Under the current EU VAT rules and regulations, and according to the case law of the European Court of Justice (“ECJ”), the lease of capital equipment either qualifies as a “supply of goods” or as a “provision of a service”. Due to the difference in VAT treatment between a supply of goods and a provision of service, which can result in different treatment regarding the taxable amount, place of supply, invoicing requirements, etc., it is important to carefully assess the VAT qualification of a lease agreement.

In that respect, the decision of a UK court to refer preliminary questions to the ECJ is of utmost importance. In the Mercedes-Benz Financial Services UK Ltd (pending case no. C-164/16) case, the UK court raised several questions regarding the VAT treatment of certain lease agreements to the ECJ. On the basis of these questions, the ECJ may further clarify under which conditions a lease agreement qualifies as a supply of goods for VAT purposes.


In principle, a lease of goods does not qualify as a supply of goods and must therefore be considered as a supply of a service for VAT purposes. The ECJ, however, ruled in the Eon Aset Menidjmunt OOD case (case no. C-118/11) that the lease of goods may nonetheless present features which are comparable to those of the supply of goods and thus qualify as such from a VAT perspective.

The Pending Mercedes-Benz Financial Services UK Ltd (MBFS) Case

The MBFS case relates to the VAT treatment of certain specific leasing agreements, so-called “Agility” agreements. Under such agreements, the lessee obtains the right to use of a vehicle, pays monthly instalments for a specified period and has the option at the end of the period to obtain ownership of the vehicle. The Agility agreement is described as a “Hire Purchase Agreement” and is regulated as such. However, in contrast to a Hire Purchase contract, the monthly payments under an Agility agreement are set relatively low, while the final payment is set relatively high (the so-called “balloon payment”).

The referring court must consider whether the lease transaction meets the criteria on the basis of which a “hire purchase” must be considered a taxable supply for VAT purposes. As a result of the “balloon payment”, the court is unclear whether it can be assumed that “in the normal course of events ownership is to pass at the latest upon payment of the final instalment” and thus whether the lease of goods under an Agility agreement can be regarded as a supply of goods. For that reason, it has raised preliminary questions to clarify the meaning of “in the normal course of events ownership is to pass at the latest upon payment of the final instalment”.

Practical Implications

The ruling of the ECJ, expected in 2017, may result in specific lease transactions being treated incorrectly for VAT purposes. Given the possible VAT and commercial implications of this ruling, we recommend reviewing the specifics of your current lease portfolio or the lease agreements you’ve concluded in the position as lessor. This will enable you to identify the lease agreements that are likely to be affected by the outcome of the MBFS case, and subsequently obtain (high level) insight into the possible VAT and commercial impact the MBFS case may have.