Briefing document & Podcast: C-438/13 (BCR Leasing Case) – Relief for Leasing Firms Facing Asset Non-Recovery

Briefing Document: BCR Leasing Case (C-438/13) – VAT on Unrecovered Leased Goods

Subject: Analysis of the Court of Justice of the European Union (CJEU) ruling in Case C-438/13, BCR Leasing IFN SA v Agenţia Naţională de Administrare Fiscală, concerning VAT treatment of unrecovered leased goods after contract termination.

1. Executive Summary:

The CJEU ruled that a leasing company is not required to pay VAT on goods that were not recovered from a lessee after the termination of a financial leasing contract due to the lessee’s breach. The Romanian tax authority (Agenția) had argued that the unrecovered goods constituted a “self-supply,” triggering a VAT obligation. The CJEU rejected this argument, clarifying the interpretation of Articles 16 and 18 of the VAT Directive (2006/112/EC). However, the court emphasized that its ruling doesn’t preclude tax authorities from requiring adjustments to initial VAT deductions under Articles 184-186 of the VAT Directive if circumstances warrant. This case clarifies VAT implications for financial leasing and ensures consistency across the EU, while underscoring the importance of potential deduction adjustments.

2. Background:

BCR Leasing, a Romanian financial leasing company, entered into financial leasing contracts for cars. Due to lessee defaults, BCR Leasing terminated some contracts. Some lessees refused to return the leased cars. The Romanian tax authority (Agenția) conducted an audit and assessed additional VAT on BCR Leasing, arguing that the unrecovered goods constituted a “self-supply” according to Romanian fiscal code. BCR Leasing challenged this assessment, arguing incompatibility with the VAT Directive. The Curtea de Apel București (Bucharest Court of Appeal) referred the matter to the CJEU for a preliminary ruling on the interpretation of Articles 16 and 18 of the VAT Directive.

3. Key Legal Questions:

The core legal question was: “May a situation involving goods under a financial leasing contract which, following termination of the contract as a result of the lessee’s breach, have not been recovered from the lessee by the leasing company… be considered a supply of goods for consideration within the meaning of Article 16 of [the VAT Directive] or, possibly, a supply of goods for consideration within the meaning of Article 18 of [the VAT Directive]?” (Judgment, Para. 21)

4. CJEU Analysis and Ruling:

The CJEU addressed whether the non-recovery of leased goods could be treated as a supply of goods for consideration under Articles 16 and 18 of the VAT Directive.

Article 16 (Self-Supply): The CJEU ruled that Article 16 did not apply. This article addresses situations where a taxable person applies goods from their business assets for private use, disposal free of charge, or use for purposes other than their business. The Court reasoned:
The goods were not intended for the private use of BCR Leasing or its staff.
The lessee’s possession was due to breach of contract, not a free disposal by BCR Leasing.
The goods were being used for the very purpose of BCR Leasing’s business (leasing). As stated by the Court, “It is clear that the impossibility of actually recovering the goods under the financial leasing contract in circumstances such as those of the case in the main proceedings, does not fall within any of those situations.” (Judgment, Para. 25)
Article 18 (Transactions Treated as Supply of Goods): The CJEU ruled that Article 18 also did not apply. This article allows Member States to treat certain transactions as supplies of goods for consideration. However, none of the conditions outlined in Article 18 were met in the BCR Leasing case. Specifically:
BCR Leasing fully deducted the input VAT when purchasing the vehicles, rendering Article 18(a) irrelevant (which concerns situations where VAT was not fully deductible on acquisition).
BCR Leasing did not use the goods for a non-taxable activity (Article 18(b)).
BCR Leasing did not cease to conduct a taxable economic activity (Article 18(c)).

The Court concluded: “Articles 16 and 18 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that the impossibility, for a leasing company, of recovering from the lessee the goods let under a financial leasing contract following its termination as a result of the lessee’s breach… may not be treated as a supply of goods for consideration for the purposes of those articles.” (Judgment, Para. 34)

5. Significance of Articles 184-186 (Adjustment of Deductions):

The CJEU emphasized the importance of Articles 184 to 186 of the VAT Directive, which relate to the adjustment of deductions. While the Court ruled against the “self-supply” argument, it clarified that this ruling does not prevent tax authorities from requiring an adjustment of the VAT deduction if warranted. This means that the tax authorities may still require BCR Leasing to adjust its initial VAT deductions if the circumstances surrounding the unrecovered goods necessitate such an adjustment, as defined within the VAT Directive. This relates to changes in factors that determine the amount of VAT deducted, such as cancellation of purchases or price reductions. While “destruction, loss or theft of property duly proved or confirmed” do not require adjustment, Member States may require adjustment in the case of theft.

6. Implications:

Clarity for Leasing Companies: The ruling provides greater clarity for financial leasing companies operating within the EU. It reduces the risk of unexpected VAT liabilities when leased goods are not recovered due to lessee breach. The ruling establishes that the non-recovery of goods does not automatically trigger a VAT obligation under Articles 16 or 18.
Consistent Application of VAT: The ruling promotes a more consistent application of VAT rules across the EU in similar situations involving financial leasing contracts and unrecovered goods.
Potential for Deduction Adjustments: The ruling underscores the importance of Articles 184-186. Tax authorities retain the right to require adjustments to initial VAT deductions if circumstances change. Leasing companies need to be aware of this potential and maintain accurate records to justify initial deductions.

7. Conclusion:

The BCR Leasing case provides important clarification regarding VAT treatment of unrecovered leased goods. The CJEU’s decision limits the application of the “self-supply” concept in such scenarios, offering relief to leasing companies. However, the ruling also highlights the potential for adjustments to initial VAT deductions, reminding businesses to remain vigilant regarding changing circumstances and their potential impact on VAT obligations.