C-305/01 MKG-Kraftfahrzeuge-Factoring

JUDGMENT OF THE COURT (Sixth 26 June 2003 *

In Case C-305/01,

REFERENCE to the Court under Article 234 EC (Germany) for a preliminary ruling in the proceedings between

Finanzamt Groß-Gerau

and

MKG-Kraftfahrzeuge-Factoring GmbH,

on the interpretation of certain provisions of the Chamber)

by the Bundesfinanzhof pending before that court

Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1),

* Language of the case: German.

THE COURT (Sixth Chamber),

composed of: J.-P. Puissochet, President of the Chamber, R. Schintgen (Rapporteur), C. Gulmann, F. Macken and J.N. Cunha Rodrigues, Judges,

Advocate General: F.G. Jacobs,

Registrar: L. Hewlett, Principal Administrator,

after considering the written observations submitted on behalf of:

— MKG-Kraftfahrzeuge-Factoring GmbH, by P.A. Schultheis, Steuerberater,

— the German Government, by W.-D. Plessing and M. Lumma, acting as Agents,

— the Commission of the European Communities, by E. Traversa and K. Gross, acting as Agents, and A. Böhlke, Rechtsanwalt,

having regard to the Report for the Hearing, after hearing the oral observations of MKG-Kraftfahrzeuge-Factoring GmbH, represented by N. Ebbert, Rechtsanwalt, of the German Government, represented by M. Lumma, and of the Commission, represented by K. Gross and A. Böhlke, at the hearing on 9 January 2003,

after hearing the Opinion of the Advocate General at the sitting on 6 March 2003,

gives the following

Judgment

Legal context and the dispute

1By order of 17 May 2001, received at the Court on 3 August 2001, the Bundesfinanzhof (Federal Finance Court) referred to the Court for a preliminary ruling under Article 234 EC two questions on the interpretation of certain provisions of the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1; 'the Sixth Directive').

2Those questions were raised in proceedings between the Finanzamt Groß-Gerau (Tax Office, Groß-Gerau; 'the Finanzamt') and MKG-Kraftfahrzeuge-Factoring GmbH ('MKG-GmbH') concerning the method of calculating the value added tax ('VAT') which MKG-GmbH is liable to pay as a company engaging in 'true' factoring.

Relevant provisions

The Sixth Directive

3Article 2, which forms Title II ('Scope') of the Sixth Directive, provides:

'The following shall he subject to value added tax:

1. the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such;

2. ...'

4Article 4 of the Sixth Directive, which constitutes Title IV ('Taxable persons'), states in its first two paragraphs:

'1. "Taxable person" shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity.

2. The economic activities referred to in paragraph 1 shall comprise all activities of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions. The exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis shall also be considered an economic activity.'

5Article 13 of the Sixth Directive, which is headed 'Exemptions within the territory of the country' and forms part of Title X ('Exemptions'), provides:

'A. Exemptions for certain activities in the public interest

B. Other exemptions

Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse:

(d) the following transactions:

1. the granting and the negotiation of credit and the management of credit by the person granting it;

3. transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection and factoring;

C. Options

Member States may allow taxpayers a right of option for taxation in cases of:

(b) the transactions covered in B(d)... above.

Member Stares may restrict the scope of this right of option and shall fix the details of its use.'

6Only the English and Swedish versions of Article 13B(d)(3) of the Sixth Directive refer in the final clause not only to debt collection but also to factoring.

Article 17 of the Sixth Directive, which is headed Origin and scope of the right to deduct' and is included in Title XI ('Deductions'), provides:

'1. The right to deduct shall arise at the time when the deductible tax becomes chargeable.

2. In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:

(a) value added tax due or paid in respect of goods or services supplied or to be supplied to him by another taxable person;

...'

National legislation

8Paragraph 1 of the Umsatzsteuergesetz 1991 (German Law on Turnover Tax; 'the UStG 1991'), headed 'Taxable transactions', reads as follows:

'(1) The following transactions shall be subject to turnover tax:

1. Supplies of goods and services effected for consideration by a trader within the territory of the country in the course of business....

9Paragraph 2 of the UStG 1991, headed 'Trader, business', states:

'(1) "Trader" shall mean any person who independently carries on a trade, business or professional activity. "Business" includes the entire trade, business or professional activity of the trader. Any activity pursued on a continuing basis for the purposes of obtaining income is a trade, business or professional activity, even if there is no intention to make a profit or if activity of an association of persons is confined to its own members.

...'

MGK-KRAFTTFAHRZEUGE-FACTORING

10Paragraph 4 of the UStG 1991, headed 'Exemptions in respect of supplies of goods and services and own use', provides:

'The following transactions covered by Paragraph 1(1 )(1) to 1(1 )(3) shall be exempt:

8. (a) the granting, negotiation and management of credit and the management of security for credit,

(c) transactions, including negotiation, concerning pecuniary debts, but excluding debt collection,

...'

11Paragraph 9 of the UStG 1991, headed 'Waiver of exemption', states:

'(1) A trader may treat a transaction which is exempt under Paragraphs 4(8)(a) to (g)... as taxable if the transaction is carried out with another trader for his business.

...'

12Paragraph 15 of the UStG 1991, headed 'Deduction of tax', provides:

'(1) A trader may deduct the following amounts in tax:

1. tax identified separately on invoices within the meaning of Paragraph 14 in respect of supplies of goods and services which have been effected by other traders for his business....

(2) No deduction may be made in respect of the tax on supplies... of goods and services used by the trader to carry out the following transactions:

1. exempt transactions;

...'

