Factoring (sometimes called accounts receivable financing or invoice financing) is a financing arrangement whereby a company agrees to sell receivables at their face value, less a discount, to another entity or factoring company. The purchaser of the receivables (also called the factor) then becomes the creditor of the sold receivables. As an alternative to assigning the receivables, factoring companies also accept pledges on the receivables against a loan granted by the factoring company.
Factoring provides opportunities for businesses to finance their liquidity needs. It has proven to be useful during the COVID-19 pandemic.
We are increasingly receiving questions from Belgian businesses seeking to enter into factoring transactions, but also from factoring companies wishing to expand their business to the Belgian market.
This article provides a list of frequently asked questions that we have received concerning the Belgian law aspects of factoring and receivables financing. For the purposes of this article, we only discuss cases where the receivables are assigned to the factor and not pledged.
Is factoring a regulated or licensed activity in Belgium? Are there any registration requirements?
Factoring in itself is not a licensed activity, though it may be treated as providing credit to the seller (assignor, originator) of the receivables depending on its specific features.
Granting credit is not a regulated activity in Belgium provided that the purchaser (assignee) of the receivables does not solicit funds from the public. Specific rules apply to consumer credit and mortgage-backed credit to individuals for residential purposes.
If the credit is provided by a credit institution incorporated in another EEA member state, the credit institution will need to passport its authorisation as a credit institution into Belgium prior to providing credit to Belgian companies.
Which law governs the assignment of a receivable against the originator and third parties?
The relationship between an assignor (seller, originator) and an assignee (purchaser) under a voluntary assignment of receivables is governed by the law applicable to the factoring agreement in accordance with Article 14(1) of the Rome I Regulation. Given the Rome I Regulation in principle grants parties the freedom to choose the applicable law of a contract, the law applicable in the contractual relationship between an assignor and an assignee will be the law chosen by the parties in the contract, subject to certain exceptions included in the Rome I Regulation.
The relationship between the assignee and the debtor, the conditions for the assignability of the receivables and the determination of when the debtor’s obligations are discharged are governed by the law of the commercial contract with the debtor in accordance with Article 14(2) of the Rome I Regulation.
Whilst Article 14 of the Rome I Regulation harmonises certain private international law rules with respect to the assignment of receivables, it does not provide for a uniform conflict rule as to which law should govern the enforceability of the assignment of a receivable against third party creditors of the assignor. Since these rules vary across jurisdictions and different private international rules refer to each other, structuring cross-border receivables financing transactions remains complex and requires detailed prior analysis of the potentially applicable legal regimes.
To reduce this complexity, the European Commission is currently working on a proposal to adopt uniform conflict of laws rules at EU level. More information on this proposal and its current status can be found on EUR-Lex (europa.eu).
Pending uniform legislation at EU level, Article 87, §3 of the Belgian Code of Private International Law currently states that the enforceability of an assignment of receivables against third parties (other than the debtor but including a bankruptcy trustee) is determined by the law of the State on the territory of which the assignor had its habitual residence at the time of the assignment. This is irrespective of the law chosen in the factoring agreement. Therefore, if for instance the factoring contract would be governed by Belgian law and if the assignor had its habitual residence in France, the Belgian law factoring agreement will also need to comply with any French law requirements to ensure it can be enforced against the creditors of the assignor.
What are the Belgian law conditions for an effective assignment between the parties to the factoring agreement?
In order to have a valid assignment of receivables between the parties to the factoring agreement, parties should reach an agreement on the receivables to be assigned, the purchase price and the timing of the sale. It is sufficient that the receivables are identified or identifiable on the basis of objective elements. There are no other specific conditions or formalities required for an effective assignment of receivables between parties.
Specific rules apply to mortgage receivables, insurance receivables, receivables owed by the government and receivables incorporated in a negotiable instrument.
What are the Belgian law formalities to render an assignment effective against the debtor and other third parties?
The assignment of receivables will be effective:
- against third parties (including the insolvency trustee of the assignor, but not against the debtor or bona fide third parties with concurrent rights in rem in relation to the same receivable) when the sale is effective pursuant to the factoring agreement; and
- against the debtor and any bona fide third parties with concurrent rights in rem in relation to the same receivable (such as other assignees and pledgees), once the debtor has been notified of, or has acknowledged, the assignment.
The notification and/or acknowledgment is not subject to any formalities. For evidence purposes we recommend the notification/acknowledgement to be in writing. In practice it is typically required that notice is given by registered mail with an acknowledgment of receipt. Alternatively, assignment notices are also printed on invoices.
Is non-disclosed (silent) factoring possible?
Yes. The transfer will however only be perfected against third parties with a concurrent right, such as (second) assignees or pledgees, in case the debtor has been notified of the transfer or has acknowledged the transfer. The debtor’s obligations can also only be validly discharged by payment to the assignee after such notification or acknowledgement.
