A German reinsurer transferred a number of reinsurance contracts to a group company established in Switzerland. The Court followed an earlier decision of the AG and concluded that the transfer was subject to VAT in the supplier’s jurisdiction. It also confirmed that the transfer did not qualify for VAT exemption as an insurance or financial service.
This decision is significant for businesses in the insurance, financial and other exempt services sectors, which would generally have a limited entitlement to recover any VAT incurred.
Swiss Re, a German established reinsurance company, transferred 195 reinsurance contracts to a related group company established in Switzerland. Approximately 10 percent of the contracts had a negative value ascribed to them. This was deducted from the value of the remaining contracts to determine the value of the transfer as a whole. The German Court referred a number of questions to the ECJ for clarification. In its judgement handed down on 22 October, the Court gave its response.
- The Court confirmed that the transfer did not constitute an insurance or banking transaction which would be taxable on a reverse charge basis within the fifth indent of Article 9(2)(e) of the Sixth Directive.
- In considering whether VAT exemption applied, the Court noted that as the transfer did not have the characteristics of an insurance transaction as outlined in cases such as CPP and Skandia, it could not be considered to be insurance. Furthermore, as the transferor had transferred all legal rights as regards insured parties rather than reinsuring the risk, it could not constitute VAT exempt reinsurance within Article 13B(a). Essentially, the actual transfer itself did not embody the legal relationship as regards the undertaking of risk in return for payment required of both insurance and reinsurance transactions.
- Having been asked to consider whether the transfer would qualify for exemption using a combination of VAT exemptions (i.e. “dealing” within the meaning of Article 13B(d)(2) and a transaction concerning debts within the meaning of Article 13B(d)) the court rejected this notion on the basis that the transfer was a single supply from an economic point of view and therefore should not be artificially split for the purposes of applying VAT exemption.
- The Court confirmed that payment by the transferor for the contracts with negative value did not impact on its conclusions regarding place of supply and application of VAT exemption as the transfer was a single supply.
- Finally, the Court held that the transfer of reinsurance contracts constitutes a supply of services rather than a supply of goods. On this basis it confirmed that Article 13B(c) could not apply as its application is limited to supplies of goods.
The immediate effect of this decision is that the transfer of such contracts will be subject to VAT in the jurisdiction in which the transferor is located. However, following the change in the place of supply rules on 1 January, 2010 the place of taxation will switch to a reverse charge in the purchaser’s jurisdiction.
While the ECJ did not expressly state that the supply was VATable, this is the likely outcome of the decision. As many jurisdictions currently regard such transfers as non-VATable insurance/reinsurance transactions, the decision may give rise to additional significant irrecoverable VAT costs for those operating within the insurance/reinsurance sectors across Europe.
Some jurisdictions, such as the UK and Ireland, are open to applying transfer of business relief to partial portfolio transfers, albeit not always in a cross border context. As noted in the March edition of Brussels Brief, the ECJ was not asked to consider whether transfer of business relief could apply to the contract transfer. The reason for this is that the German Federal Tax Court had already concluded that it did not as there was “no transfer of independent part of an undertaking, including tangible elements and, as the case may be, intangible elements which, together, constitute a part of an undertaking capable of carrying on an independent economic activity”.
Generally speaking, for relief to apply in Germany the assets to be transferred should be regarded as a self-contained unit operating separately within an organisation prior to their transfer (i.e. not merely an amalgam of assets capable of operating independently following transfer). As this approach would appear to be more restrictive than that advocated by the Court in Zita Modes, it should be possible to apply transfer relief to partial portfolio transfers depending on the circumstances of the individual transfer. It may, however, be difficult to get agreement that such relief applies in circumstances in which a portfolio with a negative value is transferred by a (re)insurer who pays the transferee to take on its obligations as regards insured parties.
To the extent that it is possible to apply transfer of business relief to a partial portfolio transfer within a particular jurisdiction, the relief should also be available in a cross border context. It is interesting to note that Article 19 of the Directive only allows Member States to limit the application of the relief to acquisitions by partially taxable purchasers of a business in cases where there is a risk of distortion of competition, tax evasion or avoidance. No restrictions are provided for in relation to cross-border business transfers where the purchaser is fully taxable. (This point should be borne in mind in jurisdictions which currently restrict the application of relief generally for all cross-border transfers).
