A German court decision has determined that lead commission paid to a lead insurer on a co-insurance arrangement is subject to VAT in Germany. If this decision were followed throughout the EU, it will potentially have a significant impact on all co-insurance arrangements. In this article, Dominic Stuttaford and Uwe Eppler from our tax practice take a look at the decision and consider the implications for insurers and insureds.
The facts of the case are relatively straight-forward. The lead insurer was paid an enhanced share of the premium on a co-insurance programme; it undertook to carry on the task of arranging the co-insurance and provided various “administrative” services. The conclusion reached by the German Fiscal Court was that contrary to the expectations of the parties when the insurance was entered into, these services were subject to VAT. They were provided to the co-insurers. The consideration was the additional premium received by the lead insurer, over and above that part of the aggregate premium proportionate to its risk.
This decision has potentially major consequences; if a VAT-able service is provided to other insurers, any VAT is likely to be a cost of the programme, as the insurers are likely to be largely exempt entities. The VAT could be suffered either because the lead insurer is obliged to charge VAT (if the other insurers are in the same jurisdiction) or if there is a reverse charge cost where the recipient of the service has to charge itself VAT. The one exception to this would be if the recipient of the services (in this case the other insurers) were underwriting the policy from outside the EU. In this case, the place of supply by the lead insurer would be likely to be outside the EU.
It is arguable that this decision should not prevail more generally within the EU. The decision is not binding on, say, an English court, which it would be, were this a decision of the Court of Justice of the European Union.
In seeking to analyse other similar arrangements such as co-insurance arrangements for multinational insurance programmes, the first issue is to consider if there is a service, to whom is it provided? The service could be seen as being provided to the insured (and not the other insurers). The insured is the recipient of the insurance and benefits from the fact that the co-insurance arrangement has been put in place. If this is the aim, two possible treatments could apply. First, if there is a separate VAT-able supply to the insured of administrative services, most insureds would be expected to recover any VAT charged (to the extent that they were in the EU). The one exception would be if the insured were in the financial sector and therefore generally unable to recover its VAT generally. Secondly, and this may often be the case – there could be one composite supply under the insurance contract to the insured – of insurance. Any supply of administrative services would not therefore be a separate supply; rather, it would be ancillary to the main supply. The main supply would then be exempt from VAT and in most cases, subject to insurance premium tax (IPT). Indeed, one of the unfortunate consequences of this decision is that in theory, there could be a double charge to indirect tax, IPT on the premium charged to the insured and VAT paid on a supply of administrative services.
Assuming that there is not a supply to the insured and therefore a service is being provided to the co-insurers, it could be argued that a more natural interpretation is that the service being supplied is essentially one of insurance brokerage (and therefore exempt). The lead insurer’s composite supply for which it is receiving an enhanced share of the premium is the arranging of the insurance and putting together the panel of insurers, who will together underwrite the risk.
Where does this leave insurers and insureds?
The decision is of the German Fiscal Court and therefore binding in Germany. In this specific case, the German court did not accept that the co-insurance arrangements were drafted in a form for there to be a service to the insured. Rather the German court concluded the contractual arrangements indicated that the services were provided to the co-insurers. Also, the German Fiscal Court rejected the argument that there was an (exempt) brokerage service provided to the co-insured.
The case means that insurers should look carefully at the wording of their co-insurance arrangements and see if there is room for the relevant tax authority to take a similar view to the German court. In some cases, this may not matter, if the co-insurers are based outside the EU. Much will depend upon the drafting; this is not conclusive but making it clear who supplies what to whom is likely to be key. In each particular case, thought should be given before the policy is concluded as to what the intended contractual arrangements should be and what impact this has for VAT and IPT purposes. Once it has been concluded and any co-insurance arrangements put in place, it is likely to be very difficult, if not impossible, to alter the conclusion.