Swiss Re Germany Holding GmbH v Finanzamt Munchen fur Korperschaften
In 2002, Swiss Re Germany Holding transferred a portfolio of 195 life reinsurance contracts to an insurance company established in Switzerland.
The transferee took over all the rights and obligations under the contracts, subject to the policyholders' consent. The total sum paid in consideration took into account that 18 of the 195 contracts had been given a negative value.
The question was whether the transfer constituted an "insurance transaction" for the purposes of the Sixth VAT Directive and was therefore exempt from VAT.
The German tax authority took the view that VAT was chargeable because the transfer was a chargeable supply of goods. The German Federal Finance Court agreed that VAT was chargeable, but on the basis that the transfer was a supply of services carried out in Germany.
The Federal Finance Court, however, had doubts about whether German law was compatible with the VAT Directive and referred the matter to the European Court of Justice (ECJ) for a preliminary ruling.
The first question for the ECJ was whether the transfer of reinsurance contracts was a supply of insurance or banking transactions which would be exempt from VAT.
Under Article 13B of the Directive, insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents are VAT exempt.
An additional question was whether the supply was of goods or services. Under Article 9 of the Sixth VAT Directive, the place where services are supplied is deemed to be where the supplier has its business or fixed establishment.
But if the services are performed for customers established outside the EU and the services are "banking, financial and insurance transactions, including reinsurance", the place of supply is the place where the customer has its business.
In the present case, if the portfolio transfer was an "insurance transaction" and a supply of services, the place of supply rule would mean no VAT would be payable because the customer (the transferee) was based in Switzerland.
The ECJ held that the transfer was subject to VAT.
In the court's view, the terms "insurance" and "reinsurance" should be given the same meaning for the purposes of the VAT place of supply rule and the Article 13B exemption. But it concluded that the transfer lacked the characteristics of an insurance or reinsurance transaction.
According to European case law, an insurance transaction is where, in return for a premium, the insurer undertakes to provide the insured with the service (the cover) agreed in the contract should an insured event occur (Card Protection Plan, Case C-349/96). It implies the existence of a contractual relationship between the provider of the insurance service and the insured (Skandia, Case 240/99).
A reinsurance transaction is where an insurer, in return for a premium, undertakes to assume the debts resulting from another insurer's obligations under insurance contracts concluded with its own policyholders.
In this case, there was a reinsurance relationship between the transferor and the reinsured and, following the transfer, between the transferee and the reinsured. Subject to the policyholders' consent, the transferee took on all the rights and obligations under the reinsurance contracts and the transferor no longer had any legal relationship with the reinsured.
The transfer itself, however, fell between these two contractual reinsurance relationships and could not be considered either as an insurance or reinsurance transaction within the meaning of Article 9 or 13B. Nor did it fall within any of the other specific exemptions in Article 13B.
The fact that 18 of the contracts had been given a negative value did not alter this conclusion. In the court's view, the transaction constituted one service which gave rise to a single overall price for 195 reinsurance contracts.
The decision will have a major impact on future transfers and could even result in past transactions being re-assessed for VAT. Generally, any VAT that arises will not be recoverable because the underlying insurance and reinsurance activities are exempt, so it will represent a significant cost.
Going forward, it will therefore be important for insurers who make or receive supplies of reinsurance or insurance contracts to confirm the VAT position of the supply with HMRC. Contracts should also address and apportion any VAT risk.
In certain cases, a transfer of contracts may be outside the scope of VAT as a transfer of a going concern (TOGC). This was not raised in the case but it should be considered in relation to such transfers, particularly if other parts of insurers' activities are transferred in addition to contracts.
Cross-border transfers should be analysed carefully, even where the transferor is outside the EU. Under new place of supply rules in force from 1st January 2010, a supply is made where a person receives services, whether from an EU or non-EU person, so a UK transferee could be required to account for VAT on a portfolio acquired from a non-UK person.