- Introduction
Written-off vehicles (“salvados”, in Portuguese) are motor vehicles that, due to damages caused by an accident seriously affecting their safety to travel, are transferred by the policyholders to an insurance company and, therefore, become the property of the latter[1].
According to Portuguese insurance law, in the event of an accident in which motor-vehicles are destroyed, the policyholder and the insurance company may agree on the transfer of such written-off vehicles (or part thereof) to the latter, by exchange of a payment done by the insurance company to the policyholder. In such cases, the insurance company becomes the owner of the written-off vehicles and, subsequently, resells them to scrap dealers, who will dismantle them.
The VAT treatment applicable to the sale of written-off vehicles by insurance companies has been giving rise to quite a few divergences since the entry into force of VAT in Portugal (1 January 1986). As we will see below, over the years, tax literature and the Tax Courts have been suggesting the application of contradictory VAT treatments to such operations. The Portuguese Tax Authorities also issued a Circular Letter aiming to solve the divergencies in this concern.
It was now the time for the European Court of Justice (“ECJ”) to give its contribution to the topic, by issuing its preliminary ruling, on 9 March 2023, on the VAT treatment applicable to the sale of written-off vehicles by Generali Seguros, S.A. (process Generali Seguros SA, C-42/22).
Does this ECJ’s fresh decision help solving the (still) existing divergences in respect to this subject-matter? Let’s see in the next paragraphs!
- The VAT profile of insurance companies
For VAT purposes, insurance companies are considered taxable persons[2], as they independently carry out remunerated economic activities on an ongoing basis.
The economic activities carried out by insurance companies typically consist of the provision of “insurance operations”, which benefit from a VAT exemption not granting the right to recover input VAT on related costs[3].
Although the applicable EU and Portuguese VAT provisions do not define “insurance operations”, these have already been defined by the ECJ[4]. In short, the Court defines insurance operations as the services supplied by a company to a policyholder, such services consisting in covering potential financial damages for the policyholder stemming from the occurrence of specific and predetermined risks.
Given the VAT exemption applicable to the operations carried out by insurance companies, typically all VAT amounts incurred by these entities constitute irrecoverable costs at their level[5]. Insurance companies are, therefore, particularly sensitive to:
- the VAT treatment applicable to input services, as the higher the VATable costs insurance companies incur, the bigger the VAT leakage; and
- the VAT treatment applicable to their output transactions, as these simultaneously carry out operations subject to distinct VAT treatments (taxable vs exempt)[6].
- The recent ECJ’s decision in Generali Seguros SA case (C-42/22)
The VAT treatment of specific output transactions performed by insurance companies (i.e., the topic mentioned in ii. above) is the subject of the recent Generali Seguros SA ECJ’s case (C-42/22), who opposed Generali Seguros, S.A. – an insurance company developing its activity in Portugal – to the Portuguese Tax Authorities.
In short, the fact pattern giving rise to the Court’s ruling is as follows:
- when Generali Seguros, S.A. policyholders vehicles’ suffered damages leading to the obligation to write-off such vehicles, Generali Seguros, S.A. purchased the written-off vehicles from the policyholders andre-sold them to scrap dealers, who were in charge of their dismantling / destruction;
- during several years, Generali Seguros, S.A. did not apply VAT on those re-sales;
- in the context of a tax audit, the Portuguese Tax Authorities considered that the sale of the written-off vehicles by Generali Seguros, S.A. is an operation subject and not exempt from VAT. The Portuguese Tax Authorities carried out VAT adjustments amounting to approx. EUR 17k (plus interest);
- Generali Seguros, S.A. challenged the Portuguese Tax Authorities’ position in front of the Tax Courts, by presenting two distinct lines of arguments:
- the re-sale of the written-off vehicles occurs in the context and is a consequence of the insurance operations carried out and, should, therefore, also benefit from the VAT exemption applicable to insurance transactions [Article 9, 28) of the Portuguese VAT Code];
if not
- such re-sales should benefit from the VAT exemption set out in Article 9, 32) of the Portuguese VAT Code[7], as the written-off vehicles being sold had previously been purchased in the context of Generali Seguros S.A.’s – VAT exempt – insurance activity.
- the case escalated to the Portuguese Administrative Supreme Court, who decided to sustain the proceedings and request the ECJ’s preliminary ruling. In particular, the Portuguese Court requested the ECJ’s confirmation on whether any of the two aforementioned VAT exemptions should apply to the re-sales of written-off vehicles by insurance companies.
In what respects to the application of the VAT exemption set out for insurance transactions to the operations carried out by Generali Seguros, S.A., the ECJ has now ruled that the sale of parts from written-off vehicles does not constitute an insurance transaction in scope of the VAT exemption, notably because these sales take place under agreements separate from the insurance contracts covering the vehicles and are concluded between the insurance company and persons other than the insured person. As per the Court, a link cannot be made between these sales and the insurance transactions which constitute the core of the insurance companies’ activities[8].
