The Federal Fiscal Court (Bundesfinanzhof, BFH) has ruled that the VAT-exempt activity as an insurance intermediary consists not only in seeking customers but also in bringing them together with the insurer.
As the Federal Fiscal Court stated in its ruling of 6 September 2007 (Ref. V R 50/05), the terms insurance agent and insurance broker within the meaning of § 4 No. 11 UStG are to be interpreted in accordance with Article 13 of Directive 77/388/EEC and not in accordance with the terms insurance representative and commercial broker within the meaning of § 92 and § 93 HGB. In the specific case, the plaintiff had neither brought the customers together with insurance companies, nor arranged the appointments with interested parties, nor selected insurance products or created insurance concepts. Rather, it was a mere data collection, an inventory of the current insurance situation, in which no specific insurance policies were presented. The fact that this activity may have been necessary for the subsequent brokerage is irrelevant, since the printing of the insurance applications is therefore not exempt from turnover tax either.
Tax liability for tipsters in the case of a valve solution
If a credit institution, as an exclusive or multiple agent, only gives a “tip” to its cooperating insurance brokerage office within the framework of a valve solution and, for administrative simplification, also passes on the customer data already recorded in return for payment, this is not an intermediary service but remuneration subject to VAT (also in the case of commissions) at the tip provider. Not every insurer is aware of the associated risk under criminal tax law and also owes a VAT statement as part of the usual credit note settlement. The subsequent correction then leads to the question of whether the unpaid VAT is economically chargeable to the credit institution or the insurer. The credit institution has the choice between plague and cholera: it could well establish tax exemption by organising its activities. Then it would have to not only seek customers, but also match them with an insurer. It would be essential to have a relationship with insurers and customers at the same time. In the case of the broker valve, however, this can only be achieved if the credit institution slips – illegally – in the advisory situation from agent status (with authorisation) into the role of vicarious agent of the valve broker company (without authorisation). However, such behaviour can be punished with a fine and withdrawal of the licence.
Value added tax liability when outsourcing the back office
The financial sector likes to involve external companies in the processing, for example by no longer having the back office located at the insurer. The BFH justifies the tax liability as follows: “Services such as setting and paying the commissions of insurance agents, keeping in touch with them and passing on information to them, on the other hand, do not form part of the activities of an insurance agent (ECJ judgment Arthur Andersen in [2005] ECR 1-1719, BFH/NV Beilage 2005, 188 paragraph 35). In general, support services for the performance of the tasks incumbent on the insurer itself are taxable.”
Value added tax liability of self-employed broker advisors: considerable expense
Particularly in the case of the self-employed broker advisor, who was previously paid free of turnover tax, this often leads to the realisation that the appearance of VAT evasion can hardly be dismissed out of hand. The repair effort is considerable, after all, accounting must be set up – and for the late payment is owed to the tax office at least 0.5 percent additional monthly interest. Also the tax consultant effort for the submission of the sales tax declarations by the broker advisor is high – which is why, for economic reasons alone, most agents and brokers remain in their sales tax-exempt profession.
Broker advisor not an intermediary
The self-employed broker advisor is not an insurance intermediary and does not require a license or liability insurance – even if he or she assists the broker in client meetings. Therefore, indemnities of the insurer do not apply to the liability of the broker advisor towards the broker and the advised policyholder – in case of doubt, the broker advisor is solely liable. Brokers are therefore advised to check the personal creditworthiness of their broker advisor for possible recourse and, in case of doubt, to refuse to work with independent broker advisors.
Obligation to pay social insurance for agents who are not self-employed
Broker advisors in particular are usually employed by insurers – this in itself is considered a weighty indication that they are also subject to social security contributions as “freelancers”. In addition, even when working from a home office, there may be an integration (right to issue instructions) into the client’s work organisation. Other indications of pseudo-self-employment are turnover targets (e.g. penalties in the form of commission scales), tighter controls (including hardware and software specifications), compulsory attendance, specified deadlines for business partners, a ban on hiring sub-agents, specifications of address lists or tour schedules and holiday regulations. Even if an agent does not employ anyone with a salary of more than 400 euros and essentially works for one client, he or she is considered to be in sham self-employment: In this case, several contracting group companies are considered to be a single principal. For bogus self-employed persons, the client is liable for social security and wage tax. Therefore, in case of doubt, it is advisable to have the status clarified by the pension insurance company beforehand. As a rule, the pseudo-self-employed agent will raise the issue of employee status when his agency contract is terminated – namely by bringing an action for unfair dismissal before the Labour Court. In the case of subsequent notification to the pension insurance institution, the client pays the employer’s and employee’s social security contributions alone – a good opportunity for the bogus self-employed person to achieve an inexpensive increase in the statutory pension entitlement.
Design options for credit and insurance brokerage – Risks associated with pools
The BFH suggests that it is possible to choose an organisational model in insurance and credit broking without this leading to a turnover tax liability. The decisive factor is whether the chosen services – of each individual service provider in isolation – constitute “on the whole an independent whole” which fulfils the specific and essential functions of an intermediary service. The organisation of pools and distributors is particularly complex in this respect, as the risk later on in the event of an audit – not infrequently due to the notification of a competitor – is considerable. It is not uncommon for the additional payment to be higher than the equity.
Fee-based advice by insurance brokers
The European Court of Justice (ECJ) already dealt with the activity of an insurance intermediary in its judgment of 3 May 2005 (Case C-472/03). These are the professional activities of persons who, for the purpose of providing insurance or reinsurance cover, act as intermediaries between policy holders and insurance or reinsurance undertakings freely chosen by them, prepare the conclusion of insurance contracts and, where appropriate, assist in their management and performance, in particular in the event of a claim, the professional activities of persons who, by virtue of one or more contracts or powers of attorney, are responsible for proposing and concluding insurance contracts in the name of and on behalf of, or solely on behalf of, one or more insurance undertakings, or for proposing and concluding such contracts, or for assisting in their administration and performance, in particular in the event of a claim’. Since then, it has been known that pure back-office activities are not characteristic services of an insurance intermediary. Conversely, it can be stated that insurance brokers who have been advising “third parties who are not consumers” in accordance with § 34 d GewO since 22 May 2007 provide typical intermediary services and that these services therefore regularly remain tax-exempt. The insurance broker has no right of choice in this respect. It is only different if another profession – for example, management consultant – is exercised with completely different services, such as consulting in the field of human resources, technical security consulting. If the licensed broker were to leave his profession and work as an insurance consultant – possibly illegally without a license – VAT liability would arise. This would also raise suspicion, which could later lead to a fine or even the withdrawal of the licence.
VM author: Dr. Johannes Fiala, lawyer from Munich (www.fiala.de), and Dipl.-Math. Peter A. Schramm, expert for actuarial mathematics (www.pkv-gutachter.de)
(Versicherungsmagazin 4/2008, 60)
Courtesy ofwww.gabler.de.
Our office in Munich
You will find our office at Fasolt-Strasse 7 in Munich, very close to Schloss Nymphenburg. Our team consists of highly motivated attorneys who are available for all the needs of our clients. In special cases, our law firm cooperates with selected experts to represent your interests in the best possible way.
About the author
PhD, MBA, MM
Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
»More about Dr. Johannes Fiala
On these pages, Dr. Fiala provides information on current legal and economic topics as well as on current political changes that are of social and/or corporate relevance.
Arrange your personal appointment with us.
You are already receiving legal advice and would like a second opinion? In this case please contact Dr. Fiala directly via the following link.
(The first phone call is a free get-to-know-you conversation; without consulting. You will learn what we can do for you & what we need from you in terms of information, documents for a qualified consultation.)