VAT Newsletter 1/2013

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The European Court of Justice („ECJ”) has ruled on the case BGŻ Leasing sp. Z o.o.(C-224/11)

The dispute in this case refers to the refusal of the tax authorities to exempt from VAT the insurance services rendered in connection to goods that are subject of a leasing agreement, having in view that the leasing services are subject to VAT.

The BGŻ Leasing’s main object of activity consists in leasing services. In this respect, leasing agreements are concluded with various customers based on which the latter pays the rent and other related expenses to the goods that are object of these agreements. During the agreement period, the respective goods remain under the property of the lessor.

Moreover, the lessor requires its tenants to insure the leased goods. If tenants chose to receive the insurance services from the lessor, the latter contracted these services from a third-party and re-invoiced the related costs to its tenants, without applying VAT.

The tax authorities considered that insurance services represent a supply of goods ancillary to the leasing services, and, therefore, it should have been subject to VAT.
We present below certain aspects of importance based on which the Court issued its decision.

ECJ considered that if any insurance transaction were subject to VAT because the services relating to the item it covers were subject to VAT, the very aim of art. 135, paragraph (1) let. a) of the VAT Directive, that is the exemption of insurance transactions, would be called into question.

Also, it is mentioned that a leasing service and the supply of insurance for the leased item cannot be regarded as being so closely linked that they form a single transaction. Moreover, although such insurance supplied to the lessee through the lessor facilitates the enjoyment of the leasing service, it must be held that it constitutes essentially an end in itself for the lessee and not only the means to enjoy that service under the best conditions.

Additionally, the requirement for insurance cover cannot, in itself, mean that a supply of insurance by the lessor is indivisible or ancillary to the supply of the leasing services. Moreover, if the lessee also decides to obtain insurance services through the lessor, such a decision is made independently of his decision to conclude a leasing agreement.

The ECJ considers that the supply of insurance services for a leased item and the supply of the leasing services themselves must, in principal, be regarded as distinct and independent supplies of services for VAT purposes.

Also, the ECJ considers that when the lessor insures the leased item itself and re-invoices the exact cost of the insurance to the lessee, such a transaction constitutes, in circumstances such as those at issue in the proceedings, an insurance transaction within the meaning of Article 135, alignment (1), letter (a) of Council Directive 2006/112/EC, hence VAT exempt.

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