In the intricate landscape of modern finance, the traditional boundaries of loan ownership are frequently shifting. When a bank sells a portfolio of property loans but continues to act as the primary administrator, communicating with borrowers, monitoring accounts, and managing contractual changes as if it still held the title, it creates a significant legal ambiguity. 

At the heart of Case T-184/25 lies a deceptively simple question: when a bank sells a loan but keeps managing it, who really "owns" the credit relationship for VAT purposes? Is it the institution that grants the loan, or the one that ends up holding it?

Background of the Case 

Bank X is part of a VAT group in Finland and mainly provides VAT-exempt financial and insurance services. A, which established Bank X and is the representative of the VAT group, has a wholly owned subsidiary B, which does not belong to the VAT group. 

A grants property loans to customers and then sells a large proportion of those loans to B, usually shortly after the loans are granted. The sale takes place at market value, with the price generally corresponding to the outstanding principal and any interest accrued up to the transfer date. Because the loans are often sold immediately after being granted, before any interest has accrued, the purchase price is essentially equal to the loan’s nominal value.

When a loan is transferred, all rights and obligations connected with it pass from A to B. The borrower does not need to take any action for the transfer to take effect. B therefore becomes the owner of the loan and assumes the associated rights and obligations. Nonetheless, B does not actually manage the loans itself. Instead, A continues to manage the loans throughout their lifetime and remains the borrowers’ point of contact, even though B owns the loans. 

More specifically, A communicates with borrowers, monitors the loans, calculates interest rates and commissions, makes changes to loan agreements, and collects debts when necessary. Also, A makes substantive decisions, such as whether to renew a loan or extend its repayment period. Importantly, the loan-management services provided to B are essentially identical to the services A would have provided if it had continued to own the loans itself. 

B primarily finances its activities through covered bonds, loans, and guarantees provided by A, which also handles all activities related to issuing bonds and selling these services to B. Both loan-management and loan-guarantee management services provided by A to B are paid based on the actual costs incurred by A each month, plus an agreed profit margin. In other words, A calculates the costs of providing the services, adds its agreed markup, and invoices B for that amount.

Due to this complex arrangement, A asked Finland's Central Tax Board for a ruling on the VAT treatment of both the loans it had sold to B and the management services that A continued to provide in relation to those loans and their guarantees. Particularly, A asked whether the transfer of the loans and the subsequent management services should be treated as VAT-exempt financial transactions or as taxable services.

The Board ruled that the sale of loans from A to B is a VAT-exempt financial activity under Finnish VAT law. In contrast, it considered debt collection services provided by A to B to be subject to VAT. The Finnish Tax Authority challenged this decision before the Finnish Supreme Administrative Court, arguing that the management services provided by A to B should not be VAT-exempt.

Since the Supreme Administrative Court was uncertain how the EU VAT Directive should apply to A's situation, it paused the proceeding. It referred three questions to the Court of Justice of the European Union (ECJ).

Main Questions from Request for Ruling

With the first question, the Supreme Administrative Court asked whether the VAT exemption for management of credit by the person granting the credit provided under the EU VAT Directive also applies when a financial institution originally grants a loan, later sells that loan to another financial institution, but continues to manage the loan itself for a fee.

If the exemption does not apply, the Administrative Court asked whether A's management services could instead qualify for the exemption covering dealings in credit guarantees or other security for money. Lastly, if neither exemption applies, the Administrative Court asked whether A's management of the debts transferred to B could qualify as a VAT-exempt transaction concerning debts.

Applicable EU VAT Directive Articles

In addition to interpreting the articles directly cited in the referred question, specifically Articles 135(1)(b), 135(1)(c), and 135(1)(d), which establish specific VAT exemptions for financial transactions, the ECJ also analyzed Articles 2(1)(c), 9(1), and 24(1). 

Finland National VAT Rules

The ECJ outlined Articles 1, 18, 41, and 42 of the Finnish VAT Law, which define that VAT is generally charged on the sale of goods and services, what the sale of a service refers to, and specific exemptions for financial services.

Importance of the Case for Taxable Persons

The ECJ's clarifications and explanations in this case address a structurally common banking practice, selling loans while continuing to service them for a fee. Moreover, it clarifies how VAT exemptions for financial services apply once the identity of the loan owner and the identity of the loan manager diverge. This brings legal certainty for those operating in the financial sector and helps taxable persons understand how overlapping exemptions interrelate.

Analysis of the Court's Findings

Regarding the first question, the ECJ noted that Article 135(1)(b) exempts three related financial activities from VAT: granting credit, negotiating credit, and managing credit by the person who granted it. The important part of the wording is “by the persons granting it.”

The interpretation of the wording must be consistent across all EU countries. However, if the different language versions of an EU provision use wording that is not completely identical, the ECJ must consider the purpose and overall structure of the EU rules in which the provision appears. 

