The European Court of Justice (ECJ) has recently confirmed that a portfolio transfer of life reinsurance contracts will be subject to VAT. Dominic Stuttaford and Julia Lloyd from our tax team consider the reasoning of the court and the possible implications of the decision for future transfers.
On 22 October 2009, the ECJ (now renamed the Court of Justice of the European Union or "CJEU") released its judgment in the case of Swiss Re Germany Holding GmbH v Finanzamt München für Körperschaften (Case C-242/08), confirming that a transfer of a portfolio of life reinsurance contracts, outside of a business transfer, will be subject to VAT at the standard rate.
The question of whether or not transactions are subject to VAT is key in the context of insurance business as VAT incurred by such businesses will generally represent an absolute cost. The usual starting point is to try to ensure that a portfolio transfer will fall within the “transfer of a business as a going concern” (TOGC) rules, so that payment made for the transfer is outside the scope of VAT altogether. This is often the case where the transfer of the portfolio is part of a wider business transfer under which the business as a whole is being transferred, but it can also apply where just the relevant contracts are transferred. In addition, no VAT is payable on a transfer from one member of a VAT group to another, but this relief is obviously of limited benefit.
The Swiss Re Germany case
This recent ECJ case concerned a referral from the German courts in relation to the proper classification of a transfer of a portfolio of life reinsurance contracts for VAT purposes. The portfolio was sold by Swiss Re Germany to a Swiss insurance company. It was common ground that the transfer was not a TOGC as the transfer did not satisfy the necessary legal requirements. The German tax authority argued that the transaction was subject to VAT as a supply of goods; Swiss Re Germany appealed on the grounds that this was an exempt supply of services. The German court found that this was a taxable supply of services. This meant that it was subject to German VAT, as supplies of services are usually supplied where the supplier (ie, Swiss Re Germany) belongs, unless the supply relates to “banking, financial and insurance transactions, including reinsurance”. Supplies of services are generally subject to VAT unless the service falls within one of the exemptions from VAT, including “insurance and reinsurance transactions”. The question referred to the ECJ was whether the transfer of the portfolio was a supply of services, and if so, whether the transaction was a banking, financial or insurance transaction. If it was, no liability to German VAT would arise.
The ECJ agreed that as life reinsurance contracts were not tangible property, their transfer is not a supply of goods, and therefore constitutes a supply of services. The ECJ confirmed that their approach was to construe the exemptions narrowly. The ECJ stated that an “insurance transaction” is understood to cover the situation where the insurer undertakes, in return for a premium, to provide the insured with certain services in the event of specified risks occurring. It does not cover all transactions carried out by the insurers themselves; the identity of the person supplied with the service is relevant for the purposes of the definition, and so there must be a relationship between the provider of the insurance service and the insured person. In this case, the ECJ found that the transfer of the portfolio lacked these characteristics. Nor was it a reinsurance transaction, since the transferor company no longer had any legal relationship with the reinsured persons following the assumption by the transferee of the transferor’s rights and obligations. The ECJ also followed the Advocate General’s opinion that the nature of the transaction was not a financial transaction and so was properly subject to VAT in Germany.
Although the decision is binding throughout the EU, the door is open to national tax authorities to decide how to implement it. In relation to the UK, the UK Government made a submission in this case that such transactions do not amount to “insurance transactions”, and so HM Revenue and Customs may not be particularly generous in its interpretation. It is also worth noting that the VAT place of supply rules are to change from 1 January 2010; in principle, where services are supplied from one business to another, the place of supply will be the jurisdiction of the recipient - which will affect the analysis especially if the transferee is based outside the EU.
At this stage, pending clarification of the scope of this decision, it is important for the parties to take advice as soon as possible, in particular as to whether the transfer can qualify as a non-VATable transfer of a business as a going concern.