13In the Umsatzsteuer-Richtlinien 2000 (Guidelines relating to turnover tax; 'the UStR 2000'), the tax authorities have adopted the following provisions:

— The third sentence of Part 18, paragraph 4, of the UStR 2000 reads as follows:

'True factoring (that is to say, the purchase of debts with full assumption of the risk of default) does not constitute a business activity for the factoring company because it does not effect a supply for consideration either when purchasing or when recovering the debt (see the judgment of the Bundesfinanzhof — BFH — of 10 December 1981, V R 75/76, in BFHE 134, 470, BStBl II 1982, 200).'

— The first six sentences of Part 57, paragraph 3 of the UStR 2000 state:

'Quasi-factoring refers to the situation where the client ("Anschlusskunde") assigns to the factor debts owed to him arising from the supply of goods or services but remains fully liable in regard to the debtor's ability to pay. In economic terms the client is still the owner of the debts. The activities carried out by the factor for the client in cases of quasi-factoring are the grant of credit, assessment of debtor solvency, management of debtor accounts, preparation of analyses and statistical material and debt collection. This involves the provision of a number of principal services. Under Paragraph 4(8)(a) of the UStG 1991, the grant of credit by the factor to clients is exempt from tax. The other services provided by the factor are, on the other hand, taxable (judgment of the BFH in BFHE 134, 470, BStBl II 1982, 200).'

— The first and second sentences of Part 60, paragraph 3, of the UStR 2000 provide:

'True factoring involves an assignment by the client to the factor of pecuniary debts owed to the former which is tax exempt under Paragraph 4(8)(c) of the UStG 1991 (judgment of the BFH in BFHE 134, 470, BStBl II 1982, 200). True factoring occurs where the client assigns to the factor debts owed to him arising from the supply of goods and services and the latter assumes the risk of any loss arising in connection with the debts acquired.'

The main proceedings and the questions referred for a preliminary ruling

14It is apparent from the papers in the case before the Bundesfinanzhof that MKG-GmbH, which brought the action giving rise to the main proceedings and is now the respondent to the appeal on a point of law before the Bundesfinanzhof, is the successor in title of MKG-Kraftfahrzeuge-Factoring GmbH and Co. KG ('Factoring KG'). The latter, together with MMC-Auto Deutschland GmbH ('M-GmbH'), formed part of the Trapp-Dries/Mitsubishi group. Over a period of time including 1991, the year in which the transactions at issue occurred, M-GmbH imported Mitsubishi vehicles and distributed them on the German market through its own dealer network. Factoring KG took on the factoring and financing operations for M-GmbH.

15By a factoring contract of 27 June 1991, Factoring KG agreed with M-GmbH to purchase, within a framework laid down by it in advance in each case, the debts owed to M-GmbH by dealers arising from vehicle deliveries. So far as concerns the debts acquired by it in that way, Factoring KG assumed the risk of default without a right of recourse against M-GmbH. The del credere took effect if a dealer failed to pay the relevant invoice 150 days after it was due.

16Factoring KG also agreed under the contract to recover the remainder of M-GmbH's debts, but with a right of recourse against it, and to manage the debtor accounts and provide M-GmbH with documents allowing it to ascertain the position with regard to its business relations with each debtor.

17Factoring KG had to pay to M-GmbH the face value of the debts purchased by it in each calendar week, less agreed charges, on the third working day of the following week. The agreed charges comprised factoring commission of 2% and a del credere fee of 1% of the face value of the debts.

18M-GmbH agreed to pay, in addition to those charges, interest calculated on the basis of the daily outstanding debit balance of the dealers with Factoring KG. The interest rate was to be 1.8% above the average interest rate payable by Factoring KG in respect of refinancing.

19Factoring KG took the view that it also made taxable supplies to M-GmbH where it engaged in 'true' factoring, entailing assumption of the risk of loss in relation to the debts acquired, and it issued invoices for those supplies together with the corresponding charges and interest. In its value-added-tax declaration for 1991, it accordingly deducted the sum of DEM 1 028 100 in respect of input transactions which related to those supplies.

20After carrying out a fiscal investigation, the Finanzamt, by notice of assessment of 11 April 1997, refused to grant MKG-GmbH, as the successor of Factoring KG, entitlement to the deduction provided for in Paragraph 15(1) of the UStG 1991. In accordance with the third sentence of Part 18, paragraph 4 of the UStR 2000, it treated MKG-GmbH as not being a business in so far as it had carried out true factoring.

21MKG-GmbH then brought an action contesting that notice before the Hessisches Finanzgericht (Finance Court, Hesse, Germany).

MGK-KRAFTEAHRZEUGE FACTORING

22The Finanzgericht found in MKG-GmbH's favour. It agreed with MKG-GmbH's analysis that, in the case of true factoring as in the case of quasi-factoring, the factor performs a number of taxable services for the client.

23The Finanzgericht stated in particular that it could not concur with the view that, where the factor assumes the risk of loss, he does not effect a taxable supply but acts solely on his own account as a new creditor and that he cannot therefore be placed on the same footing as a trader. It therefore held that it would not be lawful to allow a deduction in the case of quasi-factoring and to refuse it in the case of true factoring.

24In the present case, the Finanzgericht held that the activity engaged in by Factoring KG was, as a whole, a business activity. Even in the case of true factoring, the factor supplies numerous services and a deduction is not excluded under Paragraph 15(1) of the UStG 1991.

