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Loan transfers and VAT concerning cross-border financial transactions


Also published in Bloomberg BNA Tax Planning International: Indirect Taxes, September 2014

A ruling from the Spanish Directorate General of Taxes (DGT) on 7 November 2013 deals with the VAT treatment of a financial transaction consisting of a cross-border transfer of a loan portfolio. The criteria set out in this ruling is of great importance since recently there have been numerous transactions of this kind in Spain. Examples of this are financial institutions selling portfolios of distressed debt and non-performing loans to foreign hedge funds and large corporations sponsoring securitisation structures domiciled outside Spain. Taxand Spain provides an analysis on how some of the specific features of the ruling influence the taxation of a transaction. 


The facts examined by the DGT are described as follows:

  • The Spanish permanent establishment of an EU resident financial institution (FI1) is planning to transfer a portfolio of financial assets (loans granted to its customers) to another EU resident (and in this case non-established) institution (FI2)
  • This transfer will be executed through a 2 step transaction:
    • First FI1 will transfer the default risk associated with the portfolio to FI2 in exchange for a fee (Step A)
    • Subsequently, FI1 will enter into a sub-participation agreement with FI2 by virtue of which the former will pass capital and interest received from the borrowers (and consequently the embedded default risk) to the latter -  presumably (no information is provided on the consideration to be paid by FI2 in this Step B) in return for a price (Step B – Economic Transfer)
    • Alternatively, FI1 will transfer legal title over the portfolio to FI2 (Step B – Legal Transfer)
  • Whichever alternative is finally implemented, FI1 will administer the portfolio on behalf of FI2

The DGT’s most noteworthy considerations in response to FI1’s questions are the following:

  • While Step A is classed as a service rendered by FI2 to FI1 ( an insurance service), Step B is classed as a service provided by FI1 to FI2. ​As a result of this characterisation the DGT concludes that Step A is subject to, but exempt from, Spanish VAT as an insurance (rather than a financial) transaction. Conversely Step B, in either alternative, will not be subject to Spanish VAT since, in the DGT’s opinion, FI2 is a taxable person acting as such not established in Spain. No reflection is made in the ruling as to whether or not the transaction and, in particular Step B, could be assimilated to a factoring agreement (Cf. European Court of Justice judgments in cases C-305/01 “MKG-GmbH” and C-93/10 “GFKL”).
  • If the “Step B – Legal Transfer” alternative was chosen FI2 would become established in Spain, since FI1 would be acting as an agent authorised to conclude and/or negotiate contracts for and on behalf of the former in its role as portfolio administrator. As a consequence, loan administration services rendered by FI1 to FI2 are subject to (but not exempted from) Spanish VAT.It should be noted that DGT may not have paid attention to the fact that, as usually occurs in transactions of this kind, debtors are not notified of the transfer of their debt. In other words, the transferor continues being the legal owner of the loan/credit vis-à-vis the debtors.
  • If they were subject to Spanish VAT FI1 should compute Step B transactions for the purposes of calculating the proportion of deductible input VAT since in view of the activity it carries out they cannot be deemed incidental financial transactions. If this was the case, they should be computed in the amount of the gain, if any, obtained by FI1.

Your Taxand contacts for further queries are:
Ricardo Gomez
T. +34 915 145 200

Jorge Moreira
T. +34 915 145 200

Taxand's Take

Financial players participating actively in these types of transactions need to carefully revise their legal structures since they can hide VAT costs which may affect financial outcomes. In particular non-established hedge funds should pay attention to not becoming established (not only for VAT but also for non-resident income tax purposes), and big corporations should revisit the pros and cons of sponsoring securitisation structures outside Spain.

Taxand's Take Author

Ricardo Gomez
Taxand Board member