The commission on the sales of a pledged item should not constitute ancillary cost form a VAT point of view
C‑89/23. – Companhia União de Crédito Popular SA | The commission received by the lender for the sale of the pledged item, which ensures the provision of the cash loan, does not qualify as an ancillary cost.
In Case C-89/23, the plaintiff is a Portuguese company that provides pawn loans. The company sells pledged items from debtors who have not redeemed the pledge or have delayed payment of the loan and interest for more than three months. Following these sales, the company is entitled to a commission equal to 11% of the auction price of the asset, which, functionally, is considered as a compensation related to organizing the auction.
The company treated this commission as an ancillary cost and included it in the tax base of its VAT-exempt lending activity. However, the Portuguese tax authority assessed a tax shortfall against the plaintiff, arguing that the sales commission represents consideration for a distinct taxable transaction – the organization of the auction – and therefore should be separated from the VAT-exempt lending activity.
The European Court of Justice, stressing the need to interpret the conditions for VAT exemption strictly, classified the commission in question as a distinct transaction. Firstly, it noted that the lending service could be provided equally if the auction of the pledged item was organized by a third party rather than the lender. Furthermore, the court elaborated that the sale of the pledged item is not a usual consequence of providing pawn loans; it appears as a distinct objective for the lender (to satisfy the claim from the pledged item) and does not improve the conditions of the loan transaction itself. The court did not attribute significance to the fact that the 11% commission in question is a fixed fee mandated by law.
