The Dutch Supreme Court delivered an important judgment in a VAT procedure regarding financial services rendered by a mortgage service provider ("X") for the benefit of mortgage lenders. In deviation from the judgment of the Amsterdam High Court and the conclusion of the Advocate General, the Dutch Supreme Court ruled that such services are VATable.
X renders services to mortgage lenders in relation to mortgage loans. Among others, X processes the payments between the borrower and the lender after the loan agreement has been concluded. This includes the payment of the loan amount to the bank account of the borrower, the calculation of the interest, the collection of the payment terms from the borrowers, as well as the corresponding financial administration. X was of the opinion that such a service is VAT-exempt on the basis of the VAT exemption regarding transactions such as payments and transfers.
According to the VAT Directive and the Dutch VAT Act, services regarding transactions, such as payments and transfers, are VAT-exempt. Also, the management of credit by the person who is granting the credit is VAT-exempt. Management of credit by another party than the one granting the credit, however, is VATable. Moreover, following a decree of the State Secretary of Finance, normal debt collection is VAT-exempt. The collection of “bad debts,” however, is VATable.
The Dutch Supreme Court analyzed the different elements that the service rendered by X comprises and came to the conclusion that some of the elements are not characteristic of “transactions such as payments and transfers.” Instead, in the view of the Dutch Supreme Court, the elements of the service rendered by X are characteristic of “the management of credit.” As outlined above, the management of credit by the person who is granting the credit is VAT-exempt. However, as X does not grant the credit himself or herself, the VAT exemption does not apply and therefore, the service is VATable. Further, the Dutch Supreme Court decided that X could not rely on the decree of the State Secretary of Finance, as several (non-ancillary) elements of the service are not characteristic of “normal” debt collection, which is exempt under the decree.
This judgment is of importance to credit managers/servicers as well as credit providers who outsource the management of the credit to a third party. Credit managers will have to reconsider whether they should invoice their clients with or without VAT. As financial institutions such as credit providers in principle cannot or have a limited right to deduct VAT charged to them, such VAT will constitute a cost for them.