Factoring is an essential corporate financing tool. However, when an assigned receivable proves to be definitively irrecoverable, complex tax mechanisms come into play, raising a major legal question: can the factor claim reimbursement from its client of the Value Added Tax (VAT) that it initially advanced?
This article analyzes the legal reasoning that led the Court of Cassation to resolve this delicate contractual and tax issue in its decision of 22 October 2025.
1. The Context of Factoring and the Risk of Irrecoverability
Factoring is a complex sui generis contract by which a client (the business) assigns its trade receivables to a specialized institution, the factor, which handles collection, guarantees completion (in principle) and may provide early financing.
In a landmark case pitting Pro Living Group against Societe Generale Factoring (SGF), Pro Living had assigned invoices, including VAT, issued to the company Alinea. The total amount assigned amounted to 1,433,895.92 euros inclusive of tax, of which 238,982.65 euros was VAT. Following the compulsory liquidation of the debtor (Alinea) in October 2020, SGF, having financed the receivable inclusive of tax, was left with an unpaid debt.
The liquidator having issued a certificate of irrecoverability, the client (Pro Living) was able to carry out the tax adjustment and obtain restitution of the VAT it had initially paid to the Treasury.
The central legal issue was as follows: Could SGF, having advanced the amount inclusive of tax, require Pro Living to return the recovered VAT?
2. The Role of Conventional Subrogation
The factoring contract is legally based on the mechanism of conventional subrogation or assignment of receivables.
The subrogation mechanism: Under Articles 1346-1 et seq. of the Civil Code, payment by the factor (SGF) has the effect of vesting it in the rights of the client (Pro Living) against the debtor (Alinea). The factor then becomes a subrogated creditor. Article 1346-4 of the Civil Code provides that subrogation transfers to the beneficiary the receivable and its accessories, up to the amount paid, except for rights exclusively attached to the person of the creditor.
The reasoning of the Factor (SGF) and the Court of Appeal (19 June 2024): The Paris Court of Appeal overturned the trial court judgment which had dismissed the factor’s claim.
- On the receivable and its accessories: The Court of Appeal held that since the assigned receivable (inclusive of tax) belonged entirely to the factor, any sum paid in respect of that receivable was due to it as owner. Consequently, by operation of subrogation, SGF had a right of action against the client for the exact amount it had paid. The factor argued that it was entitled to seek reimbursement of the VAT as it constituted an accessory to the receivable.
- On the contractual exclusion: Article 4 of the contract nevertheless stipulated that the factor would have no recourse against the supplier “concerning the unpaid balance of a sold receivable.” The Court of Appeal set aside this clause, holding that the dispute did not concern the “unpaid balance of a sold receivable” but rather the restitution of VAT following the issuance of a corrective invoice. For the Court of Appeal, the reimbursement claim was in reality based on the principle of binding force of contracts (Article 1103 of the Civil Code), in connection with the invoice correction.
3. The Cassation (22 October 2025)
Seized of an appeal by Pro Living, the Court of Cassation quashed and annulled the Paris Court of Appeal’s judgment.
The Court of Cassation, in its judgment of 22 October 2025, restored an essential distinction between the payment of a receivable (with subrogation) and the status of legal taxpayer for VAT purposes.
The Legal Reasoning of the Cassation:
- The Nature of VAT: The chargeable event for VAT occurs at the time the delivery of goods or provision of services is carried out (Article 269 of the General Tax Code). The client (Pro Living), carrying on a goods delivery business, was required to pay VAT in the month of delivery to the customer. The right to obtain VAT restitution belongs legally only to the client, who is the legal taxpayer.
- The Limited Effect of Subrogation: The Court recalls that while payment inclusive of tax by the factor subrogates it in the rights and actions of the creditor, it does not have the effect of making the factor the party liable to the State for payment of that tax.
- The Right to Claim: The right to recover VAT is not an accessory to the assigned receivable within the meaning of Article 1346-4 of the Civil Code that would automatically transfer to the factor.
Consequently, the Court of Cassation established the following principle, setting precedent:
“While payment by the factor of an invoice comprising the price of goods or a service, plus the related value added tax, has the effect of subrogating the factor in the rights and actions of the creditor, it does not have the effect of making the factor the party liable to the State for payment of that tax. Consequently, when the corresponding receivables have become definitively irrecoverable, the factor is not entitled, absent a contrary stipulation in the factoring contract, to claim from the creditor the tax that the latter obtained reimbursement of pursuant to Article 272(1) of the General Tax Code.”
4. The Contractual Clause: The Exception That Proves the Rule
The crucial point, supported by administrative guidance (BOFIP) and confirmed by the Court of Cassation, is that the factor’s ability to obtain repayment of the VAT recovered by the client falls within the exclusive domain of the contractual relationship between the parties.
In the Pro Living case, the contract did not contain a clear stipulation permitting such recourse.
The Advocate General, in her opinion, had nevertheless argued that, following the correction of the invoice (which no longer included VAT), the reimbursement sought by the factor was not based on subrogation, but on the binding force of the contract (Article 1103 of the Civil Code), as the factor was only required to pay the receivable exclusive of tax, given the corrective invoice issued by the client. However, the Court of Cassation favored the tax analysis and the non-transferable nature of the right to restitution through subrogation.
Conclusion: Practical Implications
For practitioners, the conclusions are twofold and require an immediate review of contractual clauses:
- Restatement of the Legal Principle: The right to recover VAT on an irrecoverable receivable is a right exclusively attached to the person of the legal taxpayer (the client) and is not automatically transferred to the factor by operation of subrogation.
- Contractual Imperative: If the factor wishes to obtain restitution of the VAT it advanced when the client recovers it from the tax authorities (Article 272 of the General Tax Code), it is imperative that this repayment obligation be clearly and expressly stipulated in the factoring contract.
In the absence of such a stipulation, the factor has no legal basis for claiming these sums, even if it advanced the amount inclusive of tax. This judgment therefore highlights the primacy of contractual intent over the general theory of subrogation in this specific tax-financial area.