25The Finanzamt brought an appeal on a point of law before the Bundesfinanzhof challenging the Finanzgericht's decision.

26According to the Finanzamt, in the case of true factoring, consisting in the purchase of debts with full assumption of the risk of loss, the factor solely receives a supply in the form of assignment of the benefit of a debt. In managing and recovering the debt which is assigned to it without a right of recourse, the factoring company does not make a supply for consideration to the other contracting party and does not therefore engage, in this connection, in a business activity. The Finanzamt relies in that regard on case-law of the Bundesfinanzhof.

27At the hearing before the Bundesfinanzhof, the Finanzamt acknowledged that Factoring KG initially transferred the face value of the purchased debts (minus the agreed del credere fee and factoring commission) to M-GmbH's account by way of a grant of credit (in the form of a loan) within the meaning of Paragraph 4(8)(a) of the UStG 1991, and finally transferred that sum to M-GmbH as the purchase price for the debts only once the conditions of the del credere were satisfied (150 days after the invoice had in each case fallen due). Since MKG-GmbH has waived the exemption of its transactions from tax, the Finanzamt also assumes that it is entitled to a further input-tax deduction. It continues to take the view, however, that the del credere fee and factoring commission do not constitute consideration in respect of a taxable supply by Factoring KG but that Factoring KG was, rather, in this regard merely the recipient of a supply, consisting in the assignment by its client of debts owed to it, and was therefore not a trader, so that to that extent it was not entitled to the deduction.

28The Bundesfinanzhof entertains doubts as to whether the case-law hitherto developed by it in this connection should be upheld.

29After observing, first, that account should be taken of the fact that the factor all in all carries out transactions concerning debts, in accordance with Paragraph 4(8)(c) of the UStG 1991 (by which Article 13B(d)(3) of the Sixth Directive is implemented), which may be taxed only once an option for taxation has been exercised in accordance with Paragraph 9 of the UStG 1991 (by which Article 13C of the Sixth Directive is implemented), and second, that the view may be taken that the factor's transactions constitute 'factoring' within the meaning of the final clause of the English version of Article 13B(d)(3) of the Sixth Directive, the Bundesfinanzhof states that, with regard to Article 17(2) of the Sixth Directive, it should be ascertained whether a factor engaging in true factoring uses goods and services 'for the purposes of his taxable transactions' within the meaning of that provision.

30In that regard it should, at the outset, be determined whether such a factor is actually a taxable person who carries out transactions or whether, as the Finanzamt submits, he is merely the recipient. In the opinion of the Bundesfinanzhof, the approach argued for by the Finanzamt, under which Factoring KG is treated as only partially taxable — in so far as it engages in quasi-factoring and grants credit — and is denied entitlement to deduct tax so far as concerns its true factoring unrelated to the grant of credit, is not compatible with the principle of neutrality of VAT. The national court therefore hesitates to deny entitlement to deduct in the present case on the sole ground that M-GmbH, instead of collecting its debts itself, entrusted that task to Factoring KG.

31The Bundesfinanzhof adds that, should the Court hold that a factoring company uses the goods and services received by it for the purposes of its transactions even where it buys debts and assumes liability for the risk of loss in relation to those debts, it should also be decided whether those transactions constitute 'taxable' transactions within the meaning of Article 17(2) of the Sixth Directive. The answer to that question depends on whether the transactions are liable to tax or exempt.

32Since the Bundesfinanzhof took the view in those circumstances that interpretation of the Sixth Directive was required in order to determine the case before it, it decided to stay proceedings and refer the following questions to the Court of Justice for a preliminary ruling:

'(1) Can a factoring company which buys debts and assumes liability for the risk of loss in relation to those debts be said to be using goods and services received by it for the purposes of its transactions?

(2) Do such activities involve taxable transactions or at any rate transactions for the purposes of Article 13B(d) of [the Sixth Directive] which may be taxed to the extent that the Member States have conferred on taxable persons a right to opt for taxation? Which of the transactions listed in Article 13B(d) of [the Sixth Directive] are involved?'

33It should be noted as a preliminary point that it is clear from the papers in the main proceedings that the questions submitted for a preliminary ruling concern only 'true' factoring — that is to say a transaction whereby the factor purchases from his client debts owed to him and assumes the risk of the debtors' default.

34The national court has no doubt, on the other hand, that 'quasi-factoring', where the factor manages and recovers the debts owed to his client but without bearing the related risk of loss falls within the field of application of the Sixth Directive.

35It is in the light of that observation that the questions submitted for a preliminary ruling should be answered.

Question 1

36Given that the main proceedings are concerned with whether MKG-GmbH, as the successor of Factoring KG, enjoys the right to deduct tax under Article 17 of the Sixth Directive, the national court is asking by its first question whether a factoring company which purchases debts and assumes the risk of the debtors' default acquires goods and services which it uses 'for the purposes of [its] taxable transactions' within the meaning of Article 17(2).

37This question effectively seeks to ascertain whether, on a proper construction of the Sixth Directive, such true factoring transactions fall within its field of application, so that the business carrying them out is entitled to deduct input tax.

38It is to be remembered first of all that the Sixth Directive establishes a common system of VAT based, inter alia, on a uniform definition of taxable transactions.

39It follows from Article 2 of the Sixth Directive, which defines the scope of VAT, read in conjunction with Article 4, that only activities of an economic nature, carried out within the territory of the Member State by a taxable person acting as such, are subject to VAT.

40Under the Sixth Directive, 'taxable person' means any person who independently carries out one of those economic activities.

