The AG concludes that a lease qualifies as a supply of a good instead of a service if the agreement contains an ownership transfer clause and it is economically rational this clause will be invoked.

In the automotive industry leasing is a popular form of acquiring assets. For VAT it is the question whether it qualifies as supply of a good or as a service. If of a supply of a good, VAT on all lease terms (and, if applicable, option price) is due at once upfront. If it qualifies as a service, the lease terms are VAT taxable at the moment the terms are due, in such case the VAT is ‘spread’ over the lease period.

With respect to qualifying lease agreements the Advocate General (AG) of the European Court of Justice (ECJ) delivered an interesting opinion in the case “Mercedes Benz” (C-164/16).

The AG: in order to qualify as supply of a good, a lease agreement must, first, contain an ownership transfer clause. Such a clause can be either a decision automatically to transfer ownership by the end of the agreement term, or an option to purchase the leased asset.

Second, transfer of ownership must follow from the normal course of events. This concept may also be extended to include activities such as exercising a purchase right, which although optional, is in practice the only economically rational course of action, the so-called ‘urging’ option.

Finally, transfer of ownership must take place at the latest upon paying the final instalment. In agreements with a purchase option, the payment of the final instalment opens the opportunity to exercise that option. If the total of instalments corresponds to the leased asset, and exercising that option does not require further significant payment, allowing the option presumes transfer of ownership.