When a car is wrecked beyond repair, its story does not always end at the scrapyard. Sometimes, its parts find a second life, sold off piece by piece to buyers who need them. But who should charge VAT on that second life, and should VAT apply at all? 

When an insurance company profits from salvaging and reselling parts of vehicles it never intended to own, does that make it a seller of goods like any other business, or does the transaction remain eligible for the VAT exemption enjoyed by insurers? This question triggered a legal battle in Portugal that reached the Court of Justice of the European Union (ECJ).

Background of the Case 

In the course of its business activities, Generali Seguros acquired damaged vehicles that had been written off after accidents involving its insured customers. Additionally, the company removed usable parts from those vehicles and sold them to third parties. However, the insurance company did not charge VAT on these sales, considering them to be connected with its insurance activity and therefore exempt.

Following a tax inspection for the 2007 financial year, the Portuguese Tax and Customs Authority disagreed with this treatment. Contrary to the company's perspective, the authority considered that the sale of vehicle parts constituted a normal supply of goods for a fee and therefore fell within the scope of VAT. Given that VAT exemption did not apply, the authority assessed VAT of EUR 17,213.70, plus compensatory interest.

Generali paid the VAT plus compensatory interest, but challenged the VAT assessment before the Lisbon Finance Court. In its appeal, the company argued that sales should be VAT-exempt for two reasons. Firstly, the transactions were part of its insurance activity and therefore covered by the VAT exemption for insurance and reinsurance services. Secondly, the sales qualified for the exemption applicable to goods used exclusively for an exempt activity, for which no input VAT deduction had been claimed.

However, the Lisbon Finance Court denied these arguments, and confirmed that the company was liable for VAT on the sale of vehicle parts. In its decision, the Finance Court stated that the disposal of damaged vehicle parts was a separate economic activity involving the transfer of goods for consideration, rather than an exempt insurance transaction.

Generali also appealed against this decision before the Supreme Administrative Court, maintaining its arguments that the resale of parts from written-off vehicles should not be treated as an independent taxable activity. While examining the facts and merits of the case, the Supreme Administrative Court noted significant disagreement in Portuguese legal scholarship and case law regarding whether such transactions could benefit from VAT exemptions. Due to these legal uncertainties, the Supreme Administrative Court decided to refer the matter to the ECJ for a preliminary ruling.

Main Questions from the Request for Ruling

The Supreme Administrative Court (Court) raised three questions before the ECJ. With the first question, the Court asked whether these sales could be considered an integral or supplementary part of the insurance activity and therefore exempt from VAT under the provisions covering insurance services.

The second question concerns the separate VAT exemption for goods used exclusively for exempt activities. More specifically, the second question asks whether vehicle parts recovered from written-off cars could be considered goods purchased and used solely for an exempt activity, given that the insurance company had not deducted any input VAT related to those goods.

The third question asks whether it would violate the principle of VAT neutrality, as one of the fundamental VAT principles, if insurance companies were required to charge VAT on the sale of vehicle parts, even though they had no right to recover VAT on the purchase or acquisition of those parts.

Applicable EU VAT Directive Articles

To settle this dispute and answer the raised questions, the ECJ interpreted key case-related EU VAT Directive provisions, including Recital 66 and Articles 1(2), 2(1), 14(1), 24(1), 135(1)(a), and 136(a). The ECJ also noted that these VAT exemption provisions correspond to earlier rules contained in Article 13(B)(a) and Article 13(B)(c) of the Sixth VAT Directive, meaning that existing ECJ case law interpreting those provisions remains relevant.

Portugal's National VAT Rules

In addition to EU-wide rules and regulations, the ECJ also examined the relevant provisions of Portuguese VAT law applicable to the dispute, particularly Articles 9(29) and 9(33) of the Portuguese VAT Law, which mirrored the relevant EU VAT rules and formed the basis for assessing whether the company’s resale transactions should be exempt from VAT.

Importance of the Case for Taxable Persons

While the case primarily focuses on the insurance and reinsurance sector, the question of legal certainty on the scope of VAT exemptions is vital for any taxable person carrying out exempt activities, such as banks, healthcare providers, or educational institutions. 

These businesses often generate ancillary income from disposing of goods connected to their main exempt activity. Clarifying whether such disposals fall inside or outside the insurance or financial exemptions, or the "goods used exclusively for exempt activities" exemption, provides businesses with a clear framework for determining when VAT applies to similar secondary transactions, rather than relying on inconsistent national interpretations. 

Essentially, the ruling shapes how a wide range of businesses across the EU account for VAT on secondary transactions tied to exempt core activities, with direct consequences for tax costs, cash flow, and legal risk exposure.

