The case identifying information is: DIAC (20 March 2013)
In recent years, there has been uncertainty in France concerning whether auto-leasing companies were to remit VAT with respect to amounts paid by lessees as “indemnities” for early termination of auto leases. Typically, these indemnities were provided by contract, and were based on a formula that took into consideration the company’s loss of future revenue.
Some early courts decisions generally concurred with the position that these indemnities were out of the scope of VAT. Later court decisions, however, concluded that the indemnities must be viewed as a component of the initial lease payments and thus were subject to VAT.
Supreme tax court’s decision
The recent decision of the French supreme tax court concluded that the early lease termination indemnities were not subject to VAT.
The French high tax court rejected the position of other courts that such indemnifying amounts were subject to VAT, finding that the reasoning behind this position was incorrect because the formula complied with ordinary credit consumers' rules (i.e., for leasing contracts entered into with individuals) and thus was intended to compensate the lessor for actual economic effects / revenue loss of the early termination.
Tax professionals with Fidal* view the high tax court’s decision as one that is favorable for auto-leasing companies that received early termination indemnities from business customers. The decision also strengthens the position of some auto-leasing entities that are claiming refunds of VAT paid with respect to early termination indemnities. Overall, leasing companies may now need to consider whether there is an opportunity to claim a refund of VAT that was unduly collected, provided that the statutes of limitations for the tax years are still open—i.e., 1 January 2011 for a refund claim filed before the end of 2013).
Yet, tax professionals in France have further observed that the court’s decision and the VAT refund opportunity may only be beneficial if the leasing company is not required, by law or under contract, to repay such amounts to the lessees.
Although tax professionals in France have also observed that it may be anticipated that tax authorities could still resist a VAT refund claim on certain “formal aspects” (for example, whether they claim there is a need for the leasing company to establish that revised invoices were provided to their business customers), it is nevertheless prudent that auto leasing entities consider filing protective refund claims if VAT has been charged and paid on indemnities that was not recovered by the car lessees (i.e, VAT which was not recovered when the car was used for personal transportation).
For more information, contact a tax professional at Fidal Direction Internationale* in Paris:
Philippe Breton, Tax Partner
+ 33 (0)1 55 68 14 34
Laurent Chetcuti, Tax Director
+33 (0)1 55 68 14 17
*Fidal Direction International is a French law firm that is independent from KPMG and its member firms.