Value added tax in the insurance mediation – current iurisdiction *
– Outsourcing, fee-based consulting, tipster, valve model, sales service and support
*by Dr. Johannes Fiala, Lawyer (Munich), MBA Financial Services (Univ.), MM (Univ.), Certified Financial and Investment Advisor (A.F.A.), Banker (www.fiala.de)
Dipl.-Math. Peter A. Schramm, expert for actuarial mathematics (Diethardt), actuary DAV, publicly appointed and sworn by the IHK Frankfurt am Main for actuarial mathematics in private health insurance (www.pkv-gutachter.de).
No turnover tax in insurance brokerage
The Federal Fiscal Court (Bundesfinanzhof, BFH) decided in its ruling of 06.09.2007 (Ref. V R 50/05) that the VAT-exempt activity as an insurance agent and insurance broker within the meaning of § 4 No. 11 UStG necessarily involves not only seeking customers but also bringing them together with the insurer. The concepts of insurance agent and insurance broker within the meaning of § 4 No. 11 UStG are to be interpreted in conformity with the Directive in accordance with Art. 13 Part B Letter a. of Directive 77/388/EEC and not in accordance with commercial law in accordance with the concepts of insurance agent and commercial broker within the meaning of § 92 and § 93 HGB.
Value added tax liability in the case of pure data collection without intermediation
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 concrete insurance policies to be brokered were presented. The fact that this activity may even have been necessary for the subsequent brokerage is completely irrelevant, because even the printing of the insurance applications is therefore not exempt from turnover tax.
Tax liability for tipsters with valve solution
If a credit institution as an exclusive or multiple agent, within the framework of a valve solution, only gives a “tip” to its cooperating insurance brokerage office, and for administrative simplification also passes on the already recorded customer data for a fee, then this is not an intermediary service, but rather compensation subject to VAT (also in the case of commissions) at the tip provider: The associated risk under criminal tax law is by far not yet known to every insurer, who consequently also owes a VAT statement within the framework of the usual credit note settlement. The subsequent correction then leads to the question of whether the unpaid VAT is economically at the expense of the credit institution or the insurer.
Choice between plague and cholera
The credit institution 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  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 with management commissions
Even these clear words are not known by every insurer until today: Above all this leads with the so far value added tax-free remunerated independent (e.g. because no official employee position freely, judgement of the OLG Cologne of 13.12.2002 – Az: 19 U 224/01) broker responsible person to the realization that the appearance of an evasion of value added tax will be hardly to be rejected from the hand. The repair effort is considerable, after all, an accounting system has to be set up – and for the late payment at least 0.5% monthly interest, possibly 1% p.m. is owed additionally to the tax office. Also the tax adviser expenditure for the delivery of the value added tax declarations by the broker support is not completely inconsiderable – why already for economic reasons most representatives and brokers remain strictly in their value added tax-exempt occupation.
Broker advisor not an intermediary – the question of liability
In return, however, the self-employed broker advisor is not an insurance intermediary and does not require a corresponding licence or the necessary liability insurance – not even if he assists the broker in meetings with customers. Indemnities of the insurer, which refer to mediation, therefore do not apply to the liability of the broker advisor towards the broker and the policyholder advised by the broker – in case of doubt he is liable alone. In this case, brokers who rely on statements made by the broker advisor are therefore advised to check the personal creditworthiness of their broker advisor – especially the self-employed broker advisor – beforehand for possible recourse and, in case of doubt, to refuse to cooperate with self-employed broker advisors.
Obligation to pay social security in the case of a bogus self-employed agent
Broker advisors in particular are regularly employed by the insurer in the normal way – this in itself is considered a weighty indication that they are also subject to compulsory social insurance as “freelancers” like many agents employed in this way. In addition, even in the case of work “from the home office”, there may be an integration (specification or right to issue instructions regarding time, duration, place and type of activity) into the work organisation of the client. Other factors that speak in favour of bogus self-employment are, for example, turnover targets (especially sanctions through commission scales), tighter controls (also through hardware and software specifications), compulsory attendance, specified appointments with business partners, a ban on hiring subagents, specification of address lists or tour schedules, as well as holiday regulations. If you are an agent who does not employ anyone with a salary of more than 400 euros and who essentially works for
Design options for loans 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: This is because the risk later on in the event of an audit – not infrequently due to a competitor’s report – 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 03.05.2005 (Ref. C- 472/03). These are (a) ‘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 administration and performance, in particular in the event of a claim’; and (b) ‘the professional activities of persons who, under one or more contracts or powers of attorney, are responsible for offering, proposing and arranging or concluding insurance contracts in the name of and on behalf of, or solely on behalf of, one or more insurance undertakings, or for assisting in the administration and performance of such contracts, in particular in the event of a claim’. It has since been recognised that pure back-office activities are not services characteristic of an insurance intermediary (see paragraphs 34 et seq.). 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 22.05.2007 provide typical brokerage services, and therefore these services regularly remain tax-free. The insurance broker has no right of choice in this respect. The situation is only different if another profession, e.g. management consultant, is exercised with completely different services (e.g. consulting in the personnel sector, technical security consulting). If the (licensed) broker were to leave his profession and work as an insurance consultant (possibly illegally without a license), this would result in a VAT liability. This would also give rise to suspicion, which could later lead to a fine or the withdrawal of the licence.
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About the author
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.
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