Finally, it is possible to only disclose the assignment at a later stage (for instance, in case of an event of default or enforcement event). The notification can even be served after the insolvency of the assignor. It will however not be effective on the debtor if served after the debtor has paid the relevant receivable.
Note however that a notification to or acknowledgement by the debtor after the assignor’s insolvency can no longer improve the factor’s ranking, given all creditor positions will be fixed on insolvency. A third-party creditor with an older competing claim will therefore prevail where no notifications were sent by either such third party or the factor prior to the assignor’s insolvency.
Which party will prevail in case of multiple assignments or pledges of the same receivable?
Belgian law provides that in case of multiple assignments or pledges of the same receivable:
- the rights of the party who has notified the debtor first will prevail (by comparing the date of notification/acknowledgement and not the date of the assignment/pledge agreement); or
- if none of the assignments or pledges have been notified to the debtor or have been acknowledged by it, the oldest assignment/pledge will prevail.
Are there any regulations which may prevent or render void the assignment of receivables?
As a general principle under Belgian law, receivables can be assigned without the consent of the debtor, unless the receivables:
- are not tradable;
- are not assignable due to a statutory prohibition; or
- originate from agreements with an intuitu personae character (which means that a party has only agreed to enter into an agreement due to the personal character of the other party).
Trade receivables are usually tradeable, not intuitu personae and not subject to legal transfer prohibitions.
Dissenting opinions in legal writing and some casuistry exist on whether contract clauses preventing assignments of receivables can be held effective. The majority view is that contractually agreed restrictions on assignment are usually not enforceable, unless the debtor can rely on third-party complicity by the assignee to a breach of contract. The debtor has of course a claim for damages against the assignor.
Is it possible to assign receivables (including future receivables) entirely in advance?
Yes. It is sufficient that the receivables are identified or identifiable on the basis of objective elements.
Future receivables can be assigned, as long as they meet such criteria.
There is no need to provide lists (though we see it as market practice to request lists at regular times for evidence purposes).
Could the assignment of a receivable conflict with a (prolonged) reservation of title of an assignor’s supplier?
The rights of an assignee may also come into conflict with the rights of a supplier of the assignor benefiting from a reservation of title (eigendomsvoorbehoud/réserve de propriété) clause.
Such right of reservation of title can extend to the claim the assignor has vis-à-vis a third-party buyer of the goods, either expressly (via contract) or via subrogation. Pursuant to this extended right of reservation of title, the supplier thus has a right on the receivable (of the assignor) arising from the sale of the supplied goods to a third-party buyer. If the assignor would assign such receivable to an assignee, the question arises how the ranking between the assignee and the supplier will be determined. This conflict will generally be in favor of the supplier to the extent the debtor was not notified beforehand of the assignment to the factor (or has not acknowledged such assignment earlier).
Is it possible to assign receivables as security?
Belgian law, while recognising that an assignment of receivables as security can be valid, also determines such assignee cannot be granted more rights than a pledgee. Therefore, assigning receivables as security is not a legal concept under Belgian law and will be recharacterized as a pledge on such receivables.
One of the differences between a pledgee and an assignee is that the latter is entitled to sell the receivable. Both the assignee and the pledgee are entitled to collect the amounts due under the receivable. If however the underlying claim that is secured by the pledge is not yet due, any amounts collected may not be appropriated by the pledgee.
Is the Belgian SME Finance Act applicable to factoring arrangements?
The Belgian SME Finance Act applies to any credit arrangement entered into by a business (onderneming/entreprise) having its establishment or registered seat in the European Economic Area, provided that:
- the lender pursues its commercial or professional activities in Belgium; or
- the lender directs such activities to Belgium or to several countries including Belgium,
and such credit arrangement falls within the scope of those activities in Belgium.
The law among others provides that funding loss and breakage costs in credit agreements to SMEs must comply with the mandatory code of conduct for SMEs. The law also imposes a nullity sanction on certain clauses.
According to the preparatory works of the SME Finance Act, only “financial” credits fall within its scope. This means that credits in the form of supplier’s credit, intra-group loans and factoring or leasing activities would not fall within its scope. There is however some debate in legal writing whether factoring and/or leasing activities would actually fall outside the scope of the SME Act, as the wording of the act itself suggests otherwise.
Is the Belgian B2B Act applicable to factoring arrangements?
The Belgian act of 4 April 2019 amending the Belgian Code of Economic Law relating to abuse of economic dependence and unfair terms (the “B2B Act”), provides that any clauses or contractual terms not relating to the provision of credit or financial services, which create an obvious imbalance between the rights and obligations of the parties and are not provisions regarding the price or consideration for goods or services, or provisions that constitute the actual object of the agreement, will be unenforceable. For an overview of clauses that may fall under the scope of the general prohibition of unfair clauses, we refer to our article about the impact of the B2B Law on general terms and conditions. More information on the B2B Act can also be found in our article on the impact of the B2B legislation to distribution agreements and services agreements.
