Subparticipation service may (and may not) be exempt from VAT
(O. Fundusz lnwestycyjny Zamknięty reprezentowany przez O, C-250/21, opinion, 12.05.2022)

Article 135.1.b of the VAT directive states that exempted are “the granting and the negotiation of credit and the management of credit by the person granting it”.

Article 135.1.f of the VAT directive states that exempted are “transactions, including negotiation but not management or safekeeping, in shares, interests in companies or associations, debentures and other securities, but excluding documents establishing title to goods, and the rights or securities (…)”.

The case at hand involves subparticipation agreements.

The performance of such a contract consists in the following. Bank lends money to debtor. A fund (subparticipant) pays a certain amount in advance to the bank. The bank agrees to pay the fund the proceeds (benefits) of the loan. The bank retains title to the assets resulting from the loan, but the risk connected with the loan is transferred to the fund (and therefore the cash flows and risk are removed from the bank’s books).

The remuneration of the fund is the difference between the amount transferred to the bank and the loan proceeds it gains from the loan.

The Advocate General has issued an opinion on whether such a subparticipation service is exempt from VAT. She concluded that the sub-participation service is not exempt under Article 135.1.b because the essential element of that service is risk management and not the provision of capital. However, it is not excluded that the service is exempt under 135.1.f – which is, however, outside the scope of the preliminary question.

The AG’s reasoning in essence was as follows:

• In this case, the fund receives a specific fee for its service. It is therefore a supply of services for consideration.
• For a transaction to be exempt under Article 135.1.b, two elements must be present: the capital and the consideration for making that capital available.
• The provision of financial resources by the fund to the bank when the fund later receives a higher amount than that provided falls within the concept of „providing credit”.
• Here, however, the remuneration is also for the transfer of the credit risk (the bank transfers the credit risk under the agreement). The purpose of the transaction therefore goes beyond the mere financing of the bank.
• Thus, the service is partly one of providing capital, but at the same time one of assuming risk.
• It follows from the systematics of Article 135.1 that a subparticipation agreement with respect to the risk management element does not fall within the scope of Article 135.1.a, but may fall within the scope of Article 135.1.f. The latter provision, however, is outside the scope of the proceedings.
• An analysis of the purpose of Article 135.1 shows that a subparticipation agreement is not exempt from VAT (there is no difficulty in determining the taxable amount and the cost of consumer credit is not affected).