Generally, from a VAT perspective, a supply of goods is characterised by the transfer of the right to dispose of tangible property as owner. A transaction that is not considered to be a supply of goods should then be considered to be a supply of a service.
The characterisation of a transaction as a supply of a good or service has various implications including whether the transaction falls within the scope of VAT, the determination of the place where the particular transaction is deemed to take place for VAT purposes and the date when VAT on the transaction would become chargeable.
In certain leasing arrangements, it would not be immediately clear whether or not the transaction should be considered to be a supply of a good or a supply of a service. As a case in point, in terms of the Maltese VAT Act, hire purchase arrangements that expressly contemplate that the ownership over the goods in question will be transferred before the agreed price has been paid in full should be considered to be the supply of a good.
This principle was analysed in certain Court of Justice of the European Union (CJEU) cases specifically in the Mercedes-Benz Financial Services Case (C-164/16) wherein it was determined that the categorisation of a lease as a ‘finance lease’ is not sufficient to characterise a transaction as a supply of a good. It is also necessary to determine whether the arrangement constitutes a contract for hire ‘... which provides that in the normal course of events ownership is to pass at the latest upon payment of the final instalment’.
Broadly speaking, for an agreement to be characterised as a supply of a good the agreement between the lessor and the lessee should, amongst other matters, contain a clause that expressly provides for the automatic transfer of the ownership over the leased asset at the end of the lease term if performance of the contract proceeds normally, or an option for the transferee to purchase the leased asset at the end of the lease term where exercising the said option would appear to be the only economically rational choice.
Having said this, there may be certain arrangements that are characterised by the combination of a sale of an asset by one party to another and a subsequent leaseback of that asset from the other party to the original owner.
Should this be considered to be 2 separate supplies - an initial supply of the goods in question followed by a subsequent continuous supply of services being the lease of the said goods back to the original owner of the goods? The answer to these questions is not always straightforward particularly due to the fact that such transactions will typically be carried out for financing purposes and may thus have wider VAT implications.
Such a sale and leaseback arrangement was analysed in the Mydibel case (CJEU case C-201/18) wherein the court had to ascertain (in the course of answering the main questions put to it) whether the transactions making up the sale and leaseback arrangement in question should be considered to be separate supplies or a single composite supply for VAT purposes. Based on the facts on hand, it was held that the sale and leaseback transaction was purely of a financial nature designed to increase the transferor’s liquidity and that the assets in question remained in the possession of the transferor, the person originally selling the asset and subsequently leasing it back in. Thus, it was held that such sale and leaseback transaction constituted a single transaction for VAT purposes, and that such transaction could not be classified as a ‘supply of goods’ on the basis that, in that particular case, the arrangement did not empower the transferee to dispose of the assets as if it were their owner. Indeed the court did not dispute the referring court’s position that the transaction was financial in nature, where the second party lent funds to the original owner/lessee using the
property as security.
The interpretation of the court in the Mydibel Case may have significant VAT implications to parties engaged in similar sale and leaseback transactions.
Such implications include the manner in which the underlying transactions are reported, the amount and date when VAT would be chargeable on transactions taking place in Malta, as well as the extent of the parties’ rights to deduct or claim a refund of input tax. Of course each particular arrangement should be considered on a case-by-case basis and one should seek to understand upfront the VAT implications on similar transactions.
