Insurance distribution activity is currently regulated in Articles 127 to 211 of Royal Decree-Law 3/2020, of February 4th , by which Spanish regulations have been adapted to Directive (EU) 2016/97 of the European Parliament and of the Council -the “Directive“-, of January 20th 2016, on insurance distribution (the “Royal Decree-Law 3/2020“).
Pursuant to the applicable legislation, the activity of insurance and reinsurance distribution, comprises the services as described in paragraphs 1 and 2 of its Article 129, excluding, in general, services that, being complementary to the above, do not involve any action contributing to the underwriting of an insurance or reinsurance contract, such as the mere provision of information, without intervening for the achievement of the underwriting of an insurance or reinsurance contract, or the mere intervention of insurers as openers in insurance contracts.
The activity of insurance distribution can be carried out by insurance companies and their employees, insurance intermediaries, insurance bank operators and external collaborators. The latter are not considered as intermediaries for the purposes of Royal Decree-Law 3/2020, although they work with the intermediaries, being auxiliary in their distribution activity.
The insurance distribution activity defined in Royal Decree-Law 3/2020 has a specific tax treatment, within the scope of Value Added Tax (“VAT“), which has been the subject of thorough analysis in several decisions of the European Court of Justice (“ECJ“), whose case law is frequently applied by national courts and by the General Directorate of Taxation (“GDT”).
2.- General aspects of insurance and reinsurance distribution within the scope of VAT: qualification of the activity for VAT purposes and applicable localization rules.
In general, VAT accrues as a result of supplies of goods and/or services rendered by entrepreneurs or professionals within the territorial scope of application of the tax (i.e. the Spanish Iberian Peninsula and Balearic Islands).
For these purposes, insurance distribution activities, referred to in section I, are qualified as supplies of services.
The VAT Law (Law 37/1992, of December 28th , 1992) sets forth a series of rules that determine the location of the provision of services and, therefore, whether such services are subject to Spanish VAT or not.
According to these rules, in general, the provision of services in the field of insurance distribution is considered to be located at the territory of application of VAT (“VATT“) and, therefore, subject to Spanish tax, in any case, when the recipient is a entrepreneur or professional established in the VATT and when, being the supplier of the service a entrepreneur or professional established in Spain, the recipient is a final consumer established in VATT, a Member State of the European Union (“EU“), the Canary Islands, Ceuta or Melilla.
Therefore, in general, services rendered in the field of insurance distribution, carried out by a company established in VATT and to be received by entrepreneurs or professionals that are not established in VATT (unless the effective use of such services takes place in Spain – effective use rule) or by final consumers that are not established or residents in this territory like the EU, Ceuta, Melilla or the Canary Islands (i.e. consumers from third countries), are not subject to Spanish VAT.
It should be noted that, for VAT purposes, the services of insurance intermediaries rendered to final consumers (for instance, brokers) are considered to be located in the territory that corresponds to the provision of insurance services, in respect of where the mediation takes place.
3.- Insurance distribution as a supplement to the main activity.
In accordance with article 78.2.1 of the VAT Law, the taxable base of the VAT corresponding to a distribution of goods or provision services subject to the tax includes, amongst others, additional expenses, those corresponding to insurance. Accordingly, it is a supplementary insurance service to distribution of goods or services that constitutes the main transaction that is subjected to VAT.
These additional expenses, which are part of the taxable base corresponding to the transaction to which they complement, must have been borne by the taxable person in the main transaction in his own name, unlike the case of outlays (known as suplidos), which are expenses that have been borne in the name and on behalf of the customer and which, therefore, do not form part of the taxable base of the main transaction, being invoiced to that customer.
For the purposes of considering whether an insurance transaction forms part of the taxable base of another provision of services or goods that constitutes the main transaction, with the same VAT treatment (tax rate, exemption, localization rules, etc.), it is essential that such insurance transaction qualifies as a supplementary supply.
