As an example of how obscure cases in the European Court of Justice (ECJ) can have unexpected consequences, the decision of the ECJ in Swiss Re Germany Holding GmbH v Finanzamt München für Körperschaften on 22 October 2009 takes some beating.
Background
A Swiss Re subsidiary in Germany sold to a Swiss reinsurance company 195 life reinsurance contracts. All policyholders were resident outside Germany, although some were based elsewhere in the EU. The transfer was not constructed as an insurance business transfer: each policy was novated with the consent of the policyholder.
The German tax authorities initially took the view that the transfer was a supply of goods and subject to VAT, which will be strange to anyone who has ever seen a reinsurance contract. The taxpayer appealed twice and the German Appeal Court decided that the transfer was a supply of services, but could not decide on the correct VAT treatment and accordingly referred the case to the ECJ.
The ECJ, following the earlier recommendation of the Advocate General, decided that the transfer was a supply of services (not surprisingly), which was not exempt from VAT (which was surprising). So, according to the ECJ, VAT was properly charged by the German tax authorities on the transferor.
VAT
In the EU, VAT is chargeable on a taxable supply of goods or services. Anything not a supply of goods is deemed to be a VAT on Insurance Business Transfers? supply of services. The sixth VAT directive requires various supplies to be exempt from VAT, so no VAT is chargeable on them1. One of the exempt areas is insurance and reinsurance transactions, but in this case the ECJ decided that an insurance transaction was one where the insurer agrees to indemnify the insured in return for a premium, if the risk insured materialises. There had to be a contractual link between insured and insurer in order for the exemption to apply. Similarly, the transaction was not a reinsurance transaction either. Instead, the transaction fell between two stools: on the analysis of the ECJ, the fact that the contracts were novated, so that the reinsurer (transferor) no longer had any legal relationship with the reinsured entities, removed the direct link between the original parties which was essential if the exemption was to apply.
Implications
This is a very bad decision for the European insurance industry for three reasons.
First, (assuming no transfer as a going concern – see below) it imposes a charge to VAT on transfers of reinsurance policies (either by way of novation or by insurance business transfer under Part VII FSMA 2000 or the equivalent in other EU countries) which the transferee will not be able to recover if it carries on exempt activities, as most transferees do. An additional layer of unrecoverable cost is accordingly added to business transfers. Secondly, the same reasoning applies equally to transfers of insurance contracts, whether by way of novation or insurance business transfer. Thirdly, the decision aff ects not only current and future business transfers, but also concluded transactions. HMRC in the UK can now claim VAT on these transactions.
So transferors need to review their existing transfer agreements to see if they can recover from their transferees any VAT and interest which is charged on them by HMRC. The position is complicated by the change on 1 January 210 to the place of supply rules [see Summary below for the changes].
It is not, however, all bad news. First, insurance business transfers, at least in the UK, should continue to qualify for an exemption from VAT on the basis that they are likely to be regarded as a transfer as a going concern: this is not regarded as being a supply of goods or services and so is entirely outside the scope of VAT. There are, however, various conditions which need to be met. Certainly, in the UK HMRC generally consider insurance business transfers between persons in the UK to be transfers of going concerns. It is not known why the German tax authorities did not allow the equivalent exemption in Germany. Secondly, there is another exemption for transactions within VAT groups, so insurance business transfers within a group should be exempt from VAT.
Summary
Insurance business transfers within the EU and from EU to non- EU transferees are now chargeable to VAT at the standard rate in the transferor country – at least until the end of this year when the place of supply rules change. Insurance business transfers from non-EU transferors to EU transferees are not subject to VAT until the end of the year. From 1 January 2010, however, when the new place of supply rules come into force, an EU to EU insurance business transfer, or one from outside the EU to the EU, will require the transferee to account for VAT in its country at the local rate. On the other hand, EU to non EU insurance business transfers will, from 1 January 2010, not be subject to VAT in the country of the transferor.
Footnote
1 This is not as good as it sounds: if a supplier incurs VAT on supplies to it which it uses to make an exempt supply, the rules do not allow that VAT to be recovered. There are complicated apportionment rules where a VAT supply-in is used for a mixture of exempt and VATable supplies out.
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