Value Added Tax (VAT) is levied on most business transactions, relating to both goods and services. It does not apply to certain exempt services. Insurance and reinsurance as well as related services provided by insurance brokers and insurance agents are exempt from VAT under the EU VAT directive.

In a recent ruling handed down by the Court of Justice of the European Union (CJEU), it was established that insurance claim handling services provided by a third party in the name and on behalf of an insurer are subject to VAT.

The CJEU was asked by the referring national court whether particular insurance services performed by a third party on behalf of the insurer fall within the exemption found in the EU VAT directive.

In 2005, the CJEU had already been requested to interpret the scope of the insurance exemption in the Arthur Andersen & Co case. In that ruling, the Luxembourg Court determined that back office functions provided to an insurance company did not fall within the exemption of the EU VAT directive where such services included the administration of policies and management of claims. The Court made its assessment primarily on the basis that the nature of the services performed by Andersen could not be related services of the kind provided by an insurance broker or agent. Andersen was neither a broker nor an agent, and therefore VAT applied to its services.

Eleven years later, the CJEU retained the same narrow approach in the interpretation of the EU insurance exemption.

Insurance claim handling services provided by a third party in the name and on behalf of an insurer are subject to VAT

The central issue, in the more recent case, revolved around claim handling services rendered to an insurance company under an agreement concluded with that insurer. The activities performed by Aspiro, a Polish company, consisted of full settlement of claims arising from insured events, including handling correspondence, recording and investigating claims, producing damage reports, and taking decisions on claims. In handling claims, Aspiro dealt directly with the insured on behalf of the insurer, but had no relationship with the insured.

The Polish tax authorities disagreed with Aspiro’s contention that its activities fell within the ambit of the VAT exemption for insurance.

Faced with this issue, the Polish Court made a referral to the CJEU for a preliminary ruling on the matter.

Prior to the ruling, the Advocate General of the CJEU opined that the services rendered by Aspiro could not benefit from the VAT exemption. It drew this conclusion on the basis of a number of factors: Aspiro has no legal relationship with the insured; it did not provide insurance itself and therefore did not assume any risk; and it did not operate as an insurance broker. For these reasons, the Advocate General argued that the requirements of the exemption were not met even though the activities performed by Aspiro were closely connected with insurance.

Consistent with its earlier ruling, the Luxembourg Court upheld the Advocate General’s approach.

In reaching its decision, the CJEU considered that the wording of the VAT Directive extended to related services performed by insurance brokers and insurance agents. The term “related services” is sufficiently broad to cover different services connected with insurance transactions, but the Court deemed that the wording of the exemption must be interpreted strictly. To be exempt, the provision of the related services must be rendered by an insurance broker or agent.

The CJEU determined that an insurance transaction was established through the existence of a contractual relationship between the service provider and both the insurer and the insured for the provision of insurance or the procurement of insurance cover for the insured. Aspiro had a contractual relationship with the insurer only and only an indirect relationship with the insured.

Aspiro failed to show that it was an insurance agent or broker, as it did not perform activities that cover the essential aspects of the work of an insurance broker or agent, such as finding prospective clients and introducing them to the insurer.

Accordingly, the Court concluded that outsourcing of claim handling services by an insurer to a third party is not exempt from VAT where that outsourcing is not linked to the finding of prospective clients and their introduction to the insurer with a view to the conclusion of insurance contracts.

jgrech@demarcoassociates.com

Josette Grech is an adviser on EU law at Guido de Marco & Associates.

Sign up to our free newsletters

Get the best updates straight to your inbox:
Please select at least one mailing list.

You can unsubscribe at any time by clicking the link in the footer of our emails. We use Mailchimp as our marketing platform. By subscribing, you acknowledge that your information will be transferred to Mailchimp for processing.