New abusive practices in tax inspections: Incorrect reclassification of granting interest-free loans as taxable for VAT purposes

Whilst assisting our clients during tax inspections, we observed that there is a new tendency for the tax inspectors to abusively try to attract additional revenues to the state budget.

Thus, they are abusively trying to reconsider interest-free loans as being taxable transactions within the scope of VAT.

Therefore, in this article, we will prove that the reasoning proposed by the tax authorities defies the scope of the VAT, as this indirect tax cannot be levied upon granting interest-free loans.

I. Granting interest-free loans does not constitute a taxable transaction for VAT purposes

In order for a transaction to be subject to VAT, we must be in the presence of a taxable transaction.

Article 268 of the Romanian Tax Code imposes four conditions that must be met cumulatively to consider a transaction taxable from the VAT perspective:

a)the operation must constitute or be assimilated with a delivery of goods or a supply of services, in the sphere of tax, performed in consideration of payment;

b)the place of delivery of goods or supply of services is considered to be in Romania, in accordance with the provisions of art. 275 and 278 of the Romanian Tax Code;

c)the delivery of goods or the supply of services is performed by a taxable person, as defined in art. 269 ​​para. (1), acting as such;

d)the delivery of goods or the supply of services to result from one of the economic activities provided in art. 269 ​​para. (2).

It can therefore be noted, that due to the fact that the loans are granted free of charge, without interest, the condition that the loan operation be carried out in consideration of payment is not met. There is no direct consideration for the loan.

Moreover, for the operation to be considered taxable, the delivery of goods or the supply of services must result from an economic activity, as defined by art. 269 ​​para. (2) of the Romanian Tax Code.

The text of this article states that economic activities include the activities of producers, traders or service providers, including extractive, agricultural and liberal or similar activities. It is also an economic activity to exploit tangible or intangible assets in order to obtain income on a continuous basis. Or, the lender does not obtain income from granting loans, because it does not charge interest for them.

According to the jurisprudence of the ECJ, a supply of services is a taxable transaction for VAT purposes only if there is a legal relationship between the provider and the recipient in which reciprocal performance took place and the remuneration received by the provider is the actual value of the service provided to the beneficiary. (Case C-16/93 Tolsma, para. 14).

According to this reasoning, because lender does not charge interest for the loans granted, there is no reciprocal performance, respectively no economic activity. Therefore, the operation does not represent a taxable operation for VAT purposes.

Loans without any interest represent a normal way of financing within groups of affiliated companies. The Romanian Companies Law no. 31/90 does not prohibit the granting of these loans, as it results from the provisions of art. 272 paragraph (3) according to which “The deed provided in para. (1) lit. c), if it is committed by a company that has the quality of founder, and the loan is made from one of the controlled companies or that controls it, directly or indirectly. ”

Moreover, the aforementioned loans are made on an occasional basis, so from the perspective of the National Bank of Romania this type of operations can be carried out freely, not being subject to any special regulations.  Usually, the company that lends the money has an object of activity that is different from that specific to the financial institution, reason for which the granting of loans is an incidental and occasional activity.

The Court of Justice of the European Union , by its the Decision in case C-716/18, AJFP Caraş-Severin and DGRFP Timişoara established that the incidental activities, which are not performed within the normal economic activity of a taxpayer do not fall within the scope of VAT.

The relevant case-law has also ruled on the absence of an obligation to collect interest. Thus, within the Sentence no. 844 of 28.022011 of the Galați Court, the administrative and fiscal contentious section was retained:

„The profit or loss suffered by the lender following the conclusion of this act, strictly concerns the activity of the lending company and is not within the competence of the tax authority to assess why it did so in the conditions in which in the meantime it contracted interest loans. Also, it does not concern the tax authority, from the point of view of its attributions and competences, the way in which the company is managed, if this fact did not generate losses of the state budget. In any case, it cannot be established outside any legal criteria that the company should have collected the interest and, consequently, obtained a taxable profit. We take into account the fact that no legal basis is indicated for establishing the interest.

In other words, on the occasion of drawing up the tax inspection report and resolving the appeal, based on an assumption of commerce of the act concluded by the parties, the tax authority intervened in a private legal agreement to establish the party’s obligations, following reclassification of the Convention from a loan contract with no interest into one with interest and that implicitly would generate profit and fiscal obligations.

The defense put forward by the tax authority that the transaction must be reclassified in order to reflect the market price cannot be retained. The tax authority failed to prove what service was supplied. The court considers it obvious that a loan with no interest cannot be considered a supply of service for VAT purposes.”

II. Granting interest-free loans does not generate VAT obligations

Alternatively, if we consider that granting interest-free loans falls within the scope of VAT, the tax base would be 0. Value added tax is calculated only at the ”added value”. It is an indirect tax, which is calculated based on the remuneration received from the beneficiary, according to art. 286 of the Romanian Tax Code.

In our case, there is no reciprocal performance, therefore the VAT tax base is 0 and accordingly the VAT that can be levied is 0. Therefore, granting interest-free loans does not generate VAT obligations.

III. Granting interest-free loans is exempted from the scope of VAT

Finally, even if we consider that the loan operation falls within the scope of VAT and there is a positive tax base, we must recall that granting loans is a financial operation and therefore it is exempt from the scope of application of VAT, according to art. 292 para. (2) point 1 of the Romanian Tax Code.

We must also refer to the provision of the Methodological Norms for the application of the Romanian Tax Code. At point 52.3, it is explained that art. 2929 para. (2) point 1 of the Romanian Tax Code must be interpreted as also exempting from the payment of VAT the loans granted by the associates or by the shareholders to the companies, in order to ensure the financial resources of the company.

Consequently, it is not necessary to have an authorization from the National Bank of Romania for granting loans and moreover, the operation can be considered as being exempted from VAT based on art. 292 para. (2) point 1 of the Romanian Tax Code.

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