41The concept of 'economic activities' is defined in Article 4(2) of the Sixth Directive as encompassing 'all' activities of producers, traders and persons supplying services, including the exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis.

42In accordance with the Court's settled case-law, Article 4 of the Sixth Directive thus confers a very wide scope on VAT, comprising all stages of production, distribution and the provision of services (see, inter alia, Case C-186/89 Van Tiem [1990] ECR I-4363, paragraph 17).

43It is also apparent from the Court's case-law that, in accordance with the requirements of the principle of the neutrality of VAT, the concept of 'exploitation' within the meaning of Article 4(2) of the Sixth Directive refers to all transactions, whatever may be their legal form, by which it is sought to obtain income from the property in question on a continuing basis (see, inter alia, Van Tiem, paragraph 18).

44The Court has, however, made it clear that Article 4 of the Sixth Directive must be interpreted as meaning that a holding company whose sole purpose is to acquire holdings in other undertakings and which does not involve itself directly or indirectly in the management of those undertakings, without prejudice to its rights as a shareholder, does not have the status of taxable person and therefore has no right to deduct tax under Article 17 of the Sixth Directive (see, inter alia, Case C-60/90 Polysar Investments Netherlands [1991] ECR I-3111, paragraph 17, and Case C-142/99 Floridienne and Berginvest [2000] ECR I-9567, paragraph 17).

45That interpretation is based, amongst other things, on the finding that the mere acquisition and holding of shares in a company is not to be regarded as an economic activity within the meaning of the Sixth Directive, conferring on the holder the status of a taxable person. The mere acquisition of financial holdings in other undertakings does not amount to the exploitation of property for the purpose of obtaining income therefrom on a continuing basis because receipt of any dividend yielded by those holdings is merely the result of ownership of the property and is not the consideration for any economic activity (see Case C-333/91 Sofitam [1993] ECR I-3513, paragraphs 12 and 13, Case C-306/94 Régie Dauphinoise [1996] ECR I-3695, paragraph 17, and Case C-80/95 Hamas Sc Helm [1997] ECR I-745, paragraph 15).

46However, the Court has held that it is otherwise where the holding is accompanied by direct or indirect involvement in the management of the companies in which the holding has been acquired, without prejudice to the rights held by the holding company as shareholder (Polysar Investments Netherlands, paragraph 14), in so far as involvement of that kind entails carrying out transactions which are subject to VAT by virtue of Article 2 of the Sixth Directive, such as the supply of services by the holding company to those companies (see Floridienne and Berginvest, paragraphs 18 and 19). The Court has likewise held that services such as placements which a manager makes with financial institutions of monies received from his clients in the course of managing their properties and on which he receives interest fall within the scope of VAT, since the placement constitutes the direct, permanent and necessary extension of the taxable activity (see Régie Dauphinoise, paragraphs 17, 18 and 19).

47It also follows from the Court's case-law that a supply of services is effected 'for consideration' within the meaning of Article 2(1) of the Sixth Directive, and is therefore taxable, only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient (see, inter alia, Case C-16/93 Tolsma [1994] ECR I-743, paragraph 14, and Case C-2/95 SDC [1997] ECR I-3017, paragraph 45).

48It is clear that, in a case such as that in the main proceedings, the relationship between the factor and his client is governed by a contract under which there is reciprocal performance.

49First, where, as in such a case, the factor engages in true factoring by purchasing debts owed to his client without enjoying a right of recourse against the client if debtors default, he indisputably supplies a service to the client, consisting essentially in relieving him of the debt-recovery operations and of the risk of the debts not being paid. Second, in return for that service received by him, the client owes payment to the factor, corresponding to the difference between the face value of the debts which he has assigned to the factor and the amount which the factor pays him for the debts. It is clear from the documents available to the Court that, in the main proceedings, Factoring KG retained, in accordance with the terms of the contract entered into with M-GmbH, factoring commission of 2% and a del credere fee of 1% of the face value of the debts purchased.

50The making of such a payment therefore does not result from the mere fact that the debts are included amongst the factor's assets, but constitutes actual consideration for an economic activity engaged in by the factor, namely the services which he has provided to the client. There is thus a direct link between the factor's activity and the amount which he receives in return by way of payment, so that it cannot be maintained that a factor who engages in true factoring does not make a supply for consideration to the client and, therefore, that he does not pursue an economic activity for the purposes of Articles 2 and 4 of the Sixth Directive, but that he should be regarded as merely a recipient of assignments by the client of debts owed to him. The factor's guaranteeing to the client of payment of the debts by assuming the risk of the debtors' default must be considered to be exploitation of the property in question for the purpose of obtaining income therefrom on a continuing basis, within the meaning of Article 4(2) of the Sixth Directive, where that operation is carried out, in return for payment, for a given period, as was the case in the main proceedings.

51It follows that, contrary to the submissions of the German Government, the case-law resulting in particular from the judgment in Polysar Investment Netherlands, which related to the mere acquisition or holding of shares, concerns a factual and legal context different from that of the main proceedings and cannot therefore be applied by analogy.

52Accordingly, true factoring such as that at issue in the main proceedings must be regarded as falling within the scope of VAT.

53This interpretation is confirmed by the principle of neutrality of VAT, the judgment in Case C-18/92 Bally [1993] ECR I-2871 and the English and Swedish versions of the final clause of Article 13B(d)(3) of the Sixth Directive.

