First application in France of the ECJ’s Mercedes Benz Financial Services UK case law
By a decision dated 16 June 2020, the Administrative Court of Appeal of Bordeaux has for the first time applied the European Court of Justice (ECJ) case Mercedes Benz Financial Services UK (MBFS) related to the VAT qualification of a leasing contract with an option to purchase (supply of service or delivery of goods).
By way of background, on 4 October 2017, the ECJ held in MBFS that a leasing contract with an option to purchase qualifies as a delivery of goods pursuant to Article 14 of the VAT Directive 2006/112/CE, so long as the following conditions are all satisfied at the time of the material handover:
- The leasing contract includes a clause relating to the transfer of ownership of the asset from the lessor to the lessee, and
- The contract provisions, assessed objectively at the time of signing the contract, provide that "ownership of the property is intended to be automatically acquired by the lessee if the performance of the contract follows its normal course until its term."
From a practical standpoint, the ECJ considered this condition to be met when it can be inferred from the financial terms of the leasing contract that exercising the option appears to be the only economically rational choice the lessee would make at the appropriate time if the contract is performed for its full term. This will generally be the case where it is evident from the leasing contract that, when the possibility of exercising the option to purchase arises, the aggregate of the contractual instalments will correspond to the market value of the goods, including the cost of financing, and that the lessee will not be required, as a result of exercising the option, to pay a substantial additional sum.
Applying ECJ case law to a situation where under a leasing contract the initial material handover of the goods is in France, the liability for VAT on the delivery of goods arises in France.
Application of MBFS case law by the French Court
In the so-called Bonita decision dated 16 June 2020 (n° 18BX02182), the Administrative Court of Appeal of Bordeaux used the criterion of “economically rational choice” made by the ECJ to qualify a boat leasing agreement with an option to purchase as a delivery of goods at the time of the material handover of the boat.
Bonita, a property and boat rental company, signed a leasing agreement for a boat delivered to La Rochelle in 2007. In 2009 the company acquired the boat (which at the time was located in Turkey) by exercising the option to purchase.
The main issues in the Administrative Court of Appeal case were:
- What VAT territoriality rules apply to the boat delivery. This question depends on when the delivery occurs: at the handover of the boat or at the time when the option is exercised. And,
- The consequences of the decision regarding what VAT applies on whether Bonita could recover VAT incurred on this transaction.
Applying the MBFS case law, the Administrative Court considered that, given that the sum of the installments paid by Bonita was higher than the market value (VAT excluded) of the boat indicated in the leasing contract, the option to purchase exercised by Bonita in 2009 qualifies as an economically rational choice. As a result, the court concluded that the material handover of the boat in 2007 in La Rochelle must be regarded as delivery of the boat for VAT liability purpose, even though the purchase option was exercised in Turkey in 2009. Consequently, the sale of the boat was subject to French VAT and Bonita was entitled to deduct this French VAT.
This decision has been appealed before the French Supreme Court (Conseil d’Etat). Nevertheless, two noteworthy points come out of the decision of the Administrative Court of Appeal:
- Whether the lessee has paid all the monthly installments before exercising the option to purchase is not relevant. Indeed, in the case at hand, the leasing agreement covered a 60-month period but the lessee exercised the option after two years. This is in contrast to the MFBS case, where the option was exercised at the end of the leasing contract term.
- This decision is not in line with the French Administrative Guidelines, which have not taken into account the MBFS case and still provide that the material handover of the good is not considered to be delivery for VAT purposes.