The latest draft of the Counci Regulation, which will lay down implementing measures for the revised rules for insurance and financial services (FS), specifically notes that the transfer of insurance or reinsurance contracts will not qualify for VAT exemption as an insurance or reinsurance transaction. As the review and modernisation of this area was prompted by decisions such as Andersen, which had an onerous impact on the FS and insurance sector, it may be that the industry and Member States will need to reengage with the Commission to secure a broadening of exemptions to cover such transfers.
It is worth considering that the effects of this case will not necessarily be limited to the transfer of (re)insurance contracts, but also to a range of other transfers in sectors where operators are engaged in VAT exempt activities, such as financial services generally, or the medical sector.
Finally, it is worth noting that the Court’s confirmation that the exemption contained in Article 13B(c) applies only to transfers of goods may have negative implications for taxpayers with partial VAT recovery in jurisdictions which are currently applying this exemption to the transfer of bought-in services, such as software licences (e.g. Finland).
This judgment is important for any company that has a group structure with subsidiaries and participations. Given the large amounts usually involved in these transactions, the question arises whether the sale itself triggers VAT and whether input VAT incurred on related costs is deductible. Although it was feared that the ECJ would say that the sale is VAT exempt and that related input VAT would not be deductible, the actual judgment can be seen as quite positive for taxpayers.
What was the case about?
SKF was the parent company of a group of industrial companies. It was actively involved in the provision of VATable management services to its subsidiaries. In order to raise additional finance for the group’s activities, it decided to restructure the group. As part of the restructuring exercise, SKF disposed of its shareholding in its wholly-owned subsidiary, in addition to its controlling interest in another group company. SKF incurred VAT on costs associated with the share disposal (e.g. valuers as well as advisors involved in the negotiation of the transfer in addition to the drafting of legal contracts). It sought to recover VAT on such costs from the Swedish revenue authorities.
In order to determine whether SKF had a right to deduct this VAT, the Regeringsratten (Supreme Administrative Court of Sweden) referred the following questions to the ECJ:
- Is the disposal of shares a VAT taxable event ("economic activity")?
- If it is a taxable event, does the disposal come within the scope of the VAT exemptions?
- Is there a right to deduct input VAT on the supplies of services acquired by SKF in relation to the sale?
- Would breaking up the share disposals into several transactions affect the answers to the preceding questions?
The first question elicited a very simple answer. The sale of a participation is indeed a VATable event. One should take into account that SKF supplied VATable services to the participations and the sale was part of a restructuring programme of the SKF group. Selling these participations therefore had a direct link with the organization of the activity carried out by the group. Accordingly, it constituted the direct, permanent and necessary extension of the taxable activity of SKF.
The next question is whether it is an exempt supply of shares, and the judgment states quite clearly that the answer is yes. However, the ECJ also mentions that it would be possible to apply the transfer of a going concern relief. For taxpayers in Member States that implemented this relief, this would be good news, as the costs are then regarded as overhead costs. Input VAT relating to the sale would then be deductible in accordance with the usual recovery ratio of the selling company.
However, it is worrying that the ECJ keeps on mentioning the 100 percent participation when they refer to this relief. Considering there was also a 26.5 percent participation, one could draw the conclusion that the relief is at least questionable for participations of less than 100 percent.
Perhaps the most extraordinary part of the judgment concerns the right to deduct input VAT on costs when the transfer of going concern relief is not available or applicable. It was expected that no deduction would be allowed when it concerns a VAT-exempt supply of shares. However, the ECJ states that this is only the case insofar as these costs are part of the cost price of the shares. To put it differently, if the costs are made up for by the VATable supplies of the taxpayer, input VAT deduction would still be possible.
This is quite peculiar, because the sales price of shares is usually the result of the valuation of the expected profits of the company concerned and the negotiating skills of the buyer and seller. Would it therefore be helpful to agree in the sales agreement that both parties bear their own costs?
