A recent decision of the Advocate General (AG) of the European Court of Justice (ECJ) creates some uncertainty in relation to the VAT treatment of services supplied under sub-participation transactions. In the case (Szef Krajowej Administracji Skarbowej v O. Fundusz lnwestycyjny Zamknięty reprezentowany przez O S.A. Case 250/21), the AG opined that a supply made by a Polish investment fund under a sub-participation was not a VAT exempt supply.

As generally understood, a funded sub-participation involves one party (the "Sub-Participant") paying an upfront amount to the original creditor (the "Originator"). The Originator agrees to pay to the Sub-Participant the proceeds it obtains from the debtors under the original loans which are subject to the sub-participation. In doing so, the Originator transfers the credit risk to the Sub-Participant but retains legal title to the loans. The Sub-Participant has no recourse against either the Originator or the underlying debtors.

In this case, the services provided by the Sub-Participant were held to involve two indivisible elements, namely the :

• Funding of the upfront amount payable for the loans; and 
• Management or assumption of credit risk. 

The AG held that the objective purpose of the transaction is more than the mere granting of credit to the Originator by the Sub-Participant. Therefore, the exemption contained in Article 135(1)(b) of the VAT Directive for the granting, negotiation and management of credit should not apply to that supply as it did not cover the assumption of credit risk by the Sub-Participant. Assumption of credit risk was considered by the AG to be an essential part of the proposed transaction. As such, the AG opined that the remuneration received by the Sub-Participant, being the difference between the upfront amount paid to the Originator and the sums received by the Sub-Participant from the Originator, should be subject to VAT at the standard rate.

The AG's opinion is not binding and it will be interesting to see whether the ECJ follows the line of argument advanced. A couple of points are worth noting:

• While the AG opined that the exemption in Article 135(1)(b) for negotiation of credit did not apply to the services supplied by the Sub-Participant, they did leave open the potential application of the exemption of the services under Article 135(1)(f) which covers “transactions… in shares, interests in companies or associations, debentures and other securities".
• In Ireland, there is no published guidance from Irish Revenue on the VAT treatment of sub-participations but those services would generally be treated as exempt financial services either in the nature of the granting or management of credit or transacting in securities. The VAT neutrality of financial services is fundamental given the limited ability of participants in those transactions to recover VAT charged to them.

Where Irish based originators and lenders sub-participate a portion of their loan assets to a non-Irish participant, the question as to whether VAT is chargeable with respect to the participation services should be considered. The progress of this case will be one to watch for those Irish originators.