The B2B Act further lists so-called “blacklist” clauses which are void as a matter of law and “greylist” clauses which are presumed to create an obvious imbalance and can be nullified before court, subject to evidence to the contrary.
The preparatory works indicate that the provisions of the B2B Act are overriding mandatory provisions of Belgian law within the meaning of Article 9 of the Rome I Regulation.
It is unclear whether the exclusion of the provision of credit and financial services under the B2B Act also applies to any documents and arrangements not constituting loan agreements, and accordingly it cannot be excluded that a court would deem that the B2B Act will be applicable to factoring arrangements.
Has Belgium ratified the UNIDROIT convention on international factoring (Ottawa Convention)?
Yes. It entered into force in Belgium on 1 October 2010.
Belgium did make a reservation in relation to article 6 of the Ottawa Convention (which confirms the assignment is effective notwithstanding any contractual prohibition on assignment).
The rights and obligations under the Ottawa convention are similar to what is already applicable under Belgian law and therefore does not have any substantial consequences for Belgian factoring arrangements.
For more information on the Ottawa Convention, we refer to the UNIDROIT website on Factoring.
Are there any VAT related issues regarding the assignment of receivables?
The assignment or transfer of receivables is exempt from VAT under Belgian VAT law. The way in which the consideration is paid in exchange for the assignment of the receivables and the amount of the consideration can however alter the VAT treatment.
If the consideration paid by the factor for the assignment of the receivables is lower than the economic (discounted) value of the receivable at the time of the assignment, the difference between the amount of the consideration and the economic value is deemed to be a consideration for debt collection services which are subject to the standard VAT rate of 21%.
Furthermore, the factor will in some cases advance funds to its customers for the later assignment of the receivables. If the advancement of funds is a purpose in itself for the customer, that activity of the factor will be considered as the supply of credit services which is exempt from VAT. Consequently, this will have an impact on the right to deduct input VAT for the factor as the supply of credit services does not grant a right to deduct input VAT.
With respect to amounts due under receivables that cannot be recovered from the original debtor (i.e. bad debts), the Belgian VAT authorities allow the factor to directly request the refund of the VAT due under the receivable concerned.
Are there any withholding or other tax related issues regarding the assignment of receivables?
Under Belgian tax law, withholding tax is levied on the attribution or payment of income from movable goods (e.g. dividends, interest, royalties, etc.). As regards financing transactions, withholding tax is levied on payments that qualify as interest generated by a loan (i.e. implying the right to a reimbursement of capital deployed) or a receivable. Absent a definition of “loan” under Belgian tax law, the qualification under Belgian civil law applies.
The purchase or assignment of a receivable should generally not itself trigger Belgian withholding tax. In respect of an interest component included in a discount rate or factoring fee, there is no guidance in law nor in published case law regarding its qualification as interest for withholding tax purposes. It is nevertheless generally supported that in case of a transfer which qualifies as a true sale and which is not a loan under Belgian civil law, the discount rate should not be treated as interest and as such not give rise to interest withholding tax. The question further rises whether the Belgian tax authorities could successfully invoke the Belgian GAAR to requalify a securitization or factoring arrangement as a deemed financing transaction in view of levying withholding tax. This implies that both the objective and subjective components of the GAAR are met, and that the taxpayer fails to provide the counterproof on the presence of non-tax motives underlying the transaction. For various technical arguments, the GAAR however generally does not apply in this context.
Assuming that the relevant receivables are non-interest bearing, the settlement of receivables/payment of invoices on maturity would also not trigger Belgian interest withholding tax. Default interest, late payment interest or interest in respect of a granted payment delay are in most cases not subject to withholding tax as such payments do generally not qualify as interest generated by a loan or a receivable. Indeed, according to tax authorities, late payment interest under a trade receivable payable as a result of the general terms and conditions applicable to all customers of the relevant company or as a result of an additional payment term granted at the simple request of a customer does not qualify as “interest” on which Belgian withholding tax may be due, provided that this additional payment terms are generally granted and are not abnormally long. For completeness sake, please note however that in very specific cases, the Belgian tax authorities and Belgian Courts have taken the position that a payment delay in reality qualifies as a concealed loan (for instance when in the sector in which the creditor operates it is unusual to provide a payment delay).
Finally, in principle, no stamp duty, registration, documentary or similar taxes or charges are payable in Belgium in order to ensure the admissibility of the transaction as evidence or its validity and enforceability vis-à-vis third parties provided that: (i) no ‘bank scriptures’ (bankgeschriften) within the meaning of Article 8 of the Belgian Code on certain Rights and Taxes of 2 March 1927 are issued, for which a EUR 0.15 duty per copy should be due if those documents are drawn up and executed or initialled in Belgium; and (ii) the transfer of the receivables is not voluntarily enacted by a Belgian notary via a Belgian notarial deed. A registration duty of 3% is due by a defendant in proceedings on any sum of money which this defendant is ordered to pay by a judgment exceeding EUR 12,500 rendered in Belgium.