The Court also answered that such sales could not benefit from the VAT exemption applicable to goods exclusively used in a VAT exempt activity (set out in the first part of Article 9, 32) of the Portuguese VAT Code). In a rather pragmatic analysis, the ECJ concluded that this VAT exemption shall not apply in casu, as it requires the written-off vehicles being re-sold to have been previously used / consumed in the context of Generali Seguros, S.A. (VAT exempt) insurance activity. In this regard, the Court recalls that this was not the case of the written-off vehicles purchased by Generali Seguros, S.A., who acquired the vehicles “[…] in the course of its insurance business, but rather to sell, in an unaltered state and without having been used, to third parties”[9].
Therefore, as per the ECJ, the re-sale of written-off vehicles by insurance companies is a VATable transaction, not in scope of any of the above-mentioned VAT exemptions. No further guidance is provided by the Court.
The conclusion reached by the ECJ seems fair in what respects to the non-application of the VAT exemption foreseen for insurance operations (Article 9, 28) of the Portuguese VAT Code) to the sales of written-off vehicles: as highlighted by previous ECJ case-law[10], “(…) the identity of the person supplied with the service is relevant for the purposes of the definition of the type of services covered by [the VAT exemption applicable to insurance operations] and that an insurance transaction necessarily implies the existence of a contractual relationship between the provider of the insurance service and the person whose risks are covered by the insurance, namely the insured”.
However, in our view, more doubts arise on the (non) application of the VAT exemption applicable to goods exclusively used in a VAT exempt activity (first part of Article 9, 32) of the Portuguese VAT Code) to such re-sales. And these doubts are not new. In fact, in the past, the applicability of this exemption to similar operations was discussed amongst Portuguese tax literature. Inter alia, José Xavier de Basto[11] and Clotilde Celorico Palma[12] sustained that the re-sale of written-off vehicles by insurance companies should benefit from this exemption, as such vehicles had, in fact, been used by the insurance companies for the purpose of their VAT exempt activities[13].
We tend to agree with these Authors’ position:the two cumulative requirements foreseen in the first part of Article 9, 32) of the Portuguese VAT Code for this exemption to apply – i.e., i) the goods supplied having been exclusively used in a VAT exempt activity and ii) no VAT has been recovered in respect to such goods – are fulfilled, such that the exemption should not be excluded[14].
It is also relevant to highlight that the ECJ did not analyse whether the sales of written-off vehicles by insurance companies could benefit from VAT exemption, based on the second part of Article 9, 32) of the Portuguese VAT Code[15]. In short, the second part of this legal provision determines that transfers of goods in respect to which no VAT was deducted, due to the application of any of the exclusions to the right to recover VAT rules foreseen in Article 21 (1) of the Portuguese VAT Code, should (also) benefit from VAT exemption. Considering that costs incurred on the purchase / leasing of “tourism vehicles”[16] are foreseen in such legal provision as one of the categories the right to recover VAT is excluded, it seems that Generali Seguros, S.A. could have benefitted from this exemption on the re-sale of written-off vehicles qualifying as “tourism vehicles”.
Furthermore, the Portuguese Tax Courts also issued contradictory decisions in this concern. In particular, the Portuguese Supreme Administrative Court – the exact same Court who now referred Generali Seguros SA case to the ECJ – ruled for the application of the exemption foreseen to insurance operations to the sale of written-off vehicles by insurance companies[17]. Nonetheless, a few years after, it overturned its position[18].
But returning to the ECJ decision:should the conclusion reached out by the Court – according to which the re-sale of written-off vehicles by insurance companies does not benefit from a VAT exemption – mean that VAT should be assessed on such transactions by application of the general VAT rules? At first sight, it seems so…
In Portugal, this would mean that these sales are always subject to 23% VAT[19], due on top of the price to be paid by the scrap dealers. On one hand, the fact that the insurance companies would now have the right to recover VAT on costs linked to these sales could potentially put them in a more favourable position. However, we understand that VAT amounts incurred on the purchase of these vehicles by insurance companies should not be material in practice[20].
Therefore, let’s see how this decision impacts the state of art in Portugal.
- The state of art in Portugal
Although not covered by the ECJ in its decision[21], it shall be highlighted that Portugal implemented a VAT margin scheme applicable to, amongst others, the re-sale of second-hand goods (Decree-Law no. 199/96, of 13 October).
The main point of attention of this exceptional regime is that, when the conditions for its application are met, VAT is only due on the difference between the sale and the purchase price of the written-off vehicle (i.e., on the margin) and not on the global amount of consideration received, as prescribed by the general VAT rules.
