In Q-GmbH (C-907/19) the taxpayer supplied three types of services to an insurance company in return for a fee: (i) it made available a specialised insurance product with a non-exclusive user licence; (ii) it placed insurance contracts for that insurer, adapting policies if necessary and assessing the risks (although contracts were concluded between the insurer and the policy holders); and (iii) it managed those insurance contracts and the settlement of claims. The taxpayer earned brokerage fees from licensing the product to the insurer, even where sales were set up by another broker or agent.
The German referring court asked the CJEU whether the taxpayer’s supplies fell within the exemption for insurance transactions including related services performed by insurance brokers and insurance agents.
In the view of the Court, the mediation services supplied by the taxpayer (that is, the placing of the insurance contracts) were a distinct and independent activity from the grant of the licence given that there was no obligation for the insurance company to use them having been granted the licence. The Court said that it was for the referring court to ascertain whether the grant of the licence and the insurance contract management services formed a single supply or two supplies.
Given that the referring court may conclude that the various services constitute one supply and that ancillary supplies share the same VAT treatment as a principal supply, the Court went on to look at whether the grant of the licence fell within the insurance exemption.
It was clear to the Court that the grant of the licence could not be characterised as an insurance transaction since that would involve a contract between the parties for providing a service in the event of materialisation of the risk covered in return for prior payment of a premium. In this case, the taxpayer was not responsible for covering the risks insured. Nor could the grant of the licence be said to be a service related to an insurance transaction performed by a broker/agent since the service did not involve the essential aspects of the work of an insurance agent such as finding prospective clients and introducing them to the insurer. The taxpayer’s mediation services were not relevant since the grant of the licence did not require the insurer to use them.
Accordingly, the grant of the licence (and the other two services supplied by the taxpayer should the referring court find that they are part of a single supply) did not fall within the scope of the insurance exemption.
DLA Piper comment:
This case highlights the limited scope of the VAT exemption for insurance intermediary services and is a reminder that the exemption is restricted to services which an agent or broker would provide. The CJEU concluded that if the supplies in question constituted a single supply, then they would not fall within the scope of the insurance exemption. However it has left that decision for the German referring court to determine.
Businesses involved in providing insurance intermediary services together with other ancillary services may wish to review their agreements in light of the decision to ensure that they are sufficiently robust to meet a similar challenge brought by a tax authority.
Grupa Warzywna (C-935/19)
Grupa Warzywna (GW), purchased a property. Both the seller and GW understood that the sale would be subject to VAT. The deed included a declaration confirming the price to be the gross amount (inclusive of VAT). It was also supported by an invoice issued by the seller which identified VAT in the sum paid. GW deducted the input VAT specified in the invoice and claimed repayment from the Polish tax authority.
The tax authority reviewed the transaction and concluded that the sale was exempt from VAT. GW then took corrective action to amend the claim of input VAT on the purchase. Polish tax law imposes a 20% penalty on the amounts overstated which cannot be reduced having regard to the circumstances of the case. (e.g. consideration of the error, fraud or special circumstances). Therefore a 20% penalty applied automatically to the overstated VAT.
It is accepted that sanctions must not go beyond what is necessary in order to achieve the objectives of ensuring the proper collection of the tax and preventing tax evasion. The referring Polish Court had considered that the penalty was oppressive rather than preventative in nature. It also observed that the Polish regulations imposing the sanctions did not consider the facts, nature and gravity of the infringements.
The CJEU emphasised that the principle of proportionality must be interpreted as precluding national rules which impose such penalties where there is a miscalculation of VAT payable and the error is characterized by the lack of indications of fraud and depletion of revenues to the state treasury, and in a situation where there are no special circumstances.
This case highlights that provisions which impose arbitrary penalties with no room for consideration of the behaviour of the taxpayer and his culpability in relation to how the error has occurred may be inconsistent with the principle of proportionality and may be successfully challenged.