The ECJ also stated that breaking up the share disposals into several transactions would not affect the answers to these questions. Although this view prevents any differences between a full transfer of shares in one batch or in parts, it will lead to questions in practice, especially when a part of a subsidiary is sold with an option for the buyer to acquire the remaining part in the future. It remains to be seen whether such an option should be taken into account when selling the first part, and if so, to what extent.
Although the above shows that there are some remaining issues, the judgment will be good news for taxpayers, as the transfer of going concern relief is implemented in many Member States. Furthermore, the ability to claim that the costs are not part of the sales price of the shares can be helpful where the transfer of going concern relief is not available or applicable.
In a case judged on 3 September 2009, the ECJ decided that Community law precludes the application of the Italian res judicata principle in a VAT dispute relating to a tax year for which no final judicial decision has yet been delivered. Furthermore, it precludes it to the extent that it would prevent the national court seized of that dispute from taking into consideration the rules of Community law concerning abusive VAT practice.
The Italian company Olimpiclub concluded a contract that was challenged by the tax authorities as fraudulent in front of the Corte Suprema di Casszione, although the contract was judged legitimate by the lower Italian courts.
According to Olimpiclub, the judgments of the lower courts that held that the contract was not illicit for purposes of taxation, have acquired the authority of res judicata as laid down in Article 2909 of the Italian Civil Code. Consequently, notwithstanding the fact that the findings contained therein relate to tax years other than those at issue, they have binding force for the purposes of the case before the Corte Suprema di Cassazione. As a result, according to Olimpiclub, the latter is precluded from re-examining the question of abusive practice.
The Corte Suprema di Cassazione asked the ECJ whether the Community law precludes the application of a provision of national law laying down the principle of res judicata, where the application of that provision would lead to a result incompatible with Community law.
AG Mazàk noted in his conclusions that in ECJ case law the principle of legal certainty, although important (it is a fundamental principle of Community law), is not absolute and it does not prevail in every situation. Rather, it must be reconciled with other values worthy of protection, such as the principles of legality and the primacy of Community law, and the principle of effectiveness.
The ECJ noted that if the principle of res judicata were to be applied as in Italian law, if ever a final judicial decision was based on an interpretation of Community rules regarding abusive VAT practices which was contrary to Community law, those rules would continue to be misapplied for each new tax year, without any possibility of rectifying the interpretation.
In these circumstances, the ECJ considered that such an obstacle to the effective application of Community VAT rules cannot reasonably be regarded as justified in the interests of legal certainty. It must therefore be considered to be contrary to the principle of effectiveness.
The consequences of this decision in Italy should be followed closely, as well as in other EU countries.
It took only three months for ECJ to provide its judgment in this case after the AG’s opinion (reported in Brussels Briefing Issue August 2009). The Court confirmed the end result proposed by AG Poiares Maduro, but in our opinion there seems to be a slightly different emphasis in the legal reasoning of the ECJ.
SPÖ Landesorganisation Kärnten (SPÖ) is a provincial organization of the Social Democratic Party of Austria. It organized for its subordinate district and local groups a variety of publicity and advertising activities in connection with elections in Austria. SPÖ acted as a central purchasing agency acquiring advertising material. This was subsequently passed on to the district and local groups in return for a fee. Before 2004, the subordinate groups were allowed to decide for themselves whether they paid the charges that SPÖ, to a limited extent, passed on to them for advertising and publicity services, but as from 2004, SPÖ started charging a “publicity charge”, determined by the number of party members in the district and by the number of MPs to be elected from the district.
The AG emphasized that even after 2004 the flat-rate contributions paid to SPÖ did not correspond to the actual value of the publicity and advertising services. Therefore there was no direct link with between the services and the payments received. While the ECJ, too, makes a reference to the need for a direct link between the services and the remuneration, the judgment seems to be based on a more overall evaluation of the nature of the activity of SPÖ.
Particularly, the Court mentions that only activities of an economic nature fall under the scope of VAT and refers to the 2007 judgments in C-284/04 (T‑Mobile Austria) and C‑369/04 (Hutchison 3G). The ECJ concludes that the advertising activities of SPÖ did not allow the generation of revenue on a continuing basis. The only continuous income came from public funding and party membership contributions, which were obtained for the purposes of covering losses made in the course of party political activity (which presumably means that the contributions cannot at the same time be deemed as consideration within the meaning of Article 2(1) of the Sixth VAT Directive). Consequently, the advertising activities of SPÖ should not be regarded as an economic activity.