Although exceptional, this regime is of mandatory application by taxable persons purchasing and re-selling second-hand goods (“sujeitos passivos revendedores”), provided that no VAT was due on such purchase[22].
The Portuguese Tax Authorities have been consistently sustaining that this margin regime applies to insurance companies when these have previously purchased the written-off vehicles from private individuals / taxable persons which did not recover any input VAT amounts in relation to such vehicles[23][24].
The consequence of this understanding is that, in these situations, VAT is only due on the difference between the sale and the purchase price of the written-off vehicle (i.e., the margin).
It is interesting to note that the application of the margin scheme to the re-sale of written-off vehicles is also not pacific amongst the Portuguese tax literature: inter alia, Clotilde Celorico Palma is of the view that the margin regime foreseen in Decree-Law no. 199/96, of 13 October for the sale of second-hand goods may not apply to the situation at hand, as written-off vehicles may not be considered “second-hand goods” within the meaning of this regime. Considering that this Decree-Law defines “second-hand goods” as “the movable goods which can be re-used as they are or after repair (…)”, we could not agree more with the Author’s argument.
Notwithstanding possible critics on the application of this regime to the sales under analysis, insurance companies have been generally following the Portuguese Tax Authorities’ guidance in the above-mentioned Circular Letter. In fact, and bearing in mind that margins applied by insurance companies when re-selling the written-off vehicles are usually very low (or, sometimes, zero), this regime is clearly more beneficial than the general VAT regime (but still less beneficial than the application of a VAT exemption).
On the contrary, the margin regime does not apply to re-sales of written-off vehicles previously purchased from policyholders which recovered input VAT in relation to such vehicles[25]. The consequence is that the insurance companies are required to charge VAT (at the 23% rate[26]) to the scrap dealers[27]. In such a case, the insurance companies will have the right to recover the VAT charged by the policyholders on the sale of the written-off vehicles to the insurance company[28].
- Conclusion
Due to the several VAT regimes potentially applicable, the sale of written-off vehicles brings more complexity than one could initially imagine. In the last years, in Portugal, contradictory positions have been defended by tax literature, and also contradictory case-law has been issued by the Portuguese Courts.
The recent ECJ’s decision in Generali Seguros SA case confirms that the re-sale of written-off vehicles by insurance companies shall neither benefit from the exemption foreseen for insurance transactions (Article 9, 28) of the Portuguese VAT Code), nor from the exemption foreseen for goods exclusively used in a VAT exempt activity (the first part of Article 9, 32) of the Portuguese VAT Code).
Whilst we agree with the argumentation used by the ECJ to exclude these re-sales from the exemption foreseen for insurance transactions, the same does not hold true for the (very short) argumentation used by the Court to also exclude these re-sales of the scope of the exemption foreseen for goods exclusively used in a VAT exempt activity. As a matter of fact, we see arguments to sustain that these re-sales may benefit from the VAT exemption applicable to the re-sale of goods exclusively used in a VAT exempt activity (first part of Article 9, 32) of the Portuguese VAT Code) but also from the VAT exemption applicable to the re-sale of goods regarding which which no VAT was deducted, due to the application of any of the exclusions to the right to recover VAT rules foreseen in Article 21 (1) of the Portuguese VAT Code (second part of the same legal provision).
Also, this legal provision seems to be an efficient tool minimise the risk of double VAT taxation on the sale of written-off vehicles by insurance companies.
Furthermore, although the ECJ was not requested by the Portuguese Supreme Administrative Court to analyse the application of the margin regime for sales of second-hand goods to (part of) the re-sale transactions carried out by Generali Seguros, S.A., it would have been interesting to see the Court’s position in this regard.
Unless challenged, the application of the margin regime as established by the Portuguese Tax Authorities in Circular Letter no. 30153/2013, of 16 October should continue to be the rule in situations where the written-off vehicles being re-sold were purchased from private individuals / taxable persons which did not recover any input VAT amounts on such vehicles.
Finally, as the re-sale of written-off vehicles previously purchased from taxable persons which have recovered VAT in respect to the vehicles may not be covered by the margin regime mentioned above, such re-sales by the insurance companies shall be VATable in the general terms.
Afonso Costa Gomes
March 2023
[1] The definition of salvados is governed in insurance related legislation, namely Article 13 of the Decree-Law no. 44/2005, of 23 February.
[2] As prescribed by Article 9 (1) of the EU VAT Directive, transposed to Article 2 (1) (a) of the Portuguese VAT Code.
[3] The VAT exemption applicable to insurance transactions is foreseen in Article 135 (1) of the EU VAT Directive, transposed to Article 9 (28) of the Portuguese VAT Code. This provision establishes that ”Insurance and reinsurance operations, as well as the supply of related services carried out by insurance brokers and insurance intermediaries” benefit from a VAT exemption (our translation).