SK Telecom Co Ltd (C-593/19)
In SK Telecom Co Ltd (C-593/19), the taxpayer was a telecoms company based in South Korea which provided its consumer customers who resided in South Korea but who were staying temporarily in Austria with access to a mobile phone network in Austria (i.e. it supplied roaming services). This roaming service was achieved by means of an Austrian network operator making its network available to the taxpayer in exchange for the payment of a user fee plus Austrian VAT. When the taxpayer sought to recover the VAT it had been charged by the Austrian network provider from the Austrian tax authority as input tax under the 13th Directive, the tax authority refused arguing that the taxpayer was making taxable supplies in Austria (availability of the Austrian phone network) and should have charged registered and Austrian VAT to its customers on its roaming charges.
The Court was asked whether Austria was entitled to require the payment of Austrian VAT in these circumstances based on the ‘use and enjoyment’ override rule which enables member states to regard the place of supply of certain services as being within their territory where it would otherwise be outside the EU. The override rules require that the “effective use and enjoyment” of the service take place within the relevant member state (in this case Austria) and that the application of the rule is required to “prevent double taxation, non-taxation or distortion of competition”.
The Court noted that the underlying logic of the VAT Directive is that services should be taxed as far as possible at the place of consumption. Roaming services are, said the Court, distinct and independent from other mobile communications services received by people temporarily visiting a Member State and, in this case, subject to separate fees. In the view the Court, it followed from the very nature of roaming services that their effective use and enjoyment takes place in the Member State where the customer is temporarily staying.
The Court agreed with the Advocate General that when applying the test of whether there may be double taxation, non-taxation or distortion of competition, it is necessary to look at the tax treatment of the relevant services in the Member States and not the tax treatment of the services in a relevant third country such as South Korea; the fact that a service may be taxed in a third country under the national rules of that country does not prevent a Member State from taxing that service if it is effectively used and enjoyed in its territory.
The fact that there is another provision in the VAT Directive obliging Member States to apply the ‘use and enjoyment override’ to telecommunications services supplied to non-taxable persons based in a Member State by a taxable person based outside the EU did not limit the discretion on Member States to apply the ‘use and enjoyment override’ in other circumstances.
The outcome of the case was expected. The CJEU has agreed with the AG opinion. We should also remember that the AG identified that there are two supplies: (1) the B2B supply by the Austrian network operator to SK Telecom, and (2) the B2C supply by SK Telecom to the customers. The AG in relation to the first supply, noted that under the general B2B place of supply of services rules, Austrian VAT should not have been charged meaning that SK Telecom would not have requested a VAT refund from the Austrian tax authorities, because the place of the supply was in South Korea under the usual B2B rules. On that basis, the request for the preliminary ruling may not have been necessary at all!
EQ, a lawyer provided services under powers of representation for the protection of adults lacking legal capacity from 2004. The competent authority entrusted EQ with the performance of the services. EQ’s remuneration was fixed based on the financial situation of the person lacking legal capacity and where appropriate, a sum for additional services determined on an hourly basis. Accordingly, the payments were not necessarily linked to the value of the services, rather to the ability of the client to pay.
In 2018, the tax authority assessed EQ in respect of the consideration received for those services in respect of the years 2014 and 2015. This was on the basis that it considered that the services supplied were performed in the context of the professional activity of a lawyer and constituted an economic activity that was subject to VAT.
EQ’s case was that such services activities did not constitute economic activities subject to VAT. Such activities were exempt from VAT as services closely linked to welfare and social security work. It also asserted that the tax authority had breached the principle of the protection of legitimate expectation on the basis that it had previously not taken such a view from going back to 2004.
The CJEU ultimately held that the services constituted an economic activity. Further, it held that such services were capable of constituting a supply of services closely linked to welfare and social security work within the meaning of Article 132(1)(g) of Directive 2006/112. However, for the services to be exempt from VAT, the Court held that it was necessary that a judicial authority of the Member State concerned recognized that the supplier was a body (including natural persons) devoted to social wellbeing.
DLA Piper comment:
The CJEU has clarified that EQ’s services consisting of the protection of adults lacking legal capacity, constitute economic activities. However, it has also acknowledged that Member States enjoy some discretion in the recognition of bodies which may be devoted to social wellbeing which may include natural persons such as EQ. It will be for the referring court to verify whether EQ’s services may be treated as exempt.