54First of all, there is no valid justification for treating true factoring and quasi-factoring differently from the point of view of VAT, given that in both cases the factor makes supplies to the client for consideration and accordingly pursues an economic activity. Any other interpretation would draw an arbitrary distinction between those two categories of factoring and would make the business concerned bear, in the course of certain of its economic activities, the cost of the VAT without giving it the possibility of deducting that cost in accordance with Article 17 of the Sixth Directive.

55It should be remembered that the deduction regime provided for in that article is meant to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his economic activities and that the common system of VAT consequently ensures complete neutrality of taxation of all economic activities which "are subject to VAT, irrespective of their purpose or results (see to that effect, inter alia, Case C-16/00 Cibo Participations [2001] ECR I-6663, paragraph 27).

56Next, the Court found in Bally, at paragraphs 9 and 16, that where, in the context of a transaction of sale, the price of the goods is met by the purchaser by means of a credit card and paid to the supplier by the organisation issuing the card, retention by the latter of a percentage calculated on the sales price agreed between the supplier and the purchaser represents the consideration for a service rendered to the supplier by the card-issuing organisation, consisting in particular in the guarantee of payment for the goods.

57As MKG-GmbH and the Commission have rightly submitted, that finding made by the Court in Bally is equally pertinent in the context of the present case, since for the purposes of VAT, the services which a company engaging in true factoring supplies to its client are comparable in nature to the service rendered to a supplier by an organisation issuing a credit card (see, in this connection, paragraphs 49 and 50 of the present judgment).

58Finally, the fact that the English and Swedish versions of Article 13B(d)(3) of the Sixth Directive use, in the final clause, the concept of 'factoring' alongside that of 'debt collection' shows that a transaction such as that at issue in the main proceedings does fall within the field of application of the Sixth Directive. As will be elaborated upon in greater detail when considering the second question submitted for a preliminary ruling, the term 'factoring' referred to there must be interpreted broadly, covering both true factoring and quasi-factoring, given that, as an exception to a rule derogating from the application of VAT, it must be understood as applying to all possible forms of that operation.

59In view of the foregoing considerations, the answer to the first question submitted for a preliminary ruling must be that, on a proper construction of the Sixth Directive, a business which purchases debts, assuming the risk of the debtors' default, and which, in return, invoices its clients in respect of commission, pursues an economic activity for the purposes of Articles 2 and 4 of that directive, so that it has the status of taxable person and thus enjoys the right to deduct tax under Article 17 thereof.

MGK-KRAFTFAHRZEUGE FACTORING

Question 2

60By this question, the national court seeks to ascertain whether, should the first question submitted for a preliminary ruling be answered in the affirmative, transactions carried out by a company which engages in true factoring constitute 'taxable' transactions within the meaning of Article 17(2) of the Sixth Directive.

61The national court asks, more specifically, whether true factoring is subject to VAT or falls within one of the activities exempted from VAT pursuant to Article 13B(d) of the Sixth Directive, activities which may, however, be taxed where, as in the main proceedings, the Member State concerned has allowed taxpayers a right of option for taxation and the undertaking in question has expressly waived exemption of the transactions carried out by it relating to true factoring.

62In answering this question, it should be remembered that the exemptions provided for in Article 13 of the Sixth Directive constitute independent concepts of Community law which are intended to avoid divergences in the application of the VAT system as between one Member State and another and must be placed in the general context of the common system of VAT (see, in particular, Case C-240/99 Skandia [2001] ECR I-1951, paragraph 23).

63In addition, it is settled case-law that the terms used to specify the exemptions provided for by Article 13 of the Sixth Directive are to be interpreted strictly, since they constitute exceptions to the general principle that VAT is to be levied on all services supplied for consideration by a taxable person (see, inter alia, Case C-409/98 Mirror Group [2001] ECR I-7175, paragraph 30).

64It should also be noted that the transactions exempted by virtue of Article 13B(d)(3) of the Sixth Directive are defined solely in terms of the nature of the services listed, since no reference is made to the status of the persons supplying or receiving them. Furthermore, it is clear from the Court's case-law that, given the objectives pursued by the common system of VAT of ensuring legal certainty and the correct and straightforward application of the exemptions provided for in Article 13 of the Sixth Directive, it is necessary to have regard, save in exceptional cases, to the objective character of the transaction in question (see, inter alia, Case C-108/99 Cantor Fitzgerald International [2001] ECR I-7257, paragraph 33).

65It has already been found, in response to the first question, that a business such as that at issue in the main proceedings, which engages in true factoring, supplies to clients services for consideration which fall within the field of application of the Sixth Directive and are therefore taxable unless there is an exemption provided for by a specific provision of that directive.

66Article 13B(d)(3) of the Sixth Directive lists, by way of such exemptions, 'transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments'.

67It is, however, apparent from the final clause of that provision that the Sixth Directive expressly excludes 'debt collection' from the list of exemptions.

68In addition, the English and Swedish versions of the provision place factoring on the same footing as debt collection, by expressly referring to it, alongside the latter, as a transaction not included in the list of exemptions.

69While that circumstance constitutes some evidence that factoring is excluded from the exemption laid down by Article 13B(d)(3) of the Sixth Directive, the fact remains that the other language versions of this provision do not contain an express indication to that effect.

70It is therefore necessary to view the final clause of Article 13B(d)(3) in its context and to interpret it in the light of the spirit of the provision in question and, more generally, of the scheme of the Sixth Directive.

71As derogations from the general application of VAT, the exemptions envisaged in Article 13B(d)(3) of the Sixth Directive must be interpreted in a manner which limits their scope to what is strictly necessary for safeguarding the interests whose protection those derogations allow (see, to that effect, paragraph 63 of this judgment).

