VAT rate for the reimbursement of the costs of leasing insurance to the lessee

one The VAT rate to be taken into account in the reimbursement of the costs of leasing insurance to the lessee is often the case with the lessor. This issue falls within the wider issue of cost relief for so-called comprehensive services, and the question is whether a reference to the cost of leasing insurance should be issued at the basic rate (23%), whether such sales of services may benefit from the exemption provided for in Article 43(1)(37) Goods and Services Tax Act.

Under this VAT exemption provision, insurance services, reinsurance and brokering services in the provision of insurance and reinsurance services, as well as services provided by the policyholder in respect of insurance contracts concluded by him on behalf of others, are subject to VAT exemption, excluding the disposal of rights acquired in connection with the performance of insurance and reinsurance contracts.

The principle is that under the lease contracts concluded, the beneficiary undertakes to insure the subject of the lease on its own account, however, there are situations where the obligation to conclude the insurance contract is borne by the sponsor, who then transfers the burden of the costs incurred by it to the beneficiary. In this situation, doubts arise as to whether the insurance service should be treated as one of the elements of the lease agreement (additional cost included in the tax base of the lease instalments), subject to 23% VAT rate or insurance constitutes a service separate from leasing and thus subject to exemption from tax.

Lease insurance and leasing services as separate services

In the case law, which is reflected primarily in the Court of Justice’s judgment of 17 January 2013[1], it is indicated that the leasing and leasing insurance service is essentially separate and independent services for value added tax purposes. Recognition that they constitute one a complex benefit requires an analysis of the extent to which the benefits in question are linked.

The judgment of the Court of Justice states, inter alia, that if the lessor insures the subject of the lease, charging the exact cost of that insurance to the lessee, in circumstances such as the main proceedings, such an operation constitutes an insurance transaction within the meaning of Article 135(1) point (a) Directive 2006/112 of 28 November 2006 on the common system of value added tax.

In other words, this means that, where the financier transfers to the beneficiary expenditure relating to the conclusion of an insurance contract of more than the one he has incurred (e.g. including his proxy commission), such a service will not benefit from VAT exemption.

In that judgment, the Court referred to settled caselaw in which one a transaction occurs where two or more elements, or two or more of the activities carried out by the taxpayer are so closely linked that they create objectively only one an indivisible economic benefit, the separation of which would be artificial.

Insurance service as a leasing allowance

The Court pointed out that the objective for the beneficiary to carry out such a transaction is also an element in determining whether the insurance service constitutes a separate VAT exempt service.

The reduction in the level of risk associated with the use of a lease by concluding an insurance contract in itself does not mean that such a service should be considered to be of an additional nature to the leasing service in which it is included.

While the insurance service provided to the lessee by means of the lessee in the configuration presented facilitates the use of the leasing service, it should be considered that it is essentially an objective for the lessee itself, rather than merely a way of using the service on the best terms.

Other circumstances that indicate that the insurance service does not constitute an additional provision under the lease include also the freedom of the lessee to choose the insurer and the possibility to negotiate the provisions of the insurance contract, as well as the lack of the right of the lessor to terminate the lease contract due to delay in paying the insurance premium.

In view of the above conclusions, it should be pointed out that the case-law put forward does not resolve the doubts clearly and that the setting of the correct rate for the reimbursement of the costs of leasing insurance requires an analysis of the contents of the lease agreement and the accompanying circumstances to determine whether the lease insurance contract constitutes a separate and independent service benefiting from the exemption from the tax on goods and services.

Author: Jan Markowicz Advocate, graduate of the Faculty of Law and Administration of the University of Silesia in Katowice in the direction of Law. In professional practice, it focuses on the legal and tax service of economic operators and individuals. Author of publications and articles on tax law.