The federal tax court of Germany (Bundesfinanzhof) has referred several questions to the European Court of Justice (ECJ) on the qualification of certain aspects of insurance transactions for the purpose of applying value added tax (VAT). In his opinion of 13 May 2009, Advocate General Mengozzi held that, in particular, a transfer of reinsurance contracts from one reinsurer to another constitutes a supply of services that does not qualify as a VAT-exempt insurance service, and does not benefit from other VAT exemptions. Furthermore, the supply of a contract portfolio has to be regarded as a single supply, regardless of the fact that the portfolio consists of a number of individual contracts. If the ECJ concurs with the advocate general’s opinion, the sale of insurance or reinsurance portfolios is in principle subject to VAT, which may increase the purchase price to the extent that input VAT cannot be deducted by the purchaser.
In 2002, Swiss Re Germany Holding (Swiss Re) transferred 195 reinsurance contracts to an affiliated company established in Switzerland (transferee) in return for a single purchase price. Of the transferred contracts, 18 had a negative value, which reduced the purchase price. The insurance holders of the transferred contracts were insurance companies located outside Germany (in EU and non-EU member states). The transfer of the reinsurance contracts was subject to their consent and the transferee took over all rights and obligations under the reinsurance contracts.
The questions referred to the ECJ by the federal tax court of Germany could be summarised as follows.
- Could the transfer of the reinsurance ?? portfolio be regarded as a supply of goods?
- Does the transfer of a reinsurance portfolio constitute an insurance or other financial/banking service exempt from VAT?
- Does it matter if – in relation to the transfer of reinsurance contracts with a negative value – the transferee rather than Swiss Re could be regarded as the service supplier?
The advocate general’s analysis
Characterisation of the supply
A supply of goods requires a transfer of tangible property or goods. Although unlikely in the context of a transfer of contracts, such a transfer of tangibles might occur if the data relating to the client base of the transferor is sold. In the case at hand, however, the transfer of the reinsurance portfolio consists of a transfer of rights and obligations – ie of intangible assets. The transfer should therefore be treated as a supply of services rather than a supply of goods.
No VAT-exempt supply of services
On whether the transfer of a reinsurance portfolio may be regarded as an insurance transaction for the purpose of VAT, the advocate general refers to earlier ECJ rulings: the Court has held that the main characteristics of an insurance transaction are that the insurer provides to the insurance holder a particular service agreed between the parties, if the risk covered materialises (C-349/96 CCP  ECR I-973), and that there is a legal relationship between the party carrying out the transaction and the insurance holder (C-240/99 Skandia  ECR I-1951).
Because, according to the advocate general, the transaction concerned only Swiss Re and the transferee, the above conditions are not met. In particular, the fact that the consent of the insurance holders is needed means that it is not a legal relationship as in the above meaning. Consequently, the advocate general does not regard the transfer of a reinsurance portfolio as an insurance service.
The VAT regime provides for exemptions to transactions (i) consisting of the assumption of obligations and (ii) concerning debts. The separation of the portfolio transfer into such transactions could be considered – ie into (i) the obligations assumed by the transferee towards the insurance holders on the one hand and (ii) the transferee’s right to collect future insurance premiums from the insurance holders on the other hand – and the above exemptions jointly applied. However, the advocate general ruled out such an analysis and accompanying VAT-exemption. He views the separation of a single transaction relationship into two components and the application of different exemptions to each component as an artificial construction. Taking into account the need to interpret exemptions strictly, he concludes that the portfolio transfer is not exempt from VAT.
Portfolio transfer as a single supply of services
Although not strictly necessary for the decision to be reached in the given case, the advocate general also analyses whether the portfolio transfer would need to be divided into a supply by Swiss Re to the transferee in relation to the contracts with a positive value and a (reverse) supply by the transferee to Swiss Re in relation to the contracts with a negative value. Such division could result in an increase in the total VAT levied on the overall transaction as each supply may become subject to VAT. The advocate general decided that the portfolio transfer constitutes a single service. It was considered as a whole by the parties and a single purchase price was agreed. According to past decisions of the ECJ the principle applies that a supply that comprises a single service from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system.
Implications of the advocate general’s opinion
The ruling of the ECJ is expected to be handed down soon. It is, of course, open as to whether the ECJ will adopt the advocate general’s view. However, in light of past decisions of the Court, which also formed a basis of the advocate general’s opinion, there is a likelihood that the ruling will not differ too much from the opinion.
If this is the case, reinsurance portfolio transfers would in general become subject to VAT. This should not only apply to future transactions, but also to past transfers that have not yet been finally assessed by the competent national tax authorities. If the transferee performs only VAT-exempt (insurance) services, he is not eligible for VAT input deduction. Consequently, the VAT imposed on the portfolio transfers would effectively increase the purchase price of the portfolios. No VAT is imposed on portfolio transfers within a VAT group. It has to be considered carefully whether the conditions for a VAT group are met in a given case, because national tax courts of some member states, eg Germany, have recently applied a rather strict approach in this context.
The advocate general does not, in his opinion, distinguish between the transfer of insurance and reinsurance contracts. In our view this is consistent with the relevant European directives, the wording of which does not differentiate between reinsurance and insurance transactions. The ECJ ruling would therefore not only apply to the transfer of reinsurance contracts; it would also become applicable to the transfer of insurance contracts.
An important point to bear in mind is that an insurance portfolio transfer may qualify as a transfer of a going concern (TOGC). According to the German federal tax court the Swiss Re portfolio transfer could not be regarded as such; this issue was not considered by the advocate general. If the TOGC rules are applicable to a portfolio transfer, it will not be a supply for VAT purposes and will therefore not attract VAT. Although much will depend on the particular circumstances, companies currently considering undertaking an insurance portfolio transfer would be well advised to seek a ruling in advance on the application of the TOGC rules.