VAT On Securitisation Servicing Costs

On 17 June 2026, the General Court of the European Union (the “Court”) delivered a keenly awaited decision in the case of Veronsaajien oikeudenvalvontayksikkö v. A Oy (case T-184/25) (“A Oy”), which concerned the value added tax (“VAT”) treatment of credit management in securitisation and financing structures.

The Court held that the management of loans by an original lender after those loans have been transferred does not fall within the VAT exemption for "the management of credit by the person granting it" (Article 135(1)(b) of the EU VAT Directive). According to the Court, once a loan is transferred, any post-transfer servicing constitutes an independent supply of services to the purchaser of the loan, and is therefore potentially subject to VAT. 

The impact of this treatment is likely to affect many securitisation and financing structures, where loans are transferred by an originator to a special purpose vehicle (“SPV”), and where the originator continues to service the loans. Following A Oy, VAT charged by the originator to the SPV on providing the supply of servicing the loans would, following A Oy, be subject to VAT, which the SPV would be unable to recover.

Facts

A Oy, a Finnish bank, granted residential mortgage loans and subsequently sold most of the loans to its wholly owned subsidiary, B Oy. All rights and obligations associated with the mortgage loans were transferred to B Oy. In turn, B Oy used the mortgage loans as collateral for the issuance of bond securities. After the transfer, A Oy continued to manage and service the loans on B Oy’s behalf, and received an arm’s-length market price for the provision of that management and servicing. Critically, A Oy and B Oy were not part of the same VAT group.

Finland’s Tax Recipients’ Legal Service Unit (Veronsaajien oikeudenvalvontayksikkö), being an independent unit within the Finnish Tax Administration, challenged the treatment of the service being provided by A Oy as being a VAT-exempt supply. The Supreme Administrative Court of Finland referred the matter to the Court, asking whether the service provided by A Oy fell within the following Articles of the EU VAT Directive.

• Article 135(1)(b), which concerns the management of credit by the person granting it;
• Article 135(1)(c), which concerns dealings in credit guarantees or other securities; and
• Article 135(1)(d), which concerns transactions related to debts.

Decision of the Court

The Court found that none of the three VAT exemptions in Articles 135(1)(b)–(d) of the VAT Directive were applicable to the supply of servicing from A Oy.

Article 135(1)(b)

On Article 135(1)(b), which concerns the management of credit by the person granting it, the Court stated that the exemption “concerns the management of credit linked to the granting of the debt” (para 32 of the Court’s judgment, emphasis added). This was to ensure that all the services provided in the context of the credit legal relationship of grantor of credit and borrower were exempt from VAT. Once the relationship between the grantor of credit and the borrower was broken, the exemption did not cover services provided outside that relationship. The strict interpretation of the exemption in Article 135(1)(b) of the VAT Directive precluded the application of the exemption to any situation where the grantor-borrower link had ceased to exist.

Historically, exemptions for the granting and management of credit were introduced because the consideration for financial services is often embedded in interest margins rather than separately charged fees, making VAT calculation difficult. The Court's decision therefore reflects the strong preference for a narrow interpretation of a derogation from the general principle that services supplied for consideration are taxable.

In A Oy’s situation, A Oy as original lender had transferred its loans for the benefit of a third-party transferee, B Oy. The management of those loans no longer formed part of the original legal relationship which gave rise to the right to benefit from the VAT exemption in Article 135(1)(b), even though management was substantively carried out by the original lender itself. A Oy’s activity of servicing the loans therefore constituted services supplied for consideration directly for the benefit of the third-party transferee.

By restricting the “personal scope” of the VAT exemption to the grantor-borrower relationship, the Court noted that the EU legislature did not intend to favour the outsourcing of the management of credit for tax purposes, only the management of credit carried out in the context of the credit relationship between the original lender and the borrower (para 34).

Article 135(1)(c)

Under Article 135(1)(c) of the VAT Directive, the Member States are to exempt transactions concerning “the negotiation of or any dealings in credit guarantees or any other security for money and the management of credit guarantees by the person who is granting the credit”. The Court was able to conclude that the VAT exemption under this heading was inapplicable to A Oy’s servicing of the loans. Services consisting in management of credit for the benefit of a purchaser (within Article 135(1)(b)) could not be classified as dealings in credit guarantees or any other security for money within the meaning of Article 135(1)(c) of the VAT Directive. In addition, applying Article 135(1)(c) to the management of credit by A Oy would render redundant the scope of the more general exemption for the management of credit in Article 13591)(b), which the Court confirmed was applicable only to the person granting the loan credit.

Article 135(1)(d)

As regards the exemption in Article 135(1)(d) of the VAT Directive, Member States are to exempt transactions concerning “deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection”. This exemption was not applicable, as the Court concluded that the provision of loan servicing by A Oy did not constitute “transfer of the ownership of funds” and did not have “the effect of fulfilling the specific and essential functions of such a transfer” (para 57).

Conclusions

The decision in A Oy is focused on the legal severance of the relationship between the grantor of the credit and the borrower of credit. The severing of that legal relationship was decisive in the Court’s judgment. Other cases decided by the Court have adopted a more purposive and less formalistic approach, such as where the Court considered the VAT treatment of sub-participations in its decision on 2022 in O. Fundusz Inwestycyjny Zamknięty reprezentowany przez O S.A. (Case C-250/21).

The decision is likely to raise a number of practical questions regarding the supply of loan servicing in securitisation and other comparable financing structures. In such transactions, the SPV generally only makes VAT-exempt supplies, such as the issue of bond securities and the provision of credit. This broadly means that there is very little ability for an SPV to recover any VAT input tax which is charged on non-exempt (i.e. standard rated) services which are received by the SPV. The provision to an the SPV of a supply of servicing which is treated as being non-exempt for VAT purposes (such as a supply of servicing, following the Court’s decision in A Oy) is therefore likely to result in a VAT cost being incurred owing to the VAT charged on such a supply not being recoverable. Common tax planning techniques, such as establishing a VAT group between the provider and recipient of the supply of servicing, are unlikely to be practicable in a securitisation context for a variety of commercial purposes. 

It remains to be seen how H.M. Revenue & Customs (“HMRC”) will interpret the decision in A Oy. The focus on HMRC’s published guidance manuals where a loan originator retains a legal interest in the transferred loans, which is typically included in UK residential mortgage securitisations to prevent written notice needing to be provided to mortgagors on the beneficial transfer of loans to the SPV, might be one way to distinguish the facts in A Oy from many UK residential mortgage securitisations.

In addition, it is possible that treating a transfer of a loan portfolio (including the accompanying servicing of those loans) as a transfer of a going concern for VAT purposes might also deliver a different result than the one set out by the Court.