The justification for the proposal to amend the VAT Act indicates that the aim of repealing Art. 43(13)–(14) is to adapt the current VAT regulations to the VAT Directive in response to the judgment of the Court of Justice of the EU in the Aspiro case (C-40/15). A direct consequence of the planned changes as of 1 January 2017 will be loss of the VAT exemption for services provided to insurance companies by third parties on a subcontracting or outsourcing basis.
The drafters assure in the justification that the change will not have a direct impact on the scope of the exemption in the case of financial services or elements of financial services that were governed by the repealed provisions. It is intended to concern only component parts of insurance services performed by a third party. However, this seems doubtful, since the repealed provisions also refer to services that are an element of financial services.
The proposed changes should come as no surprise to taxpayers in the financial industry, as lawmakers tried to present these changes back in 2014 with the intention of introducing them from 2015. The justification then was two judgments of the Supreme Administrative Court, of 8 May 2012 (Case I FSK 268/12) and 4 March 2013 (Case I FSK 577/12). The court drew attention to the incorrect implementation of the VAT Directive in Art. 43(13) of the VAT Act. Although the changes did not come into force then, it could be expected that the issue would arise again when further amendments were made.
So it has happened, and the incentive for the change was the Aspiro judgment in which the Court of Justice held that there is no analogy between insurance transactions and financial services, and called for a strict interpretation of the definition of an element of a financial service. From this, the Minister of Finance concluded that par. 13 and 14 of Art. 43 should be repealed. At the same time, it was pointed out in the justification that after the repeal of these provisions, the VAT exemption would continue to apply to services held by the Court of Justice to constitute financial services and services that can be an element of the financial services included in Art. 43(1) (7) and (38)–(41) of the VAT Act, and the right to apply the exemption rate derives directly from those provisions.
Currently the proposal is at the stage of public consultation, and then it will be submitted to the Parliament. If the changes in this regard are enacted in their current form, the practice will show how they are interpreted by the tax authorities in the context of financial services.
Repeal of Art. 43(13)–(14) of the VAT Act concerning VAT exemptions on services auxiliary to financial services should not automatically mean taxation at the 23% rate. The exemptions listed in Art. 43(1) (7) and (38)–(41) are objective, and the essential condition for applying the exemptions is first and foremost the type of service provided. The drafters of the VAT Act stressed the objective aspect of the exemption, and did not restrict the exemption only to a specific group of entities. Therefore, a VAT exemption for auxiliary services will still be available after 1 January 2017, but only on the basis of Art. 43(1) (7) and (38)–(41), also taking into account the case law of the Court of Justice in this respect. For example, in Nordea Pankki Suomi Oyj (C-350/10), the court pointed out that exempt financial services should be distinguished from the services of a physical or technical nature often accompanying them, which are not exempt. The distinction between these two types of services should be based on an analysis of the service provider’s responsibility to the financial institution.
Another aspect of the proposed change should also be mentioned. Repeal of Art. 43(13)–(14) of the VAT Act will mean that individual tax rulings obtained by taxpayers pursuant to those provisions will cease to be in force, and thus they will no longer provide protection to taxpayers. In that situation, to ensure these services continue to fall within the VAT exemption, it will be necessary to apply for new tax ruling—which will not necessarily confirm the VAT exemption.
Katarzyna Konecka-Litkowiec, Tax Adviser