-exempt granting of a loan in accordance with sec 4 no 8 (a) of the German VAT Act. According to sec 14c para 1 of the VAT Act, the plaintiff owed the VAT shown on the invoice. The tax court in Münster also shared this view.

2. Legal assessment by the Federal Fiscal Court
The Federal Fiscal Court disagreed with the tax authorities’ decision. In the Federal Fiscal Court’s opinion, the plaintiff was entitled to input VAT deduction because it rendered a taxable supply of services to X. The Federal Fiscal Court rejected any suggestion that a tax liability, in accordance with sec 14c para 1 of the German VAT Act, had arisen.

According to the Federal Fiscal Court, the information systems were neither supplied from X to the plaintiff nor supplied back from the plaintiff to X. This conclusion was based on an overall picture of the circumstances, taking into account the agreements and their actual implementation. Several contracts may – depending on respective interests – be considered as being one agreement. Generally speaking, a lessee has the authority to dispose of goods if the ownership is to be transferred to the lessee at the expiration of the contract or the lessee is to possess all of the essential powers attaching to the ownership of the goods. This is typically the case where the lessee bears the risk of the loss of the value of the goods and if the value of the amount of the lease payments is practically identical to the market value of the goods. The Federal Fiscal Court did not criticize the tax court’s conclusion to the effect that the authority to dispose of the information systems was intended to remain constantly with X. Individual provisions of the agreements, which might have provided for a supply of the information systems to the plaintiff, were not found to justify a different outcome.
However, the Federal Fiscal Court recognized a taxable supply of services from the plaintiff to X. This supply of services by the plaintiff was based on the plaintiff’s contribution to X’s balance sheet. X had developed know-how, software and patents for the information system. However, an  accounting prohibition, in terms of commercial law, applied to this. By means of the sale and lease back transaction, X was able to include an equivalent in the form of the purchase price respectively a receivable from the plaintiff as an asset in its balance sheet. By including an asset in the balance sheet, X was granted an economic advantage. According to the Federal Fiscal Court, transactions solely designed to obtain a tax advantage can be considered supplies in terms of the German VAT Act. X was able to report more equity, pay higher dividends and claim a better rating. This was deemed to be an economic advantage.

The Federal Fiscal Court denied a VAT exemption with respect to this supply in accordance with sec 4 no 8 (a) of the German VAT Act. X itself had financed two-thirds of the purchase price for the plaintiff. Therefore, the sale and lease back could at least have served as the granting of a loan in the amount of one-third. The main focus of the supply was the contribution to the balance sheet. The financing element therefore was less important.

The Federal Fiscal Court denied a tax liability in accordance with sec 14c para 2 of the German VAT Act. The invoice referred to the lease agreement. Therefore the invoice was considered to have shown the type of supply appropriately.

3. Conclusion
Leasing agreements must always be assessed on a case-by-case basis. Depending on the structure of the financing, the VAT exempt granting of a loan can be the supply’s main focus or become less important than the taxable supply. The lessor’s contribution to the balance sheet of the lessee may be deemed to be a taxable supply.

Contact:

Thomas Streit, LL.M. Eur.
Lawyer
Phone: +49 (0) 89 / 2 17 50 12 - 75
thomas.streit@kmlz.de

As per: 01.08.2016