Aspiro is remunerated in accordance with a flat rate, depending on the type of claim concerned. Aspiro's services include, among others, settling substantive claims, claims assessment, analysing the assembled documents and taking substantive decisions on claims as well as contacting the insured persons, where necessary. In addition to the above, Aspiro also provides other administrative and technical services for the insurance company.
The key question referred to the European Court of Justice
Should the provision of the VAT Directive on the exemption of insurance services be interpreted as meaning that services that are supplied on behalf of an insurance company by a third party (such as Aspiro) — in the name and on behalf of the insurer — which has no legal relationship with the insured person, are covered by the exemption referred to in that provision?
The judgement
Initially, the European Court of Justice points out that the terms used to specify the exemptions provided for in the VAT Directive are to be interpreted strictly, since they constitute exceptions to the general principle that VAT is to be levied on all services supplied for consideration by a taxable person.
Two options exist in respect of Aspiro's services (comprehensive insurance claims settlement services). First of all, it is to be determined whether the service qualifies as tax-exempt insurance service. If not, it is also possible that the service qualifies as a related service performed by insurance brokers and insurance agents. In the event that Aspiro's service fits into either of the above two categories, it is tax-exempt.
Insurance transaction
As regards insurance transactions, the essentials of such transactions are that the insurer undertakes, in return for prior payment of a premium, to provide the insured, in the event of materialisation of the risk covered, with the service agreed when the contract was concluded.
However, in the present case, Aspiro does not itself undertake to ensure that the insured person is covered in respect of a risk and is not connected in any way to the insured person through a contractual relationship.
However, the claims settlement service is an essential part of the insurance transaction in that it includes the determination of liability and the amount of damage, and the decision to pay or refuse compensation to the insured person.
Accordingly, the question is whether the fact that Aspiro supplies a service that is an essential part of insurance is sufficient for exemption or whether the fact itself that this service does not correspond to the features of an insurance transaction precludes tax-exemption.
The question is decided by the fact that the deviation from the general rule of the VAT system, i.e. tax-exemption is to be interpreted strictly, which was repeatedly pointed out by the Court. Accordingly, although the service in question is an essential part of the insurance transaction, it can not be a tax-exempt insurance service because it does not, in itself, correspond to the concept of insurance in the strict sense.
In other words, the ECJ has adopted the strictest stance possible in the case, even compared to the former interpretations of other tax exemption matters of a financial nature under the VAT Directive.
In the case of other tax exemption matters of a financial nature the ECJ ruled that if a given service or service package corresponds to the special and essential functions applicable to the given tax-exempt service, then the service will be tax-exempt. On the contrary, as we have seen in the current judgement, for insurance services it is not sufficient that the given service (such as claims settlement) is considered an essential part of the insurance transaction.
Services performed by insurance brokers and insurance agents
The Court has also considered whether the service supplied by Aspiro may be regarded as a service performed by insurance brokers and insurance agents.
In this regard, the Court has concluded that the definition of services performed by insurance brokers and insurance agents in relation to insurance transactions is sufficiently broad to cover different services connected with the performance of insurance transactions and, in particular, the settlement of claims. Furthermore, according to the ECJ, it is irrelevant whether the service provider (in the present case, Aspiro) qualifies as an insurance broker and insurance agent. The decision on tax-exemption shall be based on the content of the services supplied.
In order for services to be tax-exempt as services performed by insurance brokers and insurance agents, they are required to meet two conditions.
- In the first place, the service provider must have a legal relationship with both the insurer and the insured party.
- In the second place, its activities must cover the essential aspects of the work of an insurance agent, such as the finding of prospective clients and their introduction to the insurer with a view to the conclusion of insurance contracts.
Aspiro meets the first of the above two conditions as it performs its activities in the name and on behalf of the insurance company (direct legal relationship) and it has an indirect legal relationship with the insured person in relation to the assessment and settlement of insurance claims.
However, Aspiro's services (and claims settlement services in general) do not meet the second condition, as they do not include the finding of prospective clients and their introduction to the insurer with a view to the conclusion of insurance contracts.
Conclusions
The judgement is primarily relevant in respect of the services outsourced by insurance companies. According to the judgement, the services/groups of services outsourced by insurance companies are taxable irrespective of their content, provided that the service provider does not undertake a liability vis-à-vis the insured person or that the service is not aimed at the finding of prospective clients and their introduction to the insurer.
In practice, where partial activities associated with already existing insurance contracts are outsourced, the services provided by insurance brokers and agents can not be exempt pursuant to the judgement as the finding of prospective clients and their introduction to the insurer can not occur in such cases.
It follows from the above that, in the absence of the outsourcing of underwriting, the outsourced services will be taxable, similarly to the claims settlement services referred to in the judgement.
The judgement and its conclusions are new milestones on the road paved by the Court concerning insurance activities and the related services. Former milestones on this road are marked, for instance, by the Taksatorringen C8/01 case and the C-472/03 Arthur Andersen case. The first of the aforementioned judgements considered whether outsourced damage assessment services can be regarded as insurance transactions or related services performed by insurance brokers and insurance agents, while the other case considered the so-called "back office" services from the same perspective. The answer in both cases was no, i.e. the ECJ, based on the strict interpretation of the rules on exemption, did not declare either of the outsourced services to be exempt.
This judgement, also having regard to and complementing the other two judgements mentioned above, provides that outsourced claims settlement services can not be regarded as exempt insurance transactions or related services performed by insurance brokers and insurance agents.
Although logical and clear, the judgement is difficult to justify from the perspective of competitive neutrality, since the charging of VAT on claims settlement services and other outsourced partial services may give rise to significant differences in the amount of the VAT liability payable by the various players in the insurance sector, depending on the business structure applied.
To give a simple example, if an insurer outsources its claims settlement services, it will receive an invoice from the subcontractor containing 27% VAT in Hungary. The insurer will not be able to deduct/reclaim this VAT as it provides tax-exempt services. If, however, the same insurer does not outsource those insurance-related partial activities, it can provide the same to its customers as complex tax-exempt services. In other words, certain insurers will be at a competitive advantage , depending on the business structure applied.
Although the judgement does not contain any major surprises in the light of the ECJ's case law so far, it offers a good opportunity for all stakeholders to review their contractual arrangements.
