Loan Intermediary Services: European Union

Abstract

In principle, loan intermediary services that are provided by banks and other financial institutions are not recognized as such in the European VAT system. Instead, the VAT regime follows a commercial law perspective and regards the granting of credit as the relevant supply; consequently, the full interest payment is considered to represent the consideration and thus constitutes the taxable amount. As a general rule, such granting of credit is exempt without credit. However, a few EU Member States allow their taxpayers to opt for taxation in B2B transactions, and the supply is moreover always zero-rated if the credit is granted to a third-country resident. To the extent that the exemption applies, it is to be construed broadly and it also covers most ancillary services. By contrast, the increasing trend to outsource credit processing is not properly reflected in the outdated European VAT legislation and will often result in prohibitive VAT burdens. Finance leases are treated as if they were ordinary (non-finance) leases for VAT purposes, i.e., the loan element is disregarded. In the case of direct loans, their treatment as an independent—exempt—supply depends on whether they are granted explicitly or merely implicitly, by increasing the price for the primary supply. In the former case, the exempt service will have no impact on the deductible pro rata if the granting of credit is merely incidental to the core business of the taxpayer.