The ministry of finance has issued a decree to the effect that factoring shall be charged to VAT from July 1, 2004 following the ECJ case of MKG-Kraftfahrzeug-Factoring-GmbH of June 23, 2003.
On June 23, 2003, the ECJ held in the MKG-Kraftfahrzeug-Factoring-GmbH case that factoring was a business activity subject to VAT. This ruling contradicts a specific provision of the German VAT Act making factoring tax-free and therefore excluding the factor from the right to recover input tax. However, the German provision is based on a mistranslation of the Sixth Directive and is therefore invalid - so the ECJ. The Supreme Tax Court followed this judgement in its own ruling on the case in October 2003. The ministry of finance has now followed up with a decree accepting the ruling in principle, but filling out more of the details, especially on the distinction between factoring on the one hand and the assumption of bad debt risks or granting credit on the other. These latter two activities are
