ECJ C-482/21 (Euler Hermes) – Judgment – Insurance company is seen as 3rd party payment as consideration for the original supply

On February 9, 2023, the ECJ issued its decision in the case C-482/21. (Euler Hermes)

Context: Reference for a preliminary ruling – Taxation – Value added tax (VAT) – Directive 2006/112/EC – Article 90 – Taxable amount – Reduction – Insurer paying compensation to policyholders for unpaid debts, including VAT – National legislation denying that insurer, as legal successor, the reduction of the taxable amount – Principle of fiscal neutrality – Principle of effectiveness)

Article in the EU VAT Directive

Articles 73, 90 and 135(1)(a) of the EU VAT Directive 2006/112/EC

Article 73 (Taxable amount)
In respect of the supply of goods or services, other than as referred to in Articles 74 to 77, the taxable amount shall include everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party, including subsidies directly linked to the price of the supply.

Article 90 (Taxable amount)
1. In the case of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under
conditions which shall be determined by the Member States.
2. In the case of total or partial non-payment, Member States may derogate from paragraph 1.

Article 135 (Exemption)
1. Member States shall exempt the following transactions:
(a) insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents;

Facts

Euler Hermes SA Magyarországi Fióktelepe (‘the applicant’) is an insurance company which, in the course of its business, assumes the obligation to pay insured persons an indemnity in respect of a specified debt in the event of nonpayment by the insured’s client. The amount of the indemnity is generally set at 90% of the value of the unpaid debt plus VAT. Under the contract, payment of the indemnity results in the transfer to the applicant of the portion of the debt corresponding to the value of the insurance and all rights originally attributed to the insured. However, the applicant bears the effective burden of the VAT which insured persons have unsuccessfully passed on to their clients.
Relying on the order of the Court of Justice of 24 October 2019 in Porr Építési Kft. (C-292/19, EU:C:2019:901), the applicant submitted to the tax authority on 31 December 2019 an application for a refund of the VAT included in the amounts paid in respect of insurance with effect from 1 January 2014, accounted for in the invoices issued with an enforcement date later than 1 December 2013, for a total amount of HUF 225 855 154 and EUR 128 240.44, plus the applicable interest.
The applicant based its application on the fact that, in connection with the insurance product in question, it had paid the insurance, also including VAT, in respect of debts which had become definitively irrecoverable. For that reason, it claimed a reduction a posteriori of the taxable amount.
On 29 January 2020, the Nemzeti Adó- és Vámhivatal Észak-budapesti Adó- és Vámigazgatósága (Budapest North Tax and Customs Directorate of the National Tax and Customs Authority, Hungary) (first-tier tax authority) rejected that application. It based its decision on the fact that the transactions which gave rise to the irrecoverable debts had not been carried out by the applicant.
The applicant appealed against that first-tier decision, following which the Nemzeti Adó- és Vámhivatal Fellebbviteli Igazgatósága (Appeals Directorate of the National Tax and Customs Authority, Hungary; ‘the defendant’) upheld the first-tier decision on 15 April 2020. It based its decision on the fact that, from a tax law perspective, the applicant was not the insured persons’ successor under the insurance contracts. Accordingly, one the of the substantive conditions for a refund of the tax had not been met.
The applicant lodged an administrative appeal before the referring court, seeking, principally, the amendment of the defendant’s decision and, in the alternative, the annulment of that decision and an order that the defendant conduct a new procedure.

Questions

Do the principles of proportionality, fiscal neutrality and effectiveness –having regard, in particular, to the fact that a Member State may not charge an amount of VAT exceeding that actually received by the supplier of goods or services in respect of that supply of goods or services – and the exemption laid down in Article 135(1)(a) of the VAT Directive – articularly as regards the requirement that that activity is to be treated as a single exempt transaction, by reference to the principles laid down in points 35, 37 and 53 of the Advocate General’s Opinion in Case C-242/08, Swiss Re – and the obligation to guarantee the free movement of capital and services in the internal market preclude a practice of a Member State pursuant to which the reduction applicable to the taxable amount in the event of definitive non-payment, as provided for in Article 90(1) of the VAT Directive, is not applicable where an insurer, in the course of its commercial credit insurance business, paid an indemnity to the insured person in respect of the taxable amount and also in respect of the VAT due when the risk materialised (non-payment by the insured’s client), meaning that, under the insurance contract, the debt, together with all associated rights of enforcement, was assigned to the insurer, in the following circumstances:

(i) at the time when the debts in question became irrecoverable, national law did not allow any reduction of the taxable amount in respect of an irrecoverable debt;
(ii) since the incompatibility of that prohibition with Union law was made clear, national positive law has consistently excluded outright the refund of VAT on an irrecoverable debt to the original supplier of the goods or services (the insured person) on the grounds that the insurer has reimbursed that amount of VAT to the supplier; and
(iii) the insurer is able to show that its claim against the debtor has become definitively irrecoverable?

AG Opinion

No opinion for this case

Decision

Article 90(1) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, as amended by Council Directive 2010/45/EU of 13 July 2010, and the principle of fiscal neutrality

must be interpreted as not precluding legislation of a Member State under which the reduction of the taxable amount in the event of non-payment, provided for in that provision, is not applied to an insurer who, under a contract for the insurance of trade debts, pays the insured person, by way of compensation following non-payment of a debt, part of the taxable amount of the taxable transaction at issue including value added tax, even though, pursuant to that contract, that part of the debt together with all associated rights have been assigned to that insurer.

Summary

Euler Hermes is an insurance company that pays its policyholders compensation if their customers fail to pay certain claims. In principle, the compensation amounts to 90% of the unpaid claim, including VAT. Under this contract of insurance, together with this indemnity, the corresponding part of the value of the claim and all related rights originally accruing to the insured shall pass to Euler Hermes. As regards the part of the amount of VAT carried over, in practice it is Euler Hermes who bears the burden of the VAT previously paid by the insured to the Treasury, but which they have passed on to their customers and which have not been paid by the latter . Euler Hermes has therefore submitted a request for a VAT refund on bad debts to the Hungarian tax authorities. This was refused by the Hungarian tax authorities on the grounds that Euler Hermes was not a taxable person for the transactions for which it wished to exercise the right to a reduction of the taxable amount and a refund of the corresponding VAT.

According to the CJEU, the reduction of the taxable amount in the event of non-payment referred to in Article 90(1) of the VAT Directive and the principle of fiscal neutrality do not preclude a regulation of a Member State on the basis of which this reduction is not applied in respect of of an insurer who, under an insurance contract for commercial receivables, pays to an insured, by way of compensation for non-payment of a receivable, part of the amount of the taxable amount of the relevant taxable transaction, including VAT, although that part of the claim and all rights attached thereto have been transferred to that insurer in accordance with that agreement.

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