September 11, 2018
Whenever people speak to you about VAT, perhaps you find the topic daunting, and wish to change the subject to something more congenial.
You are right – in some respects, yet mistaken in others!
Like life assurance, VAT is seen as a complex subject that the layman has great difficulty in grasping. We are dimly aware that we pay VAT often and for just about everything. We have to admit that we don’t always know why we must pay this tax, and yet we pay it… Rightly or wrongly!
What is VAT?
VAT is a tax, Value Added Tax (TVA – Taxe sur la Valeur Ajoutée), a French invention introduced by that country’s legislation in 1954, and harmonised across Europe in 1967.
What is VAT for?
The French have a widely-used expression: “In France, we don’t have oil, but we do have ideas!“. It arose because State budgets are always under heavy pressure (except for Germany), and the French discovered this as an almost painless way of drawing large amounts of tax revenue into the public purse.
Tax revenues are of two types: direct taxation such as personal income tax (impôt sur le revenu des personnes physiques – IRPP) or corporate tax (impôt sur les sociétés – IS), and indirect taxation such as VAT or the tax on petroleum products, for example.
In France, in 2015, direct taxation (personal and corporate tax as previously mentioned) accounted for 25% (€69.5 bn) and 12% (€33.1 bn) respectively of tax revenues whereas VAT garnered tax revenues of €142.6 bn, equivalent to 51% of the total! And it all operates without your being aware of the fact.
It was this that persuaded the other European States to introduce a system on similar lines.
In Luxembourg, VAT was introduced in 1970 via the early VAT directives, while Belgium devoted an entire legislative code to the matter.
How does VAT work?
Value Added Tax is charged on value added. Let’s take the example of an everyday product, your morning coffee.
The coffee producer produces its coffee at a cost of €10, and sells it to a wholesaler for €20 net of tax (Hors Taxes – HT). The producer’s margin is therefore €10.
With VAT included (Toutes Taxes Comprises – TTC) and applying the French VAT rate of 20%, the sale price will be €20 * 1.2 = €24, with €4 including VAT collected by the producer and paid by the wholesaler.
The wholesaler sells the coffee on to a retailer for €30 net of tax, making a gross margin of €10. The wholesaler’s sale price is €30 * 1.2 = €36. Thus, he collects €6 in VAT after paying €4 in VAT to the producer.
He must therefore declare €6 in VAT collected less €4 in VAT paid = €2. Those €2 payable to the tax authorities represent 20% of the wholesaler’s value added of €10. Proved!
The system works all the way along the links in the production chain up to your purchase of coffee capsules. You are therefore the final payer of all the VAT paid by the professionals who process the product and for whom the tax is virtually painless. All they have to pay is the excess of VAT collected over the deductible VAT paid on the purchases they make.
What is VAT chargeable on?
On almost all products and services in your everyday life: your morning coffee, the purchase of the car or bicycle that takes you to work in the morning, or what you pay at the supermarket or cinema. VAT reaches everywhere and, paradoxically, you have become so used to it that you are no longer aware that it’s there.
What is the position for insurance?
Insurance activities are taxable services which very largely benefit from a number of exemptions. This lessens the cost to policyholders, once again making the insurance policy an invaluable component of wealth and inheritance planning.
In the normal course, the products and services supplied by OneLife should be included among taxable services. However, Article 44 of the Luxembourg VAT Act specifically exempts “insurance transactions (…), including the provision of services connected with such transactions by insurance brokers or agents”.
Thus, the services both of OneLife and of OneLife’s authorised broking partners are exempt. This is unfortunately not always the case for every insurance-related transaction. We shall review the matter in detail.
VAT and insurance – exempt transactions
In the same way as for the transactions of OneLife and its authorised broking intermediaries, other transactions are exempt and are included among the exemptions under the Luxembourg VAT Act, namely the following:
- Trade in financial instruments
- Deposits in cash by custodian banks (but not deposits of financial instruments)
- Management of Collective Internal Funds, a new feature in 2017 marking good news for policyholders in reducing the fees paid by policyholders and improving the performance of these internal funds.
Unfortunately, however, not all transactions connected with insurance policies are covered by exemption.
VAT and insurance – transactions chargeable to VAT (=> “Vattable”)
- Deposits of financial instruments by custodian banks, although such deposits enjoy a preferential rate known as the “parking rate”;
- Management of financial instruments;
- Management of dedicated Internal Funds and Specialised Insurance Funds;
- Distribution of insurance products by intermediaries who do not have broker authorisation.
Thus, managing a dedicated Internal Fund is a taxable service, and VAT is assessed directly on the value of the Internal Fund.
Fortunately, the exemptions applying to most insurance transactions make this investment class far outweigh other wealth planning tools, particularly banking instruments.
And besides, VAT rates should be compared in order to be convinced of the competitive advantage of Luxembourg life assurance compared with its Belgian, French, Finnish, Danish or Swedish counterparts.
VAT rates applicable in Europe
In France, the standard rate of VAT is 20%, as against 21% in Belgium, 24% in Finland and 25% in Denmark and Sweden.
In Luxembourg, the standard rate of VAT is 17%, the lowest in the entire European Union! This is another incentive for life assurance policyholders to invest in a OneLife Luxembourg policy rather than in the policies of their own countries, in addition to the security, transparency and incomparable investment opportunities of the Luxembourg life assurance policy.
OneLife stands ready, alongside its partners and clients, to deal with any VAT-related queries concerning life assurance, or indeed any other queries.
Author: 
Jean-Nicolas Grandhaye