The Transfer of a Portfolio of Contracts: VAT - exempt or VAT - taxable?

Introduction

On October 22, 2009 the European Court of Justice ('ECJ') dealt with the question whether the transfer of a portfolio of reinsurance contracts from one reinsurer to another can be viewed as a VAT-exempt financial- or insurance transaction. The ECJ followed the Advocate-General's opinion in concluding that the transfer of a portfolio of reinsurance contracts is subject to VAT.

The judgment is not only of relevance for (re)insurance companies involved in the transfer of (re)insurance portfolio's, but may also affect other parties involved in similar portfolio sale transactions.

Background

Swiss Re Germany transferred a portfolio of 195 life reinsurance contracts to a Swiss group company. The latter paid an amount to Swiss Re Germany whereby the negative value ascribed to 18 of the contracts was deducted from the positive value ascribed to the 177 other contracts.

In the view of Swiss Re the transfer of the portfolio was not subject to German VAT. The German tax authorities claimed that the transfer of the portfolio is a supply of goods subject to German VAT.

The referring Court considered the transfer of the portfolio to be a supply of services, subject to German VAT. The Court, however, was in doubt whether this interpretation is in line with the VAT Directive. The Court therefore requested the ECJ to clarify whether the transfer of a portfolio of reinsurance contracts qualifies as a VAT-exempt insurance- or financial service. In connection therewith, the ECJ was also requested to shed light on the applicable 'place of supply' rules, i.e. is the 'place of supply' the country of the seller or the country of the purchaser? The 'place of supply' determines which country may levy VAT.

ECJ Judgment

1. The transfer of a portfolio of reinsurance contracts qualifies as a supply of services.
2. The transfer of a portfolio of reinsurance contracts lacks the characteristics of an insurance transaction and can therefore not be characterized as a VAT exempt insurance transaction.
3. The portfolio transfer can neither qualify as a VAT exempt reinsurance transaction. According to the ECJ, a reinsurance transaction is a transaction whereby a (re)insurer concludes a contract in which it undertakes to assume, in return for payment of a premium, contractual obligations of another insurer. In contrast to such a reinsurance transaction, Swiss Re Switzerland assumed all the rights and obligations of Swiss Re Germany under the transferred contracts. That is, Swiss Re Germany did no longer have any legal relationship with the reinsured persons following the transfer of the portfolio.
4. The transfer of a portfolio of reinsurance contracts cannot qualify as a VAT-exempt financial transaction as, in the view of the ECJ, such a transfer is 'by its nature' not a financial transaction within the meaning of the VAT Directive.
5. The transfer of a portfolio of reinsurance contracts does for the current 'place of supply' rules not qualify as a 'financial- or reinsurance transaction'. That is, on the basis of the current 'place of supply' provisions, VAT is due in the country of the seller.
   It is noted that as of January 1, 2010 the European 'place of supply' rules will change leading to VAT taxation in the country of the purchaser of the portfolio.

Implications

In practice, tax authorities have generally accepted that the transfer of a portfolio of (re)insurance contracts and similar transfers is not subject to VAT. In this respect the position generally was that a portfolio transfer is a VAT-exempt financial or (re)insurance transaction, or a transaction falling within the scope of the TOGC (transfer of a business as a going concern) VAT relief.

The Swiss Re judgment underlines that it is important to timely anticipate to the potential VAT implications of a portfolio transfer or similar transactions such as, for example, the transfer or assignment of portfolios of (mortgage) loans in the context of a securitisation transaction. Securitisation transactions involve transfers of portfolios relating to revenue streams generated by different assets classes including (residential) mortgages loans, consumer loans, trade receivables, car loans, etc. It will not always be clear-cut whether a VAT-exemption may apply in connection with such transactions.

When it comes to the question whether or not a VAT-exemption may apply, one should not only bear in mind the wording of the applicable VAT exemption as laid down in the EU VAT Directive, but also the purpose of the VAT-exemption. In Swiss Re, the ECJ stressed that the purpose of the VAT-exemption for financial services is, inter alia, to avoid an increase in the cost of consumer credit.

All in all, the Swiss Re judgment should be an incentive for parties involved in portfolio transfers or similar transactions to timely consider the VAT implications. In this respect one should not consider the VAT implications of a transfer in isolation but, instead, within the context of the entire transaction where the transfer is part of and the VAT position of all parties involved. As indicated, in this respect it should also be borne mind that as of January 1, 2010 different 'place of supply' rules are in place that will generally result in VAT taxation in the country of the purchaser of the portfolio.