Clifford Chance

VAT Treatment of Sub-Participations

14 October 2022

In a decision which will be welcomed by loan market participants, the Court of Justice of the European Union (CJEU) has ruled in SKAS (Case C-250/21) that the supply which a sub-participant makes to the grantor under a funded sub-participation agreement falls within the "granting of credit" VAT exemption.

By way of background, the case was a Polish referral to the CJEU and involved a party (the sub-participant) paying an upfront amount to a lender (the grantor) who had granted a loan to a borrower (the debtor).  In return for that payment, the grantor agreed to pay the sub-participant the proceeds it received from the debtor.  The sub-participant was a Polish securitisation fund, but other than that there did not appear to be anything to distinguish the transaction from a typical sub-participation entered into under standard form LMA documentation.  It contained the usual features that the sub-participant provided liquidity to the grantor, the grantor transferred the credit risk to the sub-participant and the sub-participant had no recourse (against the grantor or the debtor) if the debtor defaults.

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