[4] See inter alia ECJ’s judgement in CPP case, C‑349/96 – “the essentials of such transactions are that the insurer undertakes, in return for prior payment of a premium, to provide the insured, in the event of materialisation of the risk covered, with the service agreed when the contract was concluded […]” adding that “[t]he essence of those transactions lies in the fact that the insured person is exempted from the risk of bearing financial loss, which is uncertain, but potentially significant, by the premium, payment of which for that person is certain but limited […]”
[5] Exception should be made to situations where the insurance companies carry out other transactions granting the right to recover input VAT: in such cases, part of the VAT amounts incurred should be recoverable.
[6] Insurance companies are, thus, required to determine the appropriate VAT treatment applicable to each of their operations and ensure that invoicing, accounting, and tax procedures are in line with such VAT treatment.
[7] As per this provision, the following transfers benefit from a VAT exemption: i) transfers of goods which have been exclusively used in an exempt activity not granting the right to recover VAT [first part of the provision] and ii) transfers of goods with reference to which no VAT was deducted, due to the application of the exclusions to the right to recover VAT rules foreseen in Article 21 (1) of the Portuguese VAT Code (where the purchase of some vehicles, in particular, the purchase of vehicles qualifying as “tourism vehicles” is foreseen) [second part of the provision].
[8] The Court also analysed whether the re-sale of written-off vehicles and the insurance transactions carried out by Generali Seguros, S.A. should qualify as a unique composite transaction – subject to the same VAT treatment (i.e., VAT exemption) – but, once again, it concluded that that link was not sufficient to sustain such a conclusion.
[9] Paragraph 50 of the ECJ’s decision.
[10] We refer to Skandia case, process C-240/99, paragraph 41.
[11] In “A Tributação do Consumo e a sua Coordenação Internacional” published in Cadernos de Ciência e Técnica Fiscal, no. 164.
[12] In “Enquadramento da actividade seguradora em Imposto sobre o Valor Acrescentado”, published in Estudos sobre o Valor Acrescentado, 2006.
[13] The Authors see the written-off vehicles as a necessary input to carry out the insurance activity, in the exact same manner as “paper” or “desks” are.
[14] The application of this exemption to these re-sales would also be a good instrument to avoid double VAT taxation on the sale of goods which had already been subject to VAT (when the goods were new) and had already been consumed. In fact, in respect to these goods, VAT already did its job…
[15] We understand that this omission by the ECJ is due to the fact that the Portuguese Supreme Administrative Court excluded, from the queries to be referred, the second part of Article 9, 32) of the Portuguese VAT Code, as it assumed that Generali Seguros, S.A. situation was covered by the first part of this legal provision.
[16] The definition of “tourism vehicles” is given by Article 21(1)(a) of the Portuguese VAT Code.
[17] Please refer to the Supreme Administrative Courts’ decision in process no. 026435, of 19 February 2003.
[18] Please refer to the Portuguese Supreme Administrative Court’s decision in process no. 0101/12, of 19 April 2012.
[19] To the extent that these are carried out in the mainland.
[20] Also, as far as we are aware, most purchases of written-off vehicles by insurance companies are either out of scope of VAT (vehicles belonging to non-VAT taxable persons policyholders) or exempt from this tax (vehicles in which no VAT has been recovered by the policyholder). In these two situations, obviously no VAT may be recovered by the insurance companies.
[21] Because not in scope of the questions referred to by the Portuguese Supreme Administrative Court.
[22] Either because the second-hand goods were purchased from a non-VAT taxable person or because they were purchased from VAT taxable persons without the application of VAT (as the VAT exemption set out in Article 9, 32) of the Portuguese VAT Code applied).
[23] We refer to Circular Letter no. 30153/2013, of 16 October.
[24] This will be the case of i) private individuals (which are not entitled to recover input VAT), ii) taxable entities exclusively carrying out a VAT exempt activity (which are also not entitled to recover input VAT) and iii) taxable entities carrying out activities granting the right to recover input VAT, however covered by the exclusion to this right mentioned in Article 21 (1) of the Portuguese VAT Code.
[25] As in these situations, the policyholders are required to charge VAT on the sale of the written-off vehicles to the insurance companies (the VAT exemption set out in Article 9, 32) of the Portuguese VAT Code does not apply) and Decree-Law no. 199/96, of 13 October clearly states that it only applies in situations where no input VAT was charged on the purchase of the goods.
[26] To the extent that the sales are carried out in the mainland.
[27] Unless the reverse-charge rule foreseen in Article 2(1)(i) applies. This topic is also discussed by some Authors, but we opted not to cover it in this (short) Article.
[28] In these situations, the policyholders are required to charge VAT on the sale of the written-off vehicles to the insurance companies, as the VAT exemption set out in Article 9, 32) of the Portuguese VAT Code does not apply.