72By contrast, as already stated in paragraph 58 of this judgment, exceptions to a rule derogating from the general application of VAT must be interpreted broadly.

73Under all the language versions, debt collection is an exception to the exemptions listed in Article 13B(d)(3) of the Sixth Directive.

74The English and Swedish versions of that provision also refer in this respect, on an equal footing with debt collection, to factoring.

75In view of the requirement to interpret broadly those exceptions to a derogating provision — whose effect is to render the transactions covered by them subject to tax in accordance with the fundamental rule forming the basis of the Sixth Directive — first, factoring as referred to in the final clause of Article 13B(d)(3) in the English and Swedish versions of that directive must be understood as covering both true factoring and quasi-factoring.

76As already found in paragraph 54 of this judgment, there is no justification for treating those two categories of factoring differently from the point of view of VAT.

77Second, in the other language versions, the term 'debt collection' must be interpreted as encompassing all forms of factoring. In accordance with its objective character, the essential aim of factoring is the recovery and collection of debts owed to a third party. Therefore, factoring must be regarded as constituting merely a variant of the more general concept of 'debt collection', whatever the manner in which it is carried out.

78Moreover, the term 'debt collection' refers to clearly circumscribed financial transactions, designed to obtain payment of a pecuniary debt, which are clearly different in nature from the exemptions set out in the first part of Article 13B(d)(3) of the Sixth Directive.

79It follows that the language versions other than the Swedish and English versions are in no way incompatible with an interpretation under which factoring, including true factoring, is among the exceptions to the exemptions provided for in Article 13B(d)(3) of the Sixth Directive.

so The answer to the second question submitted for a preliminary ruling must accordingly be that an economic activity by which a business purchases debts, assuming the risk of the debtors' default, and, in return, invoices its clients in respect of commission, constitutes 'debt collection and factoring' within the meaning of the final clause of Article 13B(d)(3) of the Sixth Directive and is therefore excluded from the exemption laid down by that provision.

Costs

Costs

si The costs incurred by the German Government and the Commission, which have submitted observations to the Court, are not recoverable. Since these proceedings are, for the parties to the main proceedings, a step in the action pending before the national court, the decision on costs is a matter for that court.

Operative part

On those grounds,

THE COURT (Sixth Chamber),

in answer to the questions referred to it by the Bundesfinanzhof by order of 17 May 2001, hereby rules:

1. On a proper construction of the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, a business which purchases debts, assuming the risk of the debtors' default, and which, in return, invoices its clients in respect of commission pursues an economic activity for the purposes of Articles 2 and 4 of that directive, so that it has the status of taxable person and thus enjoys the right to deduct tax under Article 17 thereof.

2. An economic activity by which a business purchases debts, assuming the risk of the debtors' default, and, in return, invoices its clients in respect of commission, constitutes 'debt collection and factoring' within the meaning of the final clause of Article 13B(d)(3) of the Sixth Directive (77/388) and is therefore excluded from the exemption laid down by that provision.

Puissochet Schintgen Gulmann

Macken Cunha Rodrigues

Delivered in open court in Luxembourg on 26 June 2003.

R. Grass J.-P. Puissochet

Registrar President of the Sixth Chamber

OPINION OF ADVOCATE GENERAL JACOBS delivered on 6 March 2003

1In the present proceedings, the Bundesfinanzhof (Federal Finance Court, Germany) asks the Court to clarify the status under the Sixth VAT Directive of what it calls 'true factoring'. Factoring is a term used to refer to a variety of services supplied to creditors in connection with the management of their debts. A supplier of such services is known as a factor. True factoring, in the usage of the referring court, describes a transaction whereby the factor purchases debts owed to its client, and thereby assumes the risk of the debtor defaulting. It is thus differentiated from 'quasi factoring' arrangements, in which a factor assists in the administration and collection of debts without any corresponding assumption of the risk of loss.

2The Bundesfinanzhof raises two questions concerning the analysis of true factoring. By its first question, it aims to establish whether true factoring is an economic activity which involves the supply of a taxable service so as to bring it within the field of application of the Sixth Directive. If so, it seeks by its second question to know whether such factoring falls within one of the categories of exemption from VAT laid down by Article 13B(d).

Legal framework

3Under Article 2 of the Sixth Directive, a supply of goods or services effected for consideration by a taxable person acting as such is to be subject to VAT. According to Article 4(1), a taxable person is a person who carries out an economic activity, whatever the purpose or results of that activity. Economic activities include, under Article 4(2), 'all activities of producers, traders and persons supplying services' as well as 'the exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis'.

4Title X of the Sixth Directive specifies various exemptions from the obligation to pay VAT. Article 13B(d) requires Member States to exempt a range of activities, including:

'1. the granting and the negotiation of credit and the management of credit by the person granting it;

3. transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection and factoring;

…'

5In the English and Swedish language versions of the Sixth Directive, the final clause of Article 13B(d)(3) contains an explicit reference to 'factoring' as a service which is excluded from the exemption. The other language versions make no such mention. The French text, for example, refers more generally to 'recouvrement de créances'.

6By Article 13C(b), Member States may allow taxpayers a right of option for taxation in respect of, inter alia, the transactions covered in Article 13B(d).

7Title XI of the Directive specifies the circumstances in which a taxable person may make deductions from the VAT which he is liable to pay. Article 17(2)(a) provides for the right of a taxable person to deduct the tax due or paid in respect of goods and services supplied or to be supplied to him by another taxable person insofar as they are used for the purposes of his own taxable transactions.

