EU Court ruling on loan servicing fees

The EU General Court's decision in Veronsaajien oikeudenvalvontayksikkö v A Oy (Case T-184/25) could have significant consequences for securitisation transactions. While the immediate issue was whether loan servicing fees remained VAT exempt after a transfer of loans to an SPV, the broader message is clear: courts are taking an increasingly restrictive approach to financial services exemptions.

What happened?

The case concerned a common securitisation arrangement. A Finnish bank originated mortgage loans and subsequently transferred them to a securitisation vehicle. Although ownership of the loans moved to the SPV, the bank continued to administer and service the loans on behalf of the SPV in return for a fee.

The bank argued that those servicing activities fell within the VAT exemption for the "management of credit by the person granting it" under Article 135(1)(b) of the VAT Directive. The Court disagreed.

Taking a purposive and contextual approach, the Court concluded that the exemption applies only where the entity managing the loan is the current lender. Once the loans had been transferred, the original lender was no longer managing its own credit relationship with borrowers; instead, it was supplying services to a third-party credit holder. As a result, the servicing fees became taxable supplies for VAT purposes.

The Court also rejected attempts to bring the services within alternative exemptions relating to credit guarantees or transactions concerning debts.

Why does this matter?

For many securitisation structures, loan servicing (in particular, primary servicing) is not outsourced to an independent, 3^rd party servicer. Instead, the originator continues to service the loans because it already has the systems, staff and borrower relationships necessary to do so efficiently and cost effectively.

Historically, some EU jurisdictions have treated these servicing activities as VAT exempt. The Court's judgment challenges that approach by drawing a clear distinction between:

• managing loans as lender; and
• managing loans on behalf of a third-party owner of those loans.

That distinction may appear technical, but its commercial impact can be substantial.

Securitisation vehicles typically make VAT-exempt supplies and often have little or no ability to recover input VAT. If servicing fees become subject to VAT, that VAT can become an irrecoverable cost within the transaction, affecting economics, pricing and expected returns. To put this in perspective, servicing fees in European securitisations typically range from 5 to 100 basis points of the outstanding portfolio balance. For a mid-sized CMBS programme with a portfolio of €1 billion, a 20% VAT charge on servicing fees of 25 basis points could represent an additional irrecoverable cost of €500,000 per annum — a material drag on investor returns over the life of the transaction.

Potential implications beyond the EU

Although the case concerns EU law, UK market participants should not assume it can safely be ignored.

HMRC currently accepts that the management of credit by the original creditor may qualify for exemption in certain securitisation structures. HMRC's existing guidance also contains distinctions between assignments of receivables and transfers of legal title to debts. The Court's reasoning could therefore sit uncomfortably alongside some established UK interpretations. As a result, UK advisers and originators will undoubtedly be examining whether HMRC's current position remains sustainable in the longer term.

Given the UK's continuing tendency to follow developments in EU VAT jurisprudence where domestic legislation derives from the same underlying provisions, the case is likely to attract significant attention even if there is no immediate change in policy.

A broader trend: increasing scrutiny of financial services exemptions

Perhaps the most interesting aspect of the decision is that it reflects a wider judicial and HMRC trend.

Financial services VAT exemptions have always created tension. Businesses seek certainty and efficiency, while tax authorities are concerned about exemptions being applied beyond their intended scope. The EU court analysis repeatedly emphasised the need for a strict interpretation of exemptions and the principle of fiscal neutrality. In effect, it asked why an originator servicing loans for an SPV should receive more favourable VAT treatment than an independent third-party servicer undertaking exactly the same activity. That reasoning has a certain logic, but it arguably overlooks the commercial reality that originators typically retain servicing precisely because they are uniquely placed to do so, and that the exemption was arguably designed to accommodate integrated credit relationships of this kind.

This approach echoes the direction of travel seen in a number of recent disputes involving financial services VAT exemptions, where courts have focused closely on the precise legal and economic nature of the services being supplied rather than the commercial context in which they are performed.

What should businesses do now?

The judgment is unlikely to require immediate restructuring of existing transactions, particularly in jurisdictions where local guidance still supports current practices. However, it should prompt a review of VAT assumptions underpinning securitisation structures.

Businesses may wish to consider:

• assessing whether fee structures are drafted as VAT inclusive or exclusive;
• assessing the impact on transaction economics and investor returns;
• considering whether alternative servicing models could be more VAT-efficient; and
• monitoring potential responses from tax authorities, including HMRC.

This is particularly important for organisations with active securitisation programmes or significant receivables financing arrangements, where small changes in VAT treatment can have material consequences.

The UK angle: a reminder of HMRC's growing focus on financial services

The decision also arrives against a backdrop of increasing HMRC scrutiny of financial services VAT issues. Recent disputes demonstrate HMRC's willingness to challenge long-established assumptions where it considers the legal basis uncertain.

Against that backdrop, the EU Court's emphasis on strict construction and economic reality is unlikely to go unnoticed. Whether or not HMRC ultimately changes its published position, the judgment provides fresh authority for challenging arrangements that rely on a broad interpretation of financial services exemptions. That said, the decision is not beyond criticism. By focusing narrowly on the post-transfer legal position, the court may have underweighted the economic substance of arrangements where the originator's ongoing role is integral to the credit relationship. It remains to be seen whether future cases will refine or limit the scope of this ruling, and if this ruling will be appealed.

The wider lesson may be more significant. The judgment in A Oy reinforces a trend towards narrowing the scope of financial services exemptions and testing established market practices against the underlying purpose of the legislation (at least in Finland and, by extension, likely the EU).

For the securitisation industry, that makes VAT a structuring issue that deserves board-level attention rather than a routine compliance consideration. The implications may also extend beyond traditional securitisations to sub-participation structures and funded participation arrangements, where economic risk transfers but legal title to the underlying loans may not — raising analogous questions about who is "granting" or "managing" credit for VAT purposes. Businesses should also consider whether existing transactions could face retrospective challenge, or whether existing transactions would be grandfathered. As tax authorities continue to examine financial services arrangements more closely, and as industry bodies such as AFME and UK Finance assess the need for a coordinated response, businesses that revisit their assumptions now may be better positioned than those relying on historic practice alone.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2026.  For more information see our terms & conditions.