Slovene Tax Administration: Judgment of the Supreme Court of the Republic of Slovenia X Ips 19/2019 regarding the treatment of “sale and leaseback” transactions (Explanation of Slovene Tax Administration, No. 092-5571 / 2020-4, as at 8 September 2020)

We would like to inform you that the Supreme Court of the Republic of Slovenia (hereinafter Court) has issued Judgment X Ips 19/2019 regarding the treatment of "sale and leaseback" transactions.

Hereinafter, we provide the guidelines arising from this judgment, in which situations is the sale and leaseback considered to be a single financial service of the taxpayer in terms of credit.

From the judgment of the Court and the case law of the Court of Justice of the European Union mentioned herein it derives that immediate sale and leaseback of goods between the same parties does not mean two mutual supplies of goods (separate transactions) but services - a single financial transaction to increase the taxpayer's liquidity, if:

1.  the taxable person - the seller transfers (sells) the goods to another taxable person - the lessor for the purpose of obtaining funds as a loan, who concludes a financial leasing contract with the seller for the same goods;
2. the aforementioned purpose is demonstrated if the transfer of the goods does not allow the lessor to dispose of it in the manner as if he was its owner, which is also the case if the goods on the basis of such contract, remain in the possession of the former owner, i.e. lessee.

Therefore the actual possibility of using the goods is important, not only the legal aspect of the lessor's acquisition of the right of ownership (e.g. in the case of real estate with an entry in the land register).
 
The manner in which a sale and leaseback transaction is treated as a single service or as two separate transactions is a factual question, which is assessed on the basis of the circumstances of the specific case. If the goods actually remain in the possession of the seller (lessee) and the seller uses the goods continuously for the purposes of his taxable transactions, this is considered as a single financial transaction to increase the liquidity of the taxable person. The actions of that taxable person are considered to be so closely linked that they in fact constitute a single indivisible economic service for the sole purpose of financing or increasing liquidity, the distribution of which would be artificial. In case of such single transaction, this transaction cannot be defined as a supply of goods within the meaning of Article 6 of the Value Added Tax Act, on the basis of which the supply of goods means the transfer of the right to dispose of tangible property as if the recipient were the owner. In such case, the lessor does not dispose of the goods as if he was its owner.

If the transaction at the case at hand is a single financial transaction, the latter is exempt from VAT in accordance with point 4 of Article 44 of Value Added Tax Act as granting credits or loans in cash, which consequently means that it does not give the right to deduct VAT.

Regardless of the change in the position of the treatment of taxation from the point of view of VAT, cases deemed as a single financial transaction will be subject to taxation with real estate transfer tax, as from the point of view of the Real Property Transaction Tax Act, these are two separate transactions from the legal aspect – i.e. the sale and financial lease of real estate, which are taxed in accordance with Article 3 of Real Property Transaction Tax Act. In this case, the person liable for payment of real estate transfer tax at sale will be the seller, and at the financial lease the lessor.

The aforementioned means that in the case of concluding a sale and leaseback transaction, when it will be considered a single financial transaction from the VAT point of view, real estate transfer tax will also be due in the case of new constructions and unbuilt building land (which have so far been taxed with VAT). The same applies for cases of "old" real estates, where taxpayers in these cases cannot opt for taxation (according to Article 45 or any other article of Value Added Tax Act).

In the event that in connection with the granting of credits or loans in cash, which are exempt under point 4 of Article 44 of Value Added Tax Act, commission would be charged, then of this commission services tax of 8,5 % must be charged in accordance with Article 3 of the Financial Services Tax Act.

This clarification complements the issued explanations regarding VAT treatment on sales and lease back transactions. These guidelines apply to transactions concluded after the publication of this explanation on the Slovene Tax Administration website, i.e. from 8 September 2020 onwards.

In case you may have any additional questions, we are glad to assist you.