Analysis of the Court's Findings

The ECJ first confirmed that the EU VAT Directive applied to this case, since it took effect on January 1, 2007, and simply carried forward rules that already existed under the earlier Sixth VAT Directive. On that basis, the ECJ reformulated the questions to focus solely on whether the resale of parts from written-off vehicles should be treated as VAT-exempt or VAT-taxable.

Regarding the first question, the ECJ first determined how the Portuguese compulsory motor vehicle insurance system operates. Under the national rules, when a vehicle is declared a total loss following an accident, the insured person and the insurance company may agree to transfer ownership of the salvage, including the usable vehicle parts, to the insurer. After agreeing on the value and the transfer takes place, the insurer acquires ownership of the salvage and may later sell the recovered parts to third parties.

The ECJ added that the exemptions listed in Article 135(1) of the VAT Directive are autonomous concepts of EU law, meaning that their interpretation must be uniform across all EU countries, and are not subject to national interpretations. Consequently, this provision must be interpreted strictly because it is an exception to the general VAT rule. However, the ECJ emphasized that a strict interpretation does not mean the exemptions should be interpreted so narrowly as to lose their intended purpose.

From that perspective, the ECJ considered whether an insurance company's resale of parts from written-off vehicles falls within the exemption for insurance and reinsurance transactions. The ECJ noted that the provision requires EU countries to exempt insurance and reinsurance transactions, as well as related services supplied by insurance brokers and insurance agents. Nonetheless, this raises the key question of whether the resale of salvaged vehicle parts is an integral or supplementary activity.

The ECJ recalled that the exemption for the insurance sector primarily exists because of the practical difficulties in determining the correct VAT-taxable amount for insurance premiums, which represent payment for the assumption of risk rather than a straightforward supply of goods or services. Additionally, under the ECJ case law, the insurance transaction has two essential characteristics.

First, the insurer agrees, in exchange for the payment of an insurance premium, to compensate or provide the agreed service if the insured risk materializes. Second, the purpose of insurance is to transfer the financial risk from the insured person to the insurer. Furthermore, an insurance transaction necessarily requires a contractual relationship between the insurer and the insured person whose risk is covered. 

In the present case, the ECJ found that sales were carried out under separate commercial agreements independent of the insurance contracts. Moreover, these transactions take place after the insurer has acquired ownership of the salvaged parts and are concluded with third-party purchasers rather than with the insured persons. In addition, the purpose of selling salvaged vehicle parts is not to cover an insurance risk but simply to transfer ownership of goods in exchange for their market value.

Regarding the second question, the ECJ stated that the key issue is whether the vehicle parts acquired by the insurer could be considered goods used for its exempt insurance activity. The concept of “used” is critical, as it requires that the goods are intended for and actually serve a specific purpose within the exempt activity. In the case of Generali, that would mean the vehicle parts would need to be used as part of its insurance business.

The ECJ determined that Generali purchased the parts with the intention of reselling them to third parties in the same condition in which they were acquired. The company did not use the vehicle parts in carrying out its insurance activities. The fact that they originated from vehicles involved in insured accidents did not change their nature or purpose.

Regarding fiscal neutrality, the ECJ recalled that the principle operates mainly through the VAT deduction mechanism. It requires that similar economic activities subject to VAT be treated consistently, regardless of their purpose or results. However, the principle cannot be used to expand the scope of VAT exemptions beyond what is expressly provided by EU legislation. This echoes the earlier point that VAT exemptions must be interpreted strictly because they are exceptions to the general principle that supplies of goods and services are taxable.

Court's Final Decision

Based on all interpretations, examined case law, and facts of the case, the ECJ ruled that the VAT exemption provided for insurance and reinsurance transactions does not apply to the sale by an insurance undertaking of parts from written-off vehicles to third parties. 

Also, the VAT exemption for supplies of goods used exclusively for VAT-exempt activities where no input VAT deduction was available does not apply either, because the key condition was not met. Finally, the principle of fiscal neutrality does not prevent the refusal of a VAT exemption when a transaction does not meet the legal conditions set by the EU VAT Directive.

Conclusion

The ECJ's ruling draws a clear line between an insurer's core risk-transfer function and its commercial disposal of salvaged assets, confirming that once ownership of goods changes hands for market value, the transaction is taxable regardless of its origin. 

The ruling reinforces that VAT exemptions are tied to the nature of a transaction, not merely its connection to an exempt business. For insurance companies, as well as other exempt-sector businesses, the case is a reminder that ancillary asset sales carry their own VAT consequences, separate from the shielded core activity.