CJEU: factoring VAT‑taxable as debt collection services
03/11/25
On 23 October 2025, the Court of Justice of the EU (“CJEU”) ruled in the case of Kosmiro (C‑232/24) that fees related to factoring, specifically the variable factoring commission and the fixed arrangement fee, constitute VAT‑taxable consideration for debt collection services. The Court’s reasoning covers both trade factoring (assignment with transfer of risk) and invoice factoring (financing secured by invoices). The CJEU also clarified that the “debt collection” exclusion in article 135(1)(d) of the EU VAT Directive has direct effect.
Background
This case concerns a Finnish company (A) providing financial services, primarily factoring. Clients (businesses with a portfolio of outstanding receivables) use A’s services to improve liquidity and to offload payment‑collection efforts. The parties conclude factoring agreements under two models: (1) financing guaranteed by invoices (“invoice factoring”), and (2) sale of receivables (“trade factoring”).
Under invoice factoring, A grants financing to the client up to a credit limit set by A, based on the client’s receivables. A sends payment reminders for the assigned debts and manages extrajudicial collection. Legal title to the receivables does not transfer and credit risk remains with the client. Debtor payments reduce the financing balance.
Under trade factoring, A purchases selected receivables for an agreed price, with assignment of the receivables and transfer of the associated risks to A.
The referring court’s questions focused on two fees A receives for these services: (1) the factoring commissio, a percentage of each receivable covered, reflecting the credit rate and payment terms; and (2) the arrangement fee, a fixed amount covering set‑up and compliance for the factoring process.
CJEU judgment
On the first and second questions, the court asked whether, in trade factoring, where the factor relieves the client of recovery operations and of non‑payment risk, the factoring commission and arrangement fee remunerate a supply of services within the scope of the VAT Directive.
The CJEU affirmed that these fees are the consideration for services. For trade factoring, it held that the factoring commission reflecting a debt collection service whose value increases with longer payment terms and higher assumed risk, and the arrangement fee, covering, among other things, procedures required for compliance with anti‑money‑laundering obligations are the value actually given in return for the supply of services and therefore fall within the scope of the VAT Directive.
On the third and fourth questions, the court considered whether article 135(1)(b) and (d) of the VAT Directive should be read to treat the factoring commission and arrangement fee under trade or invoice factoring as consideration for a single, indivisible service of debt collection subject to VAT, or whether any part should be exempt as consideration for the granting of credit.
The CJEU held that the fees (both the commission and the arrangement fee that covers set‑up and AML compliance) constitute the consideration for a single and indivisible “debt collection” service, subject to VAT, in both trade and invoice factoring.
On the fifth question, the court addressed whether the exclusion from VAT exemption for debt collection in article 135(1)(d) of the VAT Directive applies to services such as those at issue and whether that exclusion is unconditional and sufficiently precise to have direct effect.
The CJEU confirmed that it is. The exclusion is unconditional and sufficiently precise to have direct effect and may therefore be relied on by individuals before national courts against the state.
What does this mean for your organisation?
“Factoring” covers a wide range of structures that use accounts receivable to unlock short‑term liquidity. In practice, the financial sector has diverse approaches under the same label. That causes ambiguity: while transactions involving, among other things, debts and the granting of credit may be VAT‑exempt, debt collection and more administrative services are generally subject to VAT. In some models, the arrangement does not relieve the client of collection and instead primarily delivers liquidity and short‑term certainty.
The CJEU judgment in Kosmiro could be interpreted to suggest that all factoring services are considered to be VAT‑taxable debt collection services. However in our view, this judgment is confined to the factoring models at hand and does not aim to settle the VAT treatment of all types of factoring services. The two factoring models as brought before the CJEU (invoice factoring and trade factoring) both relieved the client of the collection of selected receivables, either by service (invoice factoring) or by sale with risk transfer (trade factoring). The CJEU typically confines itself to the referred questions. A case‑by‑case analysis remains important and depends on the characteristics of the specific factoring arrangement.
Factoring arrangements are often composite, combining e.g. debt collection, risk transfer, financing, administrative support and related services. Fee structures are typically based on multiple parameters, as in the case of Kosmiro. A recurring question will be whether those fees reflect the consideration for a single supply of “debt collection,” or whether any component is, at least in part, consideration for a VAT‑exempt service, such as the granting of credit. The CJEU indicates that where the principal aim is debt collection, the fees constitute consideration for a single VAT‑taxed supply. That approach aligns with the Dutch Decree on factoring, which states that arrangements involving ongoing transfers of receivables are subject to VAT where the primary purpose is debt collection rather than the mere granting of credit, while allowing an exception for incidental transfers (for example, in bankruptcy) that do not arise from a continuous agreement.
For businesses engaging in similar factoring activities for VAT‑taxable clients, the ruling can be favourable as VAT‑taxable factoring services typically support a corresponding right to recover input VAT.
If you want to discuss what Kosmiro means for your business, please reach out to your PwC contact person.
Contact us
Follow us
