No VAT refund for insurer regarding irrecoverable debts

22/02/23

On 9 February 2023, the Court of Justice EU (‘CJEU’) ruled in the Euler Hermes case (C-482/21) that an insurance company paying compensation to policyholders for unpaid debts, including VAT, cannot reclaim the VAT relating to these unpaid debts via a VAT refund request by means of reducing the the taxable amount (i.e. article 90 (1) of the VAT Directive). The CJEU indicated amongst others that an insurer cannot be identified as being the taxable person entitled to a reduction of the taxable amount with respect to the part of the debts that have been the subject of compensation and assignment.

EULER HERMES CASE

Background

The court case is about the Hungarian insurance company Euler Hermes that - on the basis of an insurance contract - pays compensation to its policyholders in the event of non-payment of a given debt by the policyholders' customers. The amount of the compensation is 90% of the value of the unpaid debt including VAT (i.e. the VAT being charged on the invoices issued by the policymakers to its customers). Under the insurance contract, in parallel with that compensation, the relevant portion of the value of the debt and all related rights originally attributed to the policyholder are transferred to Euler Hermes, meaning that Euler Hermes is the party that eventually bears the burden of VAT. In that respect, Euler Hermes requested for a refund of VAT relating to the irrecoverable debts. The Hungarian Tax Administration rejects the request on the grounds that the transactions underlying the irrecoverable debts in question had not been carried out by Euler Hermes but by the policyholders.

Judgement

The CJEU ruled that Hungary is not in violation of EU VAT law by not granting a VAT refund to Euler Hermes for the VAT paid by its policyholders, even though (a part of) the claim and all related rights were transferred to Euler Hermes. According to the CJEU, an insurer cannot be identified as being the taxable person entitled to a reduction of the taxable amount with respect to the part of the debts that have been the subject of compensation and assignment. The CJEU further considers here that the part of the receivable for which Euler Hermes compensated its policyholder was indeed received by the policyholders as consideration for the taxable transactions in question. As such, it cannot then be classified as "unpaid" within the meaning of Article 90(1) of the VAT Directive.

What does this mean for your business?

An entrepreneur is able to reclaim VAT by reducing the taxable amount in case of cancellation, termination, rescission, total or partial non-payment or price reductions with respect to its VAT taxable output transactions. In the Netherlands, under article 29 para 6 Dutch VAT Act the taxable person taking over any unpaid debts and related rights will take over the right to reclaim the VAT remitted with respect to the receivable to the extent that it remains unpaid.

The judgement of the CJEU in the Euler Hermes case raises the question whether Article 29 para 6 Dutch VAT Act may not be fully in line with the EU VAT Directive. For now, businesses in the Netherlands should still be able to apply article 29 para 6 Dutch VAT Act. This could only change if and when the Dutch VAT Act should be amended on this particular point. For other Member States there could be changes in the VAT treatment as a result of this case. We advise insurance companies or businesses with similar activities to review their VAT position on this point.