According to the case law of the ECJ on the concept of ´accessory nature´, followed by the GDT in several binding resolutions regarding requests raised by taxpayers, a provision of service a is accessory for VAT purposes when it does not constitute an end in itself for the recipient, but the means to enjoy in the best conditions the main service provided by the supplier (among others, ruling of the ECJ of 17 January 2013, case C-224/11 and Judgment of 10 November 2016, case C-432/15 ). Although any aspect is decisive, situations such as the billing of both services for a single (and not separate) price may indicate the accessory nature of one of them. The relevant issue relies on whether customers understand that they are buying two different supplies (an insurance supply and a principal supply), in which case they should be treated separately for VAT purposes (ruling of the ECJ of 22 October 1998, cases C-308/96 and 94/97).
Besides, some indications such as the fact that the customer is offered the possibility of taking out insurance independently, with another service provider, may indicate that we are dealing with a supply of insurance services that has no supplementary character. Thus, it is possible that the provision of insurance is required for the main provision of services (for example, in a leasing contract in which the leased asset is required to be insured by the customer). However, if it is possible to contract it with an independent provider, we could be dealing with two different, independent services.
A frequent example of insurance services that are supplementary to a main service, is an insurance contracted by a customer in addition to a removal or transport service.
4.- Exemption applicable to insurance distribution activities within the scope of VAT
Article 20.1.16 of the VAT Law establishes an exemption, applicable to insurance, reinsurance and capitalization transactions.
The exemption also applies to mediation services, including the capture of clients, for the conclusion of the contract between the parties involved in the insurance, reinsurance and capitalization operations, regardless of the status of the entrepreneur or professional who provides them.
The article specifies that insurance operations are understood to include the types of insurance provision.
In general, it should be noted that this is an objective exemption. In the case of insurance operations, the exemption refers to the coverage of the risk, remunerated with the corresponding premium. Therefore, if an insurer provides its policyholders with additional services such as, for example, solvency studies of the policyholders, these services will not be exempt. However, the GDT has confirmed the application of this exemption to the transfer of portfolios between insurers, agents or intermediary entities (among others, resolution to binding request V984/2009, of May 7 or resolution to binding request V2439/2007, of November 14). The transfer of other assets that may be transferred together with the corresponding portfolio is excluded.
The application of the exemption regarding mediation services has been subject to analysis in several resolutions of the ECJ. Subsequently, the GDT has followed the criterion established by the ECJ in several resolutions to binding requests.
The concept of mediation, for the purposes of the application of the exemption set forth in the VAT Law, is not analogous to that regulated by Royal Decree-Law 3/2020. By way of example, external collaborators are not considered mediators for the purposes of the Royal Decree-Law and, nevertheless, some of their activities may be exempt from VAT, in accordance with several pronouncements of the GDT on this regard.
Based on the case law issued by the ECJ on the application of the exemption to mediation services, the treatment of mediation services in terms of VAT depends entirely on their nature. Thus, there may be services provided by insurance intermediaries that are not exempt and, on the contrary, other services may be exempt, even though they are not provided by insurance intermediaries. Therefore, it will always be essential to analyse in depth the contractual provisions, in order to determine which functions are effectively performed by the service provider.
In order to determine whether the exemption set forth in Article 20. one.16 of the VAT Law is applicable to services provided in relation to insurance, reinsurance and capitalization services, the most relevant indications are the subject of analysis in several resolutions of the GDT, some points related to the possible application of the exemption to services rendered by external collaborators are highlighted. Among them, the resolution to binding request 1068-20, of April 27th , should be underlined since it is recently issued and a very complete decision. After a thorough investigation and description of the concept of mediation in the scope of the Directive, the DGT concludes as follows:
- The services of insurance customer capture, insofar as they involve a customer search activity to put them in contact with the insurer, provided by external assistants (collaborators) of the insurance intermediaries, are exempt from VAT.
