No VAT exemption for claims handling services - it's worth knowing

Service-Tax

Pursuant to the current wording of the VAT Act, the services consisting in the liquidation of damage benefited from the objective exemption and were not subject to taxation. As a result of the amendment to the regulations, from July 1, 2017, VAT exemption will not apply to services that are part of a tax-free financial or insurance service that constitutes a separate entity and that are appropriate and necessary to provide an exempt service. The lack of VAT exemption for claims handling services and a detailed explanation of this issue will be provided in the following article.

The scope of the current VAT exemption

The VAT Act, in force before the said amendment, indicated that the tax exemption applies to the provision of a service that is part of the service mentioned in paragraph 1 point 7 and 37-41, which itself constitutes a separate whole and is appropriate and necessary to provide the exempt service. The exempted services mentioned in point 37-41 is financial and insurance services. As a consequence, not only insurance services, but also related services, such as loss adjustment, benefited from the exemption.

Lack of VAT exemption for claims handling services - a key judgment of the CJEU

The ruling of the CJEU of March 17, 2016, C-40/15, was the driving force behind the changes in the act. The Tribunal found that although the claims handling service is an essential element of an insurance transaction, as it covers the determination of liability and the amount of the claim, as well as the decision to pay or refuse compensation to the insured, the claims handling services provided by a third party on behalf of and for the benefit of the insurance undertaking, do not fall within the scope of the exemption provided for. In justifying its position, the Tribunal pointed out that the activity consisting in the settlement of claims on behalf and for the benefit of the insurer is in no way related to searching for clients and contacting them with the insurer in order to conclude insurance contracts, and moreover, the claims handling services provided by the service provider are not understood. as the provision of services by an insurance intermediary but constitute a fragmentation of the activities carried out by insurance companies.

In the justification of the judgment C-40/15, the Tribunal stated:

Article 135 (1) 1 lit. (a) of Directive 2006/112 on the common system of value added tax must be interpreted as meaning that claims settlement services provided by a third party in the name and for the benefit of an insurance undertaking do not fall within the scope of the exemption provided for in that provision.

In this regard, although the term "insurance transactions" does not only refer to transactions by insurers themselves and is in principle broad enough to cover the granting of insurance cover by a taxpayer who is not himself an insurer but who provides such protection to his clients under group insurance. By using the services of an insurer that assumes the risk being insured, such transactions inherently imply the existence of a contractual relationship between the provider of the insurance service and the person whose risks are covered, namely the insured.

Two conditions are required. In the first instance, the service provider should have a relationship with the insurer and the insured. This relationship can only be indirect if the service provider is a subcontractor of a broker or agent. Secondly, its activities should cover important aspects of insurance mediation, such as searching for insurance clients and putting them in contact with the insurer.

Meanwhile, in the event that the service provider himself has not undertaken to provide the insured with risk protection and is not related to the insured contractual relationship at all, despite the fact that the claims handling service is an important element of the insurance transaction, as it includes the determination of liability and the amount of the loss, as well as the decision to pay or a refusal to compensate the insured, this service, moreover, provided to the insurer, does not constitute an insurance transaction within the meaning of Art. 135 sec. 1 lit. a) of Directive 2006/112.

Importantly, it follows from the above judgment that the exemption will not be available to a third party that provides services to and on behalf of the insurer. Therefore, if such services are provided by the insurer itself, the claim settlement is considered to be part of the insurance service and benefits from VAT exemption.

Example 1.

In the course of the case, the insurance company applied to an external entity for the claim settlement service. From 1 July this year, the service of claims handling performed by an external company does not benefit from the exemption. However, the insurance service is still VAT exempt.

New wording of the provisions of the VAT Act

As a result of the above judgment, the VAT Act was amended and Art. 43 sec. 13 and 14, referring to the possibility of exempting the said services related to insurance and financial activities. Currently, services which were considered to be part of the insurance service, provided by third parties to insurance companies, have been excluded from the VAT exemption. Such services include claims handling services which, when provided separately, do not constitute an insurance service.

By claims handling services, we mean all activities that in their catalog include such activities as: determining the causes and circumstances of damage, making valuation and estimating the amount of damage, preparing photographic documentation, handling the claim settlement process, assistance at the scene of the event, transporting damaged property, repair things, renting replacement vehicles, booking accommodation, providing information about rights and obligations, as well as any other activities.