The circumstances of the case are probably similar to the circumstances under which many political parties and other organizations operate in the EU. Obviously, they can no longer achieve a VAT status and the right to recover input VAT solely on the basis of token recharges of costs to closely related organizations.
In our previous article addressing the AG’s Opinion, we remarked that the case had similarities with another recent AG Opinion in C-246/08 (Commission v Finland), where the lack of a direct link between services rendered and the consideration received was also stressed. However, the ECJ’s line of argument in the SPÖ judgment does not fit the facts of the Commission v Finland case, so the ECJ may well be forced to address the criteria for a “direct link” more thoroughly in its forthcoming SPÖ judgment.
This case concerns VAT on property activities in the holiday accommodation sector and the transactions involved are quite complex. The Federal Tax Court in the UK raised the question of whether supplied services qualify as services with regards to immovable property. Furthermore, the EJC has adjudicated on the place of supply in exchange transactions regarding holiday accommodation.
What was the case about?
RCI Europe (RCI) is a timeshare holiday company, with properties mostly in the UK and Spain. Its turnover derives from enrolment and subscription fees and fees for facilitating the exchange of holiday usage rights. Members put their holiday accommodation in a timesharing pool, which means that RCI is never the owner of the property itself. RCI pays VAT on the enrolment/subscription fees and on the exchange fees connected with property in the EU, but not for exchange fees connected with property outside the EU.
The UK authorities do not agree with this arrangement. They believe that RCI´s services are taxable in the UK. Another dispute arises because of the Spanish authorities’ claim that a part of RCI´s services relates to Spanish real estate and is therefore taxable in Spain. As a result, part of RCI´s services would be subject to double taxation.
Questions referred by the UK Court to the ECJ:
- Are the services supplied for the enrolment fee, the subscription fee and the exchange fee, “connected with” immovable property within the meaning of Article 9 (2) of the Sixth VAT Directive?
- If any of the services supplied by RCI are “connected with” immovable property, is the relevant immovable property the one deposited into the timeshare pool, or the one requested in exchange for the deposited one, or both?
- If any of the services are “connected with” both immovable properties, how are the services to be classified under the Sixth VAT Directive?
- How does the Sixth VAT Directive characterises the “exchange fee” for facilitating the exchange of holiday usage rights between members of a scheme run by the taxable person?
- How does the Sixth VAT Directive characterises the “exchange fee” for supplying usage rights in accommodation purchased by the taxable person from third parties to supplement the pool of accommodation available to members of that scheme?
The ECJ concluded that beneath the exchange fee, the enrolment and annual subscription fees must also be regarded as consideration for participating in a system which enables each member of RCI to exchange their timeshare usage rights. The service supplied by RCI consists of facilitating the exchange – and the enrolment and annual subscription fees represent the consideration paid by members for that service.
Article 9 (2) of the Sixth Directive has to be interpreted in the following way: Article 9 (2) requires a “sufficient direct connection” between the service and the immovable property. This requires a narrow interpretation. If not, every service with even a very tenuous connection would qualify as Article 9 (2) service (contrast this with ECJ case C-166/05 Heger). The ECJ interprets Article 9 (2) based on the purpose behind the transactions. It compares the activities of RCI Europe with leasing holiday homes. This sounds convincing. The ECJ also considers the use and enjoyment principle which is laid down in Article 9, as well with possible VAT avoidance.
In summary, the place where services are supplied by an organisation which organises the exchange of timeshare accommodation between its members for a fee, is judged to be the place where the property of which the member holds timeshare usage rights is situated.
The Federal Tax Court in Germany had raised the question of who is entitled to sign a refund application under the Eighth Directive. Several Member States (the UK, France, the Netherlands, Austria and Finland) accept the signature of an agent, but others do not. In its judgment of 3 December, the ECJ decided that an agent may sign the application.
