VAT treatment of financial and insurance-related services
Financial and insurance services are exempt from value added tax, with the scope of the exemption set out in law in considerable detail. However, the VAT treatment of other services supplied in connection with financial and insurance services can come as a surprise if the related VAT issues are not addressed in time. It is essential for the service provider to understand the contractual relationships and the true nature and significance of the service to the customer, and to assess these carefully from a VAT perspective.
The Principle of Ancillarity in Value Added Taxation
Generally, the VAT treatment of each supply is determined separately, and the applicable VAT rate depends on the specific provisions governing that supply. In certain cases, however, different supplies are regarded as being so closely linked that they form, from an objective point of view, a single indivisible economic supply, and their artificial separation would not reflect the true nature of the transaction. In such situations, the VAT treatment of the principal supply determines the VAT treatment of the ancillary supplies associated with it. In a situation where none of the supplies can be regarded as the principal supply, the applicable VAT treatment must be assessed on a case-by-case basis.
The principle of ancillarity is not explicitly laid down in the Finnish VAT Act. However, through case law and established interpretations, it has become an integral part of the VAT system. As the principle is inherently interpretative in nature, it is often difficult to determine whether different elements should be regarded as a single composite supply or divided into several distinct supplies. Consequently, the application of the principle may involve significant tax risks, the avoidance of which requires careful advance analysis of the applicable VAT treatment.
An understanding of the principle and the related risks is particularly important in sectors where companies provide both exempt supplies falling outside the scope of VAT and taxable services. In practice, questions concerning the application of this principle arise especially in the financial and insurance sectors.
VAT Treatment of Services Related to Financial and Insurance Services
In the financial and insurance sectors, applying the principle of ancillarity may lead to situations where services that would not initially seem to qualify as VAT exempt are nevertheless treated as falling entirely outside the scope of VAT. However, VAT exemptions must be interpreted narrowly, as they constitute exceptions to the general principle of taxation. Therefore, in the financial and insurance sectors, supplied services are generally assessed separately for VAT purposes.
According to the case law of the Court of Justice of the European Union (CJEU), the assessment of whether a transaction should be regarded as a single, indivisible supply must take into account all the circumstances in which the transaction is carried out. A supply should be regarded as ancillary to a principal service in particular where it does not constitute an end in itself for the client, but rather a means of enjoying the principal service provided by the supplier under the best possible conditions.
In the assessment concerning financial services, particular emphasis is placed on the basis for determining the remuneration and on the actual purpose of the service from the client’s perspective. For example, investment advice – which would otherwise be taxable – has been considered in the CJEU’s case law to constitute an ancillary service to VAT-exempt credit intermediation where the intermediary’s remuneration was determined solely on the basis of concluded credit agreements, and where the intermediation activity was, from the client’s perspective, the principal and decisive service for the conclusion of the contract.
In the case of insurance services, the assessment additionally focuses on the interpretation of contractual arrangements. Even if transactions are connected, a mere functional link is not sufficient for the application of the principle of ancillarity. What is decisive is whether the transactions are based on separate contracts and whether they are independent of one another. For example, the sale of a damaged vehicle carried out in connection with insurance activities was not exempt from VAT under the principle of ancillarity, partly because the sale was based on a separate sales contract concluded with a third party, distinct from the insurance contract.
In its recent decision KHO:2025:45, the Finnish Supreme Administrative Court addressed the VAT treatment of services related to insurance activities. All the services in question were treated as separate supplies, as their division into individual components was not considered artificial. The decisive factor was, in particular, that the services could be regarded as meaningful from the client’s perspective, even without any connection to insurance intermediation. Consequently, their VAT treatment had to be assessed separately for each service. It was considered irrelevant that a lump-sum price had been charged for the services.
The application of the correct VAT treatment requires a careful and case-specific assessment
Determining the correct VAT treatment of services connected with financial and insurance activities often involves complex borderline questions. Ensuring the correct tax treatment requires that the service provider has a thorough understanding of the contractual arrangements, as well as the actual nature and significance of the services from the client’s perspective. VAT implications should be considered already when structuring the supply of services to ensure that the applicable tax treatment is correct from the outset and that any potential opportunities for tax optimization can be fully utilized.
As the delineation between separate and ancillary supplies is often difficult to determine, and the consequences of an incorrect VAT treatment can be particularly severe, seeking an advance ruling or written guidance from the Finnish Tax Administration may be the most advisable course of action before commencing the provision of services. Given the specific nature of value-added taxation in the financial and insurance sectors, minimizing the related risks is in any case a matter that every service provider in the field should pay particular attention to.
Should any questions arise regarding the VAT treatment applicable to financial and insurance activities, seeking timely advice from a specialist is recommended. Tuokko has extensive experience in assisting clients with complex VAT issues in the financial and insurance sectors.
The financial and insurance sectors are among those where the correct VAT treatment is particularly important – a topic we also highlighted in our article VAT considerations in auditing. In the article, we explain why taking VAT aspects into account in the context of an audit is especially critical for entities operating in the financial and insurance sectors, and how close cooperation between audit and VAT specialists can help identify and correct previously unnoticed errors.
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