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05 October 2017 / article

VAT: Lease, supply or service?

The ECJ rules that a lease qualifies as a supply of a good instead of a service if the agreement contains an ownership transfer clause and it is economically rational this clause will be invoked.

VAT: Lease, supply or service?

In the automotive industry leasing is a popular form of acquiring assets. For VAT it is the question whether the lease qualifies as supply of a good or as a service. If the lease qualifies as a supply of a good, VAT on all lease terms (and, if applicable, option price) is due at once upfront. If the lease qualifies as a service, the lease terms are VAT taxable at the moment the terms are due, in such case the VAT is ‘spread’ over the lease period.

With respect to qualifying lease agreements, the European Court of Justice (ECJ) delivered an interesting judgement in the case “Mercedes Benz” (C-164/16). In this case the question was whether a lease agreement with an urgent purchase option qualifies as supply of service or a supply of a good. An urgent option in this case is an option that rationally will always be exercised.


According to the ECJ two conditions have to be satisfied for an agreement to qualify as a supply of a good.

First, the agreement must contain a clause expressly relating to the transfer of the ownership of those goods from the lessor to the lessee. An agreement may be considered to contain such clause if that agreement contains an option to purchase the leased asset.

Second, it must be clear from the terms of the contract that ownership of the goods is intended to be acquired automatically by the lessee, over the full term of the contract. According to the ECJ this condition is met if exercising the purchase option is the only economically rational choice that the lessee will be able to make, which is for the national court to ascertain.

For more information please contact your regular Loyens & Loeff adviser.

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