Whether and how to tax insurance, one of the crucial elements of the modern economy and society, is a complex issue for the design of laws on value added tax (VAT). Exemption from VAT has been the most common international practice, and it is also applied in the harmonized system of European VAT. New Zealand and Australia are examples of legal systems in which an alternative to exemption, a full taxation model for general insurance, has been adopted. This thesis addresses the legal challenges inherent in the application of VAT to insurance, both from a system design perspective and from the perspective of the interpretation of existing rules in order to discuss the issue of the current and preferred legal treatment of insurance in European VAT. The study examines the functions of insurance, the legal nature of the insurance contract and the legal context in which insurance operates. It provides an in-depth analysis of how the existing rules on VAT should be applied to insurance transactions. The study also seeks to enhance our understanding of how insurance is treated in the legislation of the modern VAT systems of New Zealand and Australia. The exemption model is compared with two full-taxation models for general insurance. The analysis demonstrates that in the light of the legal character of VAT and the coherence of the European VAT system, the introduction of full taxation of general insurance constitutes a valid system design recommendation for the European Union.