In this case, an agent has signed the application form for a Dutch company which applied for a refund in Germany. The fiscal authorities dismissed the application because there was no duly signed application form. The regional Tax Court confirmed this decision based on Article 18(9) of the German VAT Act, which requires the signature of the taxable person or its legal representative (if the taxable person is a company) by their own hand.
The Federal Tax Court is in doubt whether the German law is in accordance with Appendix A to the Eighth Directive which requires a "signature". The Court wants to know whether this expression has to be construed uniformly and, if so, how must it be construed.
The German government proposed to answer the questions as follows:
- The Eighth Directive leaves it to Member States to deal with the rule concerning the proxy.
- Alternative: the term “signature” must be understood as meaning that the application for the refund must be signed by the taxpayer in person or, if it is an organization, by its legal representative.
These views were not shared by the plaintiff and the Austrian government which considered that the term “signature” had to be given as a uniform interpretation and be understood as meaning that the signature of an agent is sufficient.
In its judgment issued on 3 December 2009, the ECJ decided that the term ‘signature’ of an application for a VAT refund, as referred to in the specimen form set out in Annex A to the Eighth Directive, is a Community law notion which must be interpreted uniformly to the effect that such a refund application need not necessarily be signed by the taxable person and can be signed by an agent. To allow a Member State to impose on a taxable person requirements other than those provided for in this specimen, for example, the requirement that the taxable person sign in person – would amount to imposing a procedural requirement which is incompatible with the harmonization objective of the Eighth Directive according to which the terms used in that model are attributed the same meaning and scope in all the Member States.
Since the VAT package provides for the electronic submission of VAT refund applications from 2010, this court case should only have limited relevance
Entering into the accounts of the customs duties due by the authorities must precede any communication sent to the debtor; sending a communication to the debtor regarding the import/export duties due after the three-year period has expired, regardless of who committed the act liable to give rise to criminal court proceedings.
In these combined judgments, the ECJ held that the customs authorities could communicate to the debtor the amount of import and export duties to be paid, only if the customs authorities had already entered the amount of duties in the accounts.
The ECJ held that the customs authorities could communicate to the debtor the amount of import and export duties to be paid only if the customs authorities had already entered the amount of duties in the accounts.
The ECJ also determined that the customs authorities could communicate to the debtor the amount of customs duties due after the expiration of the three-year period set out in Section 221(3) of the CCC, if the customs authorities were not able to fix the amount of import duty as the result of an act that is liable to criminal court proceedings, irrespective of the party who committed the act liable to give rise to criminal court proceedings.
The latter ruling, in particular, could have far-reaching consequences for the debtor, who acted in good faith but became the victim of an act liable to give rise to criminal court proceedings in which they were not involved themselves. This brings about a substantial extension to the assessment period for the debtor who acted in good faith.
Underlying these cases are various incidents of fraud in Belgium, which have involved the importing of meat that is not permitted in the European market. Large amounts of import duties on the imported goods were avoided as a consequence of this fraud. The parties owing customs duty that were being held liable by the Belgian customs (which included Snauwaert), had themselves not committed any act liable to criminal court proceedings. They took the view that, given the text of Section 221 of the CCC, a communication could not be sent after the three-year period for additional customs duty assessments has expired, since they were not involved in an act which was liable to give rise to criminal court proceedings.
The ECJ has now made itself very clear on this matter. Although Section 221 of the CCC takes as its basic premise that the additional assessment period is three years, both the text and the system of applying Section 221 of the CCC allow a communication for payment to be sent after the three-year period has expired, if the exact amount of customs duties could not be determined as the result of an act liable to criminal court proceedings, even if the debtor did not commit that act.
This decision could have major financial consequences for parties owing customs duties who have acted in good faith but, as the result of an act liable to give rise to criminal court proceedings committed by others, are confronted with an additional assessment period extended beyond three years.
Over and above all this, the new Modernized Customs Code, which will come into effect in a few years, has set the extended additional assessment period at 10 years for cases involving criminal acts. For many parties owing customs duties, this is a substantial extension of the additional assessment period. At present, Member States can set the extended assessment period themselves, and this period is often considerably less than 10 years. Once again, this provides importers and logistics companies with an important reason to take great care in preparing their customs declaration.
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