- Likewise, the administrative processing services provided by the external assistants of the insurance brokers are exempt, insofar as they are intrinsically accessory to those of client capture, provided that both services are rendered by the same auxiliary or collaborator.
- On the other hand, services provided by external collaborators that are not supplementary to customer acquisition services, are outside the scope of the exemption.
- Finally, the exemption may apply the following services:
- Advice, presentation, proposal or performance of work prior to the conclusion of the insurance or reinsurance contract, and this, even if the insurance contract presented, analysed or proposed is not finally concluded. The acquisition of clients is included among these services prior to the conclusion of the contract.
- Those consisting of the conclusion of the insurance or reinsurance contract.
- Assistance to the insurance company in the execution or management of the insurance or reinsurance contract, when the provider has previously recruited the client in question, as well as assistance, advice or assistance to the policyholder, insured or beneficiary, particularly in the event of a loss.
- The provision of information related to one or more insurance contracts, in accordance with the criteria chosen by customers through a website or other means, and the preparation of a classification of insurance products, including prices and product comparisons, or a discount on the price of an insurance contract, provided that the customer can conclude an insurance contract directly or indirectly at the end of the process on the website or other means used.
- Conversely, the exemption does not cover the following:
- The mere provision of data and information on potential policyholders to insurance or reinsurance intermediaries, or insurance or reinsurance companies, if no further action is taken by the service provider to assist in the conclusion of an insurance or reinsurance contract.
- The mere provision of information on insurance or reinsurance products, on an insurance or reinsurance intermediary, or an insurance or reinsurance company to potential policyholders, if the service provider does not take any additional action to assist in the conclusion of an insurance or reinsurance contract.
- The mere handling of losses by an insurance or reinsurance undertaking, in its professional capacity, and the loss adjusting and settlement of claims.
- The provision of information related to one or more insurance contracts according to criteria chosen by customers through a website or other means, and the preparation of a classification of insurance products, including prices and comparisons of products, or a discount on the price of an insurance contract, where the purpose of such a comparison is not to conclude a contract but merely to compare insurance products available on the market, even if the same medium or website provides a direct link or access to the websites or media of an insurance or reinsurance intermediary or an insurance or reinsurance company for the conclusion of the contract.
In general, insurance distribution activities, which are considered as provision of services for VAT purposes, are not subject to Spanish VAT when they are carried out by a company established in VATT for entrepreneurs or professionals not established in VATT (except in the case of services whose effective use takes place in Spain – effective use rule) or for final consumers not established or resident in said territory, i.e. the EU, Ceuta, Melilla or the Canary Islands (consumers from third countries).
A special feature is that the services of insurance intermediaries rendered in favour of final consumers (this will be the case of brokers) are located in the territory corresponding to the provision of insurance services in respect of which the mediation takes place.
In many occasions, the insurance distribution activity is carried out in on an accessory and complementary basis with respect to the main activity of the service provider, receiving in this case, for VAT purposes, the treatment corresponding to the latter, since it is considered that we are dealing with a single provision of services or delivery of goods.
In accordance with the VAT Law, insurance, reinsurance and capitalization operations, as well as mediation services in connection therewith, are exempt from VAT. It should be noted that this is an objective exemption, closely linked to the nature of the services rendered and the functions performed by the provider.
Therefore, in order to determine the VAT treatment of services provided in the field of insurance distribution, it is essential to carry out a detailed analysis of the functions that the service providers perform and their link with the underwriting of an insurance or reinsurance contract; the possible supplementary nature of the provision and the nature and residence of the provider and/or the client.
Finally, it should be noted that the EU Commission has recently issued a public consultation on VAT rules for insurance and financial services. As a result of the existing complicated rules, as well as their difficult application, operators criticize the uncertainty, the lack of neutrality of VAT as well as the compliance costs. The purpose of the consultation is to obtain as much information as possible in order to make a proposal for a directive that would eliminate the competitive disadvantage faced by financial and insurance operators as a result of the non-recoverability nature of the VAT.