8The relevant provisions of Community law are implemented in German law by the Umsatzsteuergesetz 1991 (German turnover tax law - 'the UStG'). By paragraph 9 thereof, Germany has chosen to exercise the option provided for by Article 13C(b) of the Sixth Directive.

9It appears that, in its previous case-law applying the UStG, the Bundesfinanzhof has treated true and quasi factoring differently. Whereas it has regarded the activities comprising quasi factoring as subject to taxation unless falling within an exemption, it has held that true factoring does not constitute an economic activity or the supply of a service and is therefore not taxable.

MGK-KRAFTFAHRZEUGE-FACTORIXC. The facts and questions referred

10The facts as they appear from the order for reference are as follows.

11The applicant and respondent on appeal is the successor in title to MKG-Kraftfahrzeuge-Factoring GmbH & Co. KG (MKG). MKG supplied factoring and financing services to MMC-Auto Deutschland GmbH (M-GmbH), a company which imported Mitsubishi vehicles and distributed them via its own dealer network on the German market.

12In 1991, MKG entered into a contract with M-GmbH. As part of that contract, MKG agreed to purchase certain debts owed to M-GmbH by its dealers in connection with the delivery of vehicles if they were not paid within 150 days of their falling due. In relation to those debts, MKG assumed the risk of loss resulting from default, thereby performing true factoring services. In exchange, it received from M-GmbH factoring and del credere fees as well as interest payments on a loan equivalent to the nominal value of the debt less those fees during the 150 day period. In addition, MKG agreed to perform various quasi factoring services for M-GmbH.

13MKG took the view that the true factoring services which it supplied to M-GmbH were taxable and on that basis sought in its tax declaration for 1991 to deduct tax in respect of goods and services supplied to it.

14MKG made its tax declaration to the defendant and appellant, the Finanzamt Groß-Gerau (Groß-Gerau Tax Office), which was the competent tax authority. After examining MKG's business, the Finanzamt refused to allow the deduction sought. It took the view, on the basis of the Bundesfinanzhofs previous case-law, that true factoring does not amount to an economic activity or to the supply of a service, and is therefore not taxable.

15MKG successfully challenged the Finanzamt's decision before the Hessisches Finanzgericht (Finance Court, Hesse). The Finanzgericht held that true factoring was an economic activity and therefore taxable. The Finanzamt appealed against that decision to the Bundesfinanzhof, which made the present order for reference.

16The Bundesfinanzhof wonders whether it was correct in its previous case-law to hold that true factoring does not constitute a taxable service for the purposes of the Sixth Directive. However, it considers that there are sufficient doubts as to the proper interpretation of the applicable Community law to merit a reference, and has accordingly referred to the Court the following two questions:

'1. Can a factoring company which buys debts and assumes liability for the risk of loss in relation to those debts be said to be using goods and services received by it for the purposes of its transactions?

2. Do such activities involve taxable transactions or transactions (they involve the latter in any event) for the purposes of Article 13B(d) of [the Sixth Directive] which may be taxed to the extent that the Member States have conferred on taxable persons a right to opt for taxation? Which of the transactions listed in Article 13B(d) of [the Sixth Directive] are involved?'

17It is clear from the order for reference that by its first question the referring court is in essence seeking to ascertain whether (contrary to its previous case-law) a person who undertakes true factoring can be said to perform an economic activity and therefore to supply a taxable service within the field of application of the Sixth Directive. If so, the purpose of the second question is then to establish whether true factoring none the less falls within one of the exemptions specified by Article 13B(d). Analysis

18As regards the first question, the German Government argues that true factoring is not a taxable transaction under the Sixth Directive because it is not an economic activity for the purposes of Article 4 of the Directive, nor does it involve the supply of a service within the meaning of Article 2(1) of the Directive.

19In support of its claim that true factoring is not an economic activity, the German Government makes reference to the Court's judgment in Polysar Investments Netherlands. The Court held in that case that the mere acquisition and holding of shares in a company, in the absence of any direct or indirect involvement in the management of that company, does not amount to an economic activity within the meaning of Article 4 of the Sixth Directive. The holding of shares cannot in itself be said to constitute the exploitation of property for the purpose of obtaining income therefrom on a continuing basis because any dividend yielded is merely the result of ownership of the property. 4

20According to the German Government, the acquisition of debts in a true factoring transaction is exactly equivalent to an acquisition of shares. Each type of transaction is a financial investment in which the investor assumes a risk of loss and in which any returns are merely the consequence of owning the property in question. Following Polysar, true factoring is therefore not an economic activity for the purposes of Sixth Directive.

21The German Government also argues that true factoring is not taxable under the Sixth Directive because the factor does not supply any service within the meaning of Article 2 of the Directive. The only transaction involved is the sale of a debt, in relation to which the factor is the consumer. It refers in that regard to the Mirror Group judgment, 5i n which the Court was called upon to determine, inter alia, whether a lessee of commercial property supplied taxable services to the lessor by committing to the original lease and by exercising an option to lease additional property, in each case in exchange for consideration. In addressing that question, the Court underlined the general proposition that 'a taxable person who only pays the consideration in cash due in respect of a supply of services, or who undertakes to do so, does not himself make a supply of services for the purposes of Article 2(1) of the Sixth Directive'. 6

22I am not persuaded that true factoring falls outside the scope of the Sixth Directive.

