SERVICE OF WARRANTY EXTENSION AS AN INSURANCE OPERATION AND ITS IMPACT ON THE PRO-RATA DEDUCTION. JUDGMENT OF THE ECJ OF JULY 8, 2021. RÁDIO POPULAR
The judgment (with case number C-695/19) of the European Court of Justice (ECJ) tries to clarify the qualification of the operations carried out by the taxpayer (the entity Rádio Popular), which offers to its clients a service to extend the guarantee of the items purchased through an insurance contract concluded with an insurance company, as well as the impact that such operations may have on the calculation of the deduction pro-rata.
This refers to an entity whose main activity is the sale of household appliances and other computer items, which offers its customers the possibility of extending the guarantee of the items purchased, through an insurance contract and with an insurance company, which guarantees the buyer, in the event of a claim, the repair of the item or its replacement, during a period additional to that covered by the manufacturer’s warranty. This contract is concluded between the buyer and the insurance company, but it is Rádio Popular who charges the customer as consideration for the extension of the guarantee.
Treating this extension service as a VAT exempt insurance operation, the entity did not charge VAT but, nevertheless, deducted 100% of the VAT borne by all its activity, insofar as it understood that this service are financial operations of an ancillary nature to the main activity, therefore by virtue of article 174, paragraph 2, letters b) and c) of the VAT Directive, they must be excluded from the denominator of the pro-rata calculation, without affecting, therefore, the deduction of input VAT borne. However, the Tax Administration considered that, since these were VAT exempt insurance operations, the right to deduction VAT was limited and that the amount corresponding to these operations should not be excluded from the calculation of the pro-rata, as they cannot be classified neither as financial operations since the Directive clearly distinguishes between both, nor accessory operations.
The referring court asks to the ECJ for a preliminary ruling as to whether provision of services consisting of the extension of the guarantee as described in the case do constitute financial operations, or if they are similar to them, in such a way that they must be excluded from the pro-rata in accordance with Article 174, paragraph 2 and Article 135, paragraph 1, letters b) or c) of the Directive.
The ECJ initially remarks that both parties agree to consider that article 135.1.a) of the Directive (exemption in insurance and reinsurance operations, including those related to them carried out by insurance brokers and agents) is applicable to the warranty extension operations described in the present case and which, therefore, are exempt from VAT. Accordingly, it is a question of verifying if these operations are effectively included in this article and, if so, article 174.2.b) or c) can be applied to them to the extent of excluding those from the calculation of the pro rata.
Confirming that the operations described are not strictly insurance operations, since the taxpayer is not linked to the buyer by the insurance contract, it examines whether they can be classified as provision of services “related to insurance operations, carried out by brokers and insurance agents”, reaching the conclusion that, indeed, this is the case, since on the one hand they consist, in essence, in the sale of warranty extensions that take the form of an insurance operation, so they should be understood as “relative” to insurance operations and, on the other hand, taking into account their content to determine whether they are carried out by insurance brokers or agents, as established by the doctrine of the CJEU itself, two criteria are satisfied: the provider maintains a relationship with the insurer and the insured, and the provider carries out an activity essentially related to the function of the insurance agent, such as looking for clients and putting them in contact with the insurer. Therefore, these operations can be included within article 135.1.a) of the Directive.
However, in line with this conclusion, it recalls that in the exception of the pro-rata calculation method of article 174.2 are not included the operations of article 135 letter a), so it would only be necessary to examine whether, even qualifying as insurance operations, they could be “ancillary financial operations” within the meaning of letters b) and c) of Article 172, paragraph 2 and, thus, be excluded from the pro-rata calculation, as suggested by the taxpayer.
However, the Court points out that article 135 clearly distinguishes between the insurance operations (letter a) from the rest of the operations included in letters b) to g), of a financial nature, being therefore different operations and that some cannot be assimilated to the others, especially in order to apply the exception of the pro-rata calculation. Therefore, this exception does not apply to mediation operations in the sale of warranty extensions, which are exempt from VAT and cannot be excluded from the denominator of the pro-rata to determine the calculation of the deduction.