In the recent past, we have increasingly observed that the Federal Central Tax Office (BZSt) wants to subject business models that are not directly related to the traditional insurance business to insurance tax liability. This new auditing practice also affects companies in the financial sector that operate, among other things, genuine factoring with the assumption of credit risk (del credere risk). This development is causing (legal) uncertainty for many companies due to the receipt of audit orders from the BZSt.
What are the tax implications of insurance tax?
If a company’s factoring services are subject to insurance tax, this would have far-reaching consequences. An insurance tax liability for genuine factoring leads to considerable tax burdens for the buyer and seller of the receivable. The buyer of the receivable generally has no or no longer the full input tax deduction on its input services, as it provides a VAT-exempt other service (Section 4 no. 10 letter a UStG; Section 15 para. 2 sentence 1 no. 1 UStG; input tax loss). The VAT exemption of the insurance benefit avoids a double burden of insurance and VAT.
The seller of the receivable must pay 19% insurance tax on the factoring fee and cannot deduct the insurance tax as input tax.
Possible background to the current tax audit practice
In 2018, the Federal Fiscal Court (BFH) ruled that a guarantee promise made by a motor vehicle dealer in return for payment constitutes an independent service and is not merely a dependent ancillary service to the vehicle delivery. A guarantee promise in return for payment constitutes a service based on an insurance relationship within the meaning of the German Insurance Tax Act (VersStG), which is VAT-exempt in accordance with Section 4 no. 10 letter a UStG. According to Section 1 (1) VersStG, the payment of an insurance premium on the basis of an insurance relationship established by contract or otherwise is subject to insurance tax.
The Federal Ministry of Finance (BMF ) then published a letter on 11 May 2021 (III C 3 – S 7163/19/10001 :001; BStBl I 2021 p. 781) dealing with the consequences under insurance tax and VAT law. The BMF subsequently published two further letters ( of 18 June 2021, BStBl 2021, p. 871 and of 18 October 2021, BStBl I 2021, p. 2142 ), which, among other things, clarified that the tax principles on guarantee commitments apply regardless of the industry and therefore go beyond the application in the motor vehicle sector and for motor vehicle dealers. The BMF letters have raised a number of questions and led to many discussions. Together with the BZSt, the BMF then published an interpretation guide in the form of questions and answers (FAQ) to the BMF circulars. A central point of the BMF letter is the definition of guarantee commitments as independent benefits subject to insurance tax if they are provided in return for payment. This applies regardless of whether the benefit is provided in the form of a cash payment or a benefit in kind (such as a repair). The FAQ letter once again clarifies that the tax principles on guarantee commitments apply beyond the motor vehicle industry and are therefore not sector-specific.
Insurance tax or VAT on receivables purchase with assumption of risk (genuine factoring)?
In the case of genuine factoring, the factor always assumes the risk of loss of receivables in addition to the purchase of receivables. This assumption of risk is increasingly scrutinised by the BZSt to determine whether it constitutes an independent insurance benefit within the meaning of the VersStG that is subject to insurance tax.
The current tax audit practice is particularly surprising in view of two circumstances:
- On the one hand, the business models can be categorised differently under civil law depending on the contract design (e.g. genuine factoring, (payment) guarantee or bad debt insurance), which must not be mixed up or reinterpreted for tax purposes.
- Secondly, as far as can be seen, no judgement by a fiscal court, the Federal Fiscal Court or the European Court of Justice on the VAT liability of factoring services has raised the question of whether the factoring service is VAT-exempt as an insurance service.
And now?
Current tax audit practice shows that the BZfSt is increasingly focussing on companies in the financial sector whose business models include the assumption of risk – as in genuine factoring – particularly if factoring is provided in connection with other services (e.g. payment processing).
If your company buys receivables with risk assumption (genuine factoring), you should not be surprised if you receive an audit order from the BZSt.
In view of the potential tax burdens, a proactive approach to the issue is essential in order to avoid any unpleasant surprises in the event of a future tax audit. You should check your factoring contracts to see whether the tax clauses cover a possible tax audit risk.
If the BZSt audit assumes that you are insured, you should consider taking legal action against this audit finding.
