Leaseback is not a delivery of goods, GFD agrees to change administrative practice
12 May 2022
Three years after the court's ruling in the Mydibel case, the tax administration is no longer accepting the historical interpretation relating to leaseback. The change has tax implications for both lessors and lessees.
A leaseback is considered to be a situation where the owner of the item sells it to a leasing company from which the original owner will subsequently reacquire the item in the form of a finance lease, i.e. in instalments with a final purchase after an agreed period. Prior to April this year, the administrative practice was to treat the sale between the original owner and the leasing company as a delivery of goods followed by the formal handover of the item to the original owner for use by the leasing company. Both were treated as taxable supplies of goods. This settled administrative practice was affected by the Mydibel judgment, according to which the sale of an item from the owner to the leasing company is not a supply of goods because the item remains in the possession and therefore in the economic ownership of the original taxpayer. The leasing company does not acquire economic ownership of the item by purchase, but merely enables the seller to obtain the funds. For this reason, according to a recent opinion of the Czech General Financial Directorate, the transaction in question has the character of a financial service at the level of a loan.
Given that financial services are exempt from VAT without the right to deduct, the change would have a major impact on ongoing leaseback transactions. If a sale from the owner to a leasing company was not to be treated as a supply of goods for VAT purposes, then a subsequent finance lease cannot be treated as a supply of goods either. And if neither transaction is a taxable supply, neither supply can be claimed as a deduction, even if VAT is shown on the tax invoice. And that would already be a significant financial hit.
Fortunately, the General Financial Directorate has agreed to the proposal of the Coordination Committee's drafters that leaseback will be considered a financial service only for contracts concluded after 29 March 2022. For contracts concluded before then, it will be possible to consider both supplies, i.e. from the original owner to the leasing company and from the leasing company to the original owner, as taxable supplies of goods for which a deduction is claimed. The condition is that both parties to the contract do so.