New guidance explains when insurance and reinsurance firms in Ireland can reclaim VAT on non-EU business and investment costs.
Ireland’s tax authority has issued updated rules on VAT deductibility for insurance and reinsurance activities. The guidance, published in the Tax and Duty Manual, defines life insurance, non-life insurance, and reinsurance, and confirms that supplies to EU policyholders remain VAT exempt.
The purpose of this guidance is to outline the VAT deductibility rules that apply to supplies of insurance and reinsurance.
VAT Treatment
The supply of insurance (life and non-life) to policyholders located within the EU is VAT exempt. The supply of reinsurance to insurance companies located within the EU is VAT exempt.
VAT Deductibility – Insurance Activities
Any costs directly attributable to the supply of insurance policies to EU policyholders are not eligible for VAT deductibility. The supply of insurance policies (life and non-life insurance) to policyholders located outside of the EU constitutes a qualifying activity for which VAT deductibility is available. Any costs that are directly attributable to the supply of insurance policies to non-EU policyholders are eligible for VAT deductibility. Where costs are not directly attributable to supplies of insurance policies to EU or non-EU policyholders, but have been used for both, an apportionment of VAT deductibility is required in accordance with normal deductibility rules.
VAT Deductibility – Reinsurance Activities
The rules for VAT deductibility for reinsurance companies are the same as for insurance companies.
VAT Deductibility – Investment Activities
Insurance and reinsurance companies will often earn income from dealing in financial assets, such as shares. Further guidance can be found here VAT treatment of share transactions and trading platforms. VAT on costs in relation to the sale and/or transfer of shares and trading in shares with EU counterparties are not eligible for VAT deductibility.
The sale or transfer of shares and trading in shares with non-EU counterparties are “qualifying activities”. VAT on costs in relation to qualifying activities are eligible for VAT deductibility. VAT on costs that relate to the sale and/or transfer of shares and trading in shares with both EU and non-EU counterparties needs to be apportioned in accordance with normal deductibility rules.
VAT Deductibility – General Overheads
Where VAT is incurred on costs that relate to both: – (i) insurance and/or reinsurance and (ii) investment activities, a VAT deductibility methodology needs to be formulated that correctly reflects: – the way that such costs are used for the purposes of the deductible activities and has due regard for the total supplies and activities of the business. Each business will need to select a methodology that adheres to the principles above which must be used consistently unless there are substantial changes to the business operating model.
Life Insurance Companies
Life insurance companies can offer life insurance products that do not transfer significant insurance risk from the policyholder to the life insurance company but carry financial risk instead. These products are treated as investment products, not as traditional life insurance products, from a financial reporting perspective. Therefore, life insurance companies can have two distinct income streams, being a life insurance business and an investment business. The VAT deductibility rules for the investment business carried out by life insurance companies is set out in Sections 8 and 9.
