Insurance transactions have long benefited from exemption from Value Added Tax (VAT). But does that mean every service supplied by, or to, an insurance undertaking automatically qualifies for the exemption?
In Malta, the exemption is set out in item 2 of part two of the fifth schedule to the Value Added Tax Act, which exempts:
"The supply by persons licensed under the Insurance Business Act or the Insurance Distribution Act, of insurance and reinsurance transactions, including related services, in respect of which they are so licensed, where those services are specific to and essential for the provision of insurance or reinsurance transactions."
This wording may, at first glance, appear broad. However, determining whether a particular service falls within the exemption requires a closer analysis of the nature of the service being supplied.
At EU level, Article 135(1)(a) of the VAT Directive provides an exemption for “insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents.”
The scope of this exemption has been considered in detail by the Court of Justice of the European Union (CJEU), which has consistently held that VAT exemptions should be interpreted strictly. The fact that a service is connected with, or supports, an insurance activity is therefore not, in itself, sufficient for the exemption to apply.
The CJEU judgment in Aspiro (C-40/15) is particularly relevant in this context. The case concerned claims settlement services provided by a third party in the name and on behalf of an insurer. The CJEU assessed whether such services could qualify for the exemption under either of two headings. First, it held that the services did not constitute "insurance transactions" in their own right, since the provider did not itself undertake to cover the insured risk and had no contractual relationship with the insured party. Second, it held that the services did not qualify as "related services performed by insurance brokers and insurance agents", since the two conditions set out below were not satisfied.
In considering whether a supplier carries out the activities characteristic of an insurance broker or insurance agent for the purposes of the exemption, the CJEU identified two relevant aspects. The supplier should:
- Have a relationship with both the insurer and the insured, although that relationship may be indirect, but only where the supplier is a sub-contractor of the broker or agent.
Perform activities encompassing the essential aspects of the work of an insurance agent, such as finding prospective clients and introducing them to the insurer with a view to the conclusion of insurance contracts.
The significance of Aspiro is that services do not become exempt simply because they support or facilitate an insurance business. Consequently, administrative, operational, and support services connected with insurance activities may remain subject to VAT even where they form part of the wider insurance value chain
That said, this should not be taken to mean that every insurance-related service that does not, viewed in isolation, satisfy the Aspiro criteria is necessarily taxable.
A further consideration is whether the service constitutes an independent supply for VAT purposes or forms part of a transaction comprising several elements. Under established VAT principles, it may first be necessary to determine whether, from an economic perspective, the elements constitute separate supplies or a single composite supply. Where a service is genuinely ancillary to a principal supply, its VAT treatment would generally follow that of the principal supply.
Accordingly, where an insurance-related service is supplied as part of, and is ancillary to, a wider exempt insurance transaction, its VAT treatment may differ from that which would apply if the same service were supplied independently.
Conclusion
The scope of the insurance VAT exemption can be narrower in practice than might initially be assumed. While insurance and reinsurance transactions generally benefit from VAT exemption, the same treatment cannot automatically be extended to every service connected with an insurance activity.
CJEU case law demonstrates that the VAT treatment will depend on factors such as the nature of the services supplied, the functions performed by the supplier, and whether the relevant service constitutes a separate supply or forms part of a wider transaction.
Businesses operating within the insurance sector should therefore avoid relying solely on the fact that a service is “insurance-related” when determining its VAT treatment. A careful review of the contractual arrangements, the functions actually performed, and the underlying transaction flows remains important in determining the correct VAT treatment and mitigating potential VAT exposure.
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