taxud/2414/08 - European Commission - Europa

In a second step this approach was refined to cover with more precision only the supply
of any constituent element of an exempted insurance or financial service, which
constitutes a distinct whole and has the specific and essential character of the exempt
service. This concept made clear that only elements of exempted insurance or financial
services qualify; elements which are not part of such services are excluded. Even more, it
must be constituent; this is a first filter and means that it must have one or more "genetic
markers" of an exempt service making it recognisable as an element of an exempt
financial or insurance service. Where this recognition is not possible, the service does not
qualify. The service passing this first filter must constitute a distinct whole and have the
specific and essential character of an exempt service to qualify for the exemption.
Example 1: General book-keeping services have always been done within an insurance
company by its employees. For cost reasons that book-keeping is outsourced to the
insurance's tax consultant and is now being supplied and invoiced by the tax consultant
to the insurance company; such services would not represent a constituent element of an
insurance service; in fact, it does not have any "genetic marker" which would make it
recognisable as such a part of an insurance service;
Example 2: A bank has developed and supplies as a part of its bank account operation
services personalised security software to its account holders; this software interacts with
the bank's computer systems and enables the account holders to make, via their own
computer, currency exchanges on their specific account in a safe environment where
third parties are blocked out; the supply of these account operation services would be
exempted from VAT as a financial service under the new draft Articles 135 (1) (c) and
135a (5) of Council Directive 112/2006/EC and with it the supply of software as a
constitutive but ancillary element of the account operation service.
With software development becoming more sophisticated and expensive, the bank
decides to outsource banking software development; a software company now improves
the software for bank account operations and invoices its services to the bank. The bank
itself continues to supply this improved personalised security software as a part of its
bank account operation services to its account holders.
Let's at first look at the relation between the software supplier and the bank: The
improving of that banking software done by the software company is a service which
remains a constituent element of bank account operations because its purpose remains to
organise currency exchanges for bank account holders. As a sort of specialised software
it still has a "genetic marker" linking it to an exempt financial service. However, it is no
longer a part of such a financial service; it has been separated from that financial service
and become a distinct whole and therefore a distinct service in its own. But it no longer
has the specific and essential character of an exempt service (bank account service). On
the contrary, it represents a mere technical supply and is therefore explicitly excluded
from the VAT exemption under Article 13 (2) (i) of the draft Regulation.
In a second step let's look at the relation between the bank and its account holders: Here
nothing has changed. The bank still supplies account operation services exempted from
VAT as a financial service under the new draft Articles 135 (1) (c) and 135a (5) of
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