Background
When the leased goods are imported, it is often advantageous to designate the lessee as the importer of the goods. Importing goods could be more costly or complicated if the owner of the goods acts as an importer, because the eventual owner of the goods may not be established, or VAT registered in the country the goods are imported into. Therefore, an import by the lessee may be preferred. In case the owner of the goods is not established within the EU, the lessee could therefore clear the goods for customs purposes and could be designated by the EU Member State of importation as liable for the import VAT payment.
Whether the VAT payable on import of leased goods is deductible and by whom depends on specific facts of each unique case. For example, the goods could be imported either by lessor or lessee, the goods could be either returned or not to the country of origin, the goods could be rented for a short- or long-term period, the nature of the goods may vary from goods for industrial use to goods that can (also) be used for non-business/private purposes (e.g., aircrafts or yachts). Furthermore, goods could be rented under either financial or operational lease contract.
The impact of financial or operational lease in VAT deduction
For VAT and Customs purposes, it is important to make a distinction between operational and financial lease. In the case of operational lease, a lessor keeps a legal and economic ownership of the leased goods. In the case of financial lease, a lessor remains a legal owner of the goods, however, economic ownership of the goods is transferred to a lessee.
Financial lease
Since the lessee becomes an economic owner of the goods, the import VAT deduction should be possible provided that formal and substantial conditions are met (e.g., the lessee holds an import document specifying him as importer and stating the amount of VAT due or enabling that amount to be calculated; and the lessee uses the imported/leased goods for its taxable economic activities). However, special VAT deduction rules may apply for example for capital goods.
Operational lease
If imported goods are leased under operational lease, then firstly, the questions arises whether the lessee can act as an importer since the lessee does not take legal or economic ownership of the goods. The practice differs across the EU. In several EU Member States, where the owner of the goods is not established within the EU, the lessee could clear the goods for customs purposes and could be designated by the Member State of importation as liable for the import VAT payment. Some EU Member States do not allow a lessee to act as an importer according to working paper 1064 of 10 July 2023.
Who is liable for payment of import VAT?
Generally, the importer is liable for payment of VAT. But there are exceptions. For example, in certain situations a lessee may become (jointly) liable for the payment of import VAT even if it is not an owner of the goods. This happens, for example, when the goods are removed from the suspension arrangement.
Import VAT deduction by a lessee
If a lessee acts as an importer of the goods and/or becomes liable for payment of import VAT, the question arises if the lessee can deduct import VAT payable.
As far as the formal conditions for deduction of VAT are concerned, the lessee can deduct import VAT if the criteria for import VAT deductions are fulfilled. These are fulfilled if the lessee holds an import document specifying him as importer and stating the amount of VAT due or enabling that amount to be calculated.
From the EU principles for VAT deductions, including the CJEU decisions, we learn that the importer does not need to be an owner of the goods to be able to deduct import VAT.
Criteria for deduction of import VAT
According to the EU VAT Directive and the Court of Justice of the EU (CJEU) case law, the import VAT can only be deducted by the importer if he or she is either:
- An owner of the goods at the moment of importation
- And/or uses the goods for its taxable economic activities.
In its judgment of 25 June 2015 in Case C-187/14 (DSV Road A/S), the CJEU stated that in respect of import VAT, “a right to deduct exists only in so far as the goods imported are used for the purposes of the taxed transactions of a taxable person”.
In its judgment of 8 October 2020 in Case C-621/19 (Weindel Logistik Service), the CJEU again noted that a taxable person may deduct from the amount of VAT that he is liable to pay, the tax due on imported goods where those goods are used for the purposes of his taxable transactions. The CJEU stated that the importer has no right to deduct where goods are imported by a taxable person who does not dispose of the goods as an owner and where the upstream import costs are non-existent or are not incorporated in the price of output transactions or in the price of the goods and services supplied by the taxable person in the course of his economic activities.
What says the VAT Committee?
The EU VAT Committee is an advisory body providing (non-legally binding) guidance on the application of the EU VAT Directive. The VAT Committee was set up to promote the uniform application of the EU VAT legislation.
Several working papers have been published by the VAT Committee on the issue of VAT deduction by a lessee. One of them concerns a specific case of import of an aircraft under operational lease. The Italian tax administration faced the situation in which taxable persons in Italy leased an aircraft from non-EU suppliers and introduced them into Italy under temporary admission with a partial relief from customs duties. The lessee of the aircraft became liable for import VAT. Apparently, the aircraft in question did not qualify for zero-rate VAT that generally applies to such goods. Namely, the EU VAT Directive zero-rates supplies of aircraft and parts that are used by commercial airlines operating chiefly on international routes.
The VAT Committee opined on the possibility for a lessee of imported goods to deduct the VAT paid upon the importation of those goods, when the lessee is designated as liable for the payment of such VAT. The EU VAT Committee referred in working paper 1061 of 20 February 2023 to its previous working paper 762 dealing with an aircraft lease where the European Commission concluded specifically for the case of import of a leased aircraft that the lessee of an imported good is not entitled to deduct VAT.
In working paper 1061 the VAT Committee has shared its opinion that under the above-described circumstances, allowing a full deduction to the lessee of the aircraft would be disproportionate. Therefore, its previous conclusions expressed in working paper 762 should be maintained. According to the VAT Committee, allowing the deduction to the lessee could lead to problems with the adjustments of the VAT deduction required in cases where the owner, after expiry of the lease, puts this non-EU aircraft to private or more generally non-business uses.
In working paper 1064, the European Commission confirmed that the above guidelines only apply to operational lease and not to financial lease. In the latter case the ownership of the goods would be transferred, and the costs would be factored into the lease.
In addition, as working paper 1064 mentions, several EU Member States apply a different criterion to these situations and grant a right to deduct the import VAT to the lessee. Furthermore, several rulings of the CJEU have concluded that deduction of the import VAT paid is allowed for persons who are not the owner of the goods.
Comments
VAT deduction is a complicated matter. The exact VAT treatment of the lease transactions depends on all facts and circumstances. Since each lease scenario is different, each case should be evaluated carefully to determine its VAT implications. It is recommendable to analyse in advance how to best structure your import and lease to optimize the VAT aspects and to ensure that the input VAT will be deductible.
There may be possibilities to optimize your VAT and customs aspects such as making use of exemptions and make use of special customs procedures. For example, in case of return of goods/short-term lease, it may be possible to make use of various exemptions, like the one applicable to temporary importation.
If you have questions about importing or exporting goods under a lease agreement, please don’t hesitate to contact us.