What “By the Persons Granting It” Means

In its Opinion, the Advocate General noted that some language versions, including Greek, French and Dutch, use a past-tense formulation for the person who granted the credit. This suggests that the exemption belongs to the institution that originally provided the loan to the borrower, even if that loan was later transferred to another institution.

However, other language versions, including English, Croatian, Romanian and Slovenian, use wording equivalent to the present tense or present participle. In that context, the exemption applies to whoever currently holds the position of lender. 

On the other hand, the German and Finnish versions can support either interpretation, which confirms that the wording alone cannot resolve the issue. Consequently, the interpretation depends on the provision's context and legislative objectives. 

The provision exempts both the granting and negotiation of credit and the management of credit by the person granting it. Because these activities appear together in the same provision, the ECJ considers that the management exemption is intended to cover management activities that are connected with the original granting of the credit. The exemption therefore relates to the relationship between the lender and the borrower. Moreover, its purpose is to keep the various services performed within that credit relationship VAT-exempt.

However, the exemption is specifically limited to management performed by the person granting the credit. This is decisive in this case. Once A sells the loans to B, the original legal relationship between A and the borrowers is no longer the relevant credit relationship. B becomes the owner of the loans and the party entitled to the rights arising from them. The ECJ further added that the EU legislature did not intend the exemption to create a VAT advantage for outsourcing loan management.

The Purpose of VAT Exemptions for the Financial Sector

The ECJ also explained that the main purpose of exemptions for financial transactions is to avoid the practical difficulties involved in determining the VAT taxable base and deductible VAT for financial transactions. Additionally, these exemptions seek to prevent VAT from increasing the cost of consumer credit.

Taking that into account, the ECJ confirmed the European Commission's position that the first objective of the financial-services VAT exemption is to avoid difficulties in determining the taxable amount and deductible VAT is not relevant to A's situation. The main reason for this is that the arrangement in question does not make it difficult for A to identify what amount relates to the loan-management service and what amount relates to the original granting of credit.

The same is true for the second objective of the financial-services exemption: preventing VAT from increasing the cost of consumer credit. The ECJ determined that A does not provide the management services directly to borrowers, though VAT on those services could indirectly affect their financing costs. It also noted that outsourcing loan management can raise costs regardless of whether VAT applies.

The ECJ went a step further, applied the principle of fiscal neutrality to A's situation and concluded that there should be no difference in VAT treatment based on who provides the loan-management services after the loan has been sold. Consequently, if A, the original lender, sells the loan to B and then provides management services to B, those services should receive the same VAT treatment as if another independent company was hired by B to manage the loan.

Loan-Management Services as Credit Guarantee Dealings

The EU VAT Directive contains two relevant categories for VAT exemptions involving credit guarantees or other security for money: negotiation of, or dealings in, credit guarantees or other security for money, and the management of such guarantees by the person granting the credit

The ECJ noted that in this case the first category is relevant. More specifically, the ECJ focused on determining whether A's management services can themselves be classified as dealings in credit guarantees or other security for money.

In that sense, the ECJ clarified that managing loans for the benefit of the company that purchased those loans is not, by itself, a dealing in a credit guarantee or other security for money. Additionally, the provision specifically refers to the management of credit guarantees by the person granting the credit. As a result, it cannot be interpreted as covering the broader management of loans that happen to serve as collateral.

Notably, Article 135(1)(b) already specifically addresses the management of credit, which limits the exemption to management performed by the person granting the credit. Bringing the loan-management service under Article 135(1)(c) merely because the loans serve as security makes the defined limitation meaningless.

Scope of the VAT Exemption for Debt Transactions

Concerning the third question, the ECJ stated that Article 135(1)(d) exempts certain financial transactions involving deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments. More importantly, the provision expressly excludes debt collection from the exemption.

The ECJ added that, based on established case law, transactions covered by this article belong to the broader category of financial transactions, primarily payment instruments and transactions involving the transfer of money from one party to another. Based on this, it is apparent that the EU legislature did not intend to cover every service that relates to a debt, but only those involving the movement or transfer of money.

To answer this question, the ECJ applied a test to determine whether a service qualifies as a VAT-exempt transaction concerning debts under Article 135(1)(d). The key question under this test is whether the transaction actually results in, or could result in, a transfer of ownership of funds.

In the present case, the ECJ found that nothing in the facts indicates that A's management activities transfer funds to another party or perform the essential functions of such a transfer. In other words, A is essentially administering loans that have already been transferred to B rather than carrying out financial transactions that transfer ownership of funds.

Court's Final Decision

After carefully considering all the facts, the established case law, and applying the test, the ECJ concluded that none of the three VAT exemptions under Article 135 applies to A's loan-management services after the loans have been transferred to B.

Conclusion

This case is a reminder that VAT exemptions drafted with traditional lender-borrower relationships in mind don't always translate cleanly to modern, layered financial arrangements. Institutions engaged in loan sales, securitization, or servicing arrangements would do well to revisit their VAT positions in light of the ECJ's reasoning, particularly where the loan owner and loan manager no longer align.