Outsourcing in insurance: the hidden VAT implications

Outsourcing is now embedded in insurance and reinsurance operating models. Claims handling, policy administration, IT platforms and customer support are routinely placed with third‑party providers. The VAT consequences, however, are commonly misread. The exemption for “insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents” in Article 135(1)(a) of the VAT Directive is interpreted strictly; it does not extend simply because a service “relates to” insurance. The dividing line is functional: risk‑bearing and genuine intermediation on the one hand; operational support on the other.

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The hard tests: what is really exempt?

Article 135(1)(a) of Council Directive 2006/112/EC exempts insurance and reinsurance transactions from VAT, together with related services performed by insurance brokers and agents. Established CJEU jurisprudence confirms that this exemption is to be interpreted strictly, as it constitutes a derogation from the general principle that all services supplied for consideration are subject to VAT.

An activity will qualify as insurance or reinsurance only where the supplier undertakes, in return for consideration, to cover an insured risk; assistance‑type cover falls within this concept when the supplier actually assumes the risk. By contrast, “related services” are confined to the work of brokers or agents who carry out a distinct act of mediation that does all that is necessary to bring the insurer and the insured together to conclude a contract, with links to both sides; pure back‑office support does not suffice.

Our view is that, if a third party neither bears risk nor truly mediates the conclusion of policies, exemption should be regarded as the exception rather than the rule.

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Outsourcing outcomes the CJEU has already settled

Claims handling supplied to insurers is taxable, and even a comprehensive mandate to manage and settle claims in the name and on behalf of the insurer does not transform the service into exempt insurance or exempt intermediation (Aspiro, C‑40/15).

Likewise, back‑office and administrative support is taxable; running commission systems, maintaining agent data or providing general administrative help does not amount to an exempt broker/agent service (Arthur Andersen, C‑472/03).

Independent loss assessment is also taxable, because services of motor damage assessors are neither insurance nor intermediation (Taksatorringen, C‑8/01). Finally, where a composite outsourced package constitutes a single supply, the VAT treatment follows its principal element; if the principal component is taxable (for example, a licence or IT platform with ancillary support or incidental mediation), the whole supply is taxable, as confirmed in Q‑GmbH (C‑907/19).

Reinsurance follows the same logic: assuming ceded risk is exempt; running the cedant’s administration without bearing risk is not (Swiss Re Germany Holding, C‑242/08).

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Key VAT risk areas for insurers

The foregoing jurisprudence demonstrates that, as a general proposition, the following categories of outsourced services are unlikely to benefit from the insurance exemption:

• Claims handling and settlement administration
• Policy administration and customer support services
• Underwriting support and data processing
• IT platforms and insurance software solutions

When analysing the VAT treatment of such arrangements, the focus must be on the economic reality of the supply. Relevant considerations include the degree of decision-making authority retained by the supplier, the allocation of risk between the parties, and whether the service possesses independent economic value distinct from the underlying insurance transaction.

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Where insurers and brokers still trip up

Common pitfalls persist. Labels do not control outcomes: calling a service “TPA” or “agency” is unhelpful if the provider does not in fact intermediate the conclusion of contracts with policyholders, as the Court looks to substance and role, not labels.

Nor is there a “halo effect” for services merely because they relate to insurance; functions essential to the business, claims, policy administration, IT and data, remain taxable when bought in from third parties. In composite outsourcing deals, if the licensing or platform element drives value, expect the bundle to be treated as a single taxable supply unless any exempt mediation is structured as a distinct, separately supplied service with independent value.

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Bottom line: Our opinion

The default VAT outcome for outsourced insurance functions is taxation. Exemption is earned only by either genuine risk assumption, rare in outsourcing, or by genuine mediation, which the case‑law defines narrowly; attempts to “draft around” these tests typically fail under CJEU scrutiny.