During the post-Brexit transitional period the UK was considered a Member of the EU for VAT purposes. There was no impact on taxation during the transition.
From 1st January 2021 the UK is no longer part of the single market, meaning that a tax border is established with the EU. Directive 2006/112/EC on Value Added Tax (EU VAT Directive) no longer applies to the UK which is now considered a third country for VAT purposes.
VAT implications for Discretionary Investment Management and Custodian Services supplied after 1st January 2021 and linked to UK resident policyholders
A. Standard VAT rules for a EU/Luxembourg based life insurer
Following a judgement delivered by the European Court of Justice (ECJ) in 2012, discretionary investment management services supplied to, say, an EU based life insurance company are subject to VAT. Deposit or custodian services supplied to a Luxembourg based life insurance company are not impacted by the ECJ judgement, but nevertheless liable to VAT under Luxembourg law, at a reduced rate. These services are deemed to be supplied in the EU Member State where the recipient of the services is established. [1]
B. Positive impact of Brexit on VAT burden for a UK resident policyholder
Brexit has no direct impact for a life insurance company based in Luxembourg as discretionary investment management and custodian fees are still subject to Luxembourg VAT at the relevant rate.
Financial and insurance services are VAT exempt in Luxembourg with no right of recovery if provided to EU counterparts, while the same services rendered to non-EU counterparts are VAT exempt, with a VAT deduction right. In other words, insurance services, being VAT exempt, carry a right to VAT recovery but only if supplied to persons based outside the EU.
If discretionary investment management and custodian services can be linked to a particular client, a Luxembourg based life insurance company is entitled to recover all VAT in respect of these services when the underlying client (i.e. the policyholder) is resident outside the EU. There is no right to recover VAT on these fees where the underlying client is resident within the EU.
C. Conclusion
From 1st January 2021, UK resident policyholders are considered as non-EU resident for VAT purposes. Any VAT payable in respect of discretionary investment management and custodian services supplied after this date, can now be recovered. In effect, Lombard International Assurance S.A. will not pass on VAT to UK resident policyholders in respect of either service in future.
Life insurance companies resident in Ireland have traditionally relied on an interpretation of the EU VAT Directive, granting a VAT exemption for managers of “special investment funds”. The right of Luxembourg life insurance companies to reclaim VAT arises for a different reason (see B. above).
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VAT and its application to Luxembourg life insurance policies held by UK residents after Brexit
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[1] Note that from 1.1.2018, VAT exemption was granted in Luxembourg to collective internal funds underlying life insurance contracts (“les fonds d'investissement internes collectifs d'assurance-vie”). The management of these funds can thus benefit from a VAT exemption going forward, provided the subscribers bear the financial risk and the fund is subject to the supervision of the Luxembourg Insurance Commission (“Commissariat aux Assurances”).
Disclaimer: The content of this note is intended solely to provide general guidance to the reader and is not intended as an offer to sell or solicitation for the purchase or sale of any life assurance product. Neither is the information intended to constitute any form of legal, fiscal or investment advice or recommendation and it should therefore be used only in conjunction with appropriate professional advice obtained from a suitable qualified professional source.
Any description in this document is not intended or written to be used, and cannot be used, by a client, partner, or any other person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing, or recommending to another party any matters addressed herein. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. This presentation also does not cover any UK VAT treatment and/or RDR rules applicable to the facts and services mentioned herein.
Lombard International Assurance S.A. does not warrant, represent or guarantee that the information contained within this note is complete, accurate or up-to-date. Lombard International Assurance expressly disclaims all liability to any person in respect of anything, or the consequences of anything, done or omitted to be done wholly or partly in reliance upon the whole or any part of the contents of this note.