23The Court has on a number of occasions confirmed that Article 4 gives the Sixth Directive a very wide scope, so that it comprises all stages of production, distribution and the provision of services. 7

24Moreover, the English and Swedish language versions of Article 13B(d)(3) expressly state that factoring is excluded from the exemption laid down by that provision, and thereby constitutes a taxable transaction. 'Factoring' must surely be read as encompassing true factoring, given the general usage of that word, reflected in the Bundesfinanzhofs choice of terminology. Whilst the other language versions of Article 13B(d)(3) do not contain any explicit mention of factoring, it has not been suggested that any of them is inconsistent with the English and Swedish texts.

25In any event, it would in my view ignore the economic reality of true factoring to place it outside the scope of the Sixth Directive. When a factor purchases debts, he provides a service by relieving his client of the risk of default. The client then provides consideration in exchange for the service supplied, normally in the form of a fee or commission. In the case of such a service, by contrast with either the acquisition and holding of shares or the lease of real estate, the vendor of the debt therefore obtains a benefit which is distinguishable from the proceeds of the sale of the property.

26Support for the proposition that such an activity constitutes a taxable service under the Sixth Directive can be derived from the Court's judgment in Bally. The Court held that the issuer of a credit card supplies a service to a trader who accepts the card from its customer in payment for goods or services. That service consists in part in providing a guarantee of payment to the trader for the purchases made. Consideration for the service is supplied by the trader in the form of a commission calculated as a percentage of the purchase price of the goods or services purchased by the customer, which is deducted by the issuer of the card from the amount paid over to the trader. 0

27As the Commission and MKG submit, a true factoring transaction is very similar in nature to the service performed by the issuer of a credit card. A factor serves to guarantee payment of his client's debts by assuming the risk of default. In exchange, the client supplies consideration in the form of a fee which is usually deducted from the purchase price of the debt.

28I am therefore of the opinion that true factoring constitutes a taxable service for the purposes of the Sixth VAT Directive.

29As regards the second question referred, the German Government maintains that, if true factoring is a taxable service, it constitutes a 'transaction concerning debts' within the meaning of Article 13B(d)(3), and therefore falls within the exemption laid down by that provision. MKG submits that true factoring is excluded from the exemption by the final clause of Article 13B(d)(3).

30The Commission questions whether an answer to the second question is in fact necessary to enable the referring court to resolve the dispute which is before it. Given that Germany has elected to allow taxpayers to opt to pay tax on transactions otherwise exempt by reason of Article 13B(d)(3), it would not appear to matter whether true factoring is understood to fall within the exemption set out in Article 13B(d)(3) or within the exclusion from that exemption.

31Despite its reservations regarding the second question referred, the Commission none the less proceeds to offer submissions on the status under Article 13B(d) of both true and quasi factoring, both of which it regards as falling within the exclusion from the exemption.

32In my view, since the Bundesfinanzhof considers that a response to the second question referred is necessary for it to give judgment in the proceedings before it, it is appropriate for the Court to address it. However, it appears to me that the second question relates only to true factoring transactions, such being the 'activities' which form the subject of the first question. Accordingly, I shall consider only the status of true factoring under Article 13B(d).

33The explicit reference to factoring in the English and Swedish language versions of the final clause of Article 13B(d)(3) provides strong support for the conclusion that true factoring falls within the exclusion to the exemption laid down by that provision, especially given that the more general formulations of the exclusion adopted in the other language versions would not appear to be incompatible with an interpretation which encompassed true factoring.

34Nor has the German Government advanced any argument as to why factoring should be deemed to fall within the exemption to Article 13B(d)(3). Its references to the legislative history of the Directive are to my mind inconclusive, suggesting merely that the appropriate classification of factoring was not an issue which gave rise to debate in the Council.

35It therefore seems to me that true factoring is placed outside the exemption contained in Article 13B(d)(3) by reason of the exclusion contained in the final clause of that provision.

Conclusion

Conclusion

36Accordingly, I am of the opinion that the Court should answer the questions submitted for preliminary ruling as follows:

(1) on a proper construction of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — common system of value added tax: uniform basis of assessment — a factoring company acts as a taxable person when it buys debts and assumes liability for the risk of loss in relation to those debts and may accordingly deduct from the tax which it is liable to pay tax which it has paid in respect of goods and services supplied to it for the purposes of its taxable transactions;

(2) such an activity constitutes 'debt collection and factoring' within the meaning of Article 13B(d)(3) of the Directive and is therefore excluded from the exemption laid down by that provision.

Notes

(1) Original language: English

(2) Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — common system of value added tax: uniform basis of assessment, OJ 1977 L 145, p. 1 (here after referred to as the 'Sixth Directive').

(3) Case C-60/90 [1991] ECR I-3111, paragraph 17.

(4) Paragraphs 13 and 14 of the judgment. For a discussion of the subsequent case-law of the Court applying the principle established in Polysar Investment Netherlands, see the Opinion of Advocate General Léger of 12 September 2002 in Case C-77/01 EDM, at footnote 19, and the Opinion of Advocate General Ruiz-Jarabo Colomer of 6 February 2003 in Case C-442/01 KapHag Renditefonds, paragraphs 25 to

(31) , judgment of 26 June 2003 ECR I-6851, I-6853.

(5) Case C-409/98 [2001] LCR I-7175.

(6) At paragraph 26 of the |udgment.

(7) Case C-186/89 VAN Tiem [1990] ECR I-4363, paragraph 17 of the judgment.

(8) Case C-18/92 Bally [1993] ECR I-2871.

(9) Paragraph 9 of the judgment.

(10) Paragraph 11 of the judgment.