A warranty could be seen as an “insurance transaction” exempt from VAT

A warranty as insurance transaction

The European Court of Justice (hereinafter “ECJ”) has ruled that the supply of services whereby an economic operator which is independent of a second-hand motor-vehicle dealer provides, in return for payment of a lump sum, a warranty covering mechanical breakdowns constitutes an exempt insurance transaction (ECJ, C-584/13, Mapfre Warranty SpA, 16 July 2015).

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The facts

Second-hand motor vehicle dealers and garages offer a warranty proposed by Mapfre Warranty consisting in the repair of vehicles affected by a mechanical breakdown or problems inherent to the vehicle sold. In practice, second-hand motor vehicle dealers offer their customers, at the time of the purchase of the vehicle, the possibility of subscribing for additional breakdown cover. If the customer accepts, he receives a subscription form in return for paying a lump-sum (included in the sales price).

 

If a breakdown occurs, the purchaser of the vehicle activates the warranty and contacts a professional repairer. This establishment provides a quote for the repairs, which is sent to Mapfre Warranty so that it can accept and authorize the repair.

Question referred to the ECJ

Does a warranty covering mechanical breakdowns offered by a company independent from the second-hand motor-vehicle dealer, in return for payment of a lump-sum, constitute an exempt insurance transaction?

Decision of the ECJ: it constitutes an insurance transaction

According to the ECJ, the warranty proposed by Mapfre Warranty to its customers against the payment of a lump-sum constitutes an insurance transaction since:

  • there is legal relationship between the customer and the insurer (Mapfre Warranty) regardless how the contractual arrangements between the parties (insured, dealer and insurer) are settled;
  • there is a premium paid by the customer no matter the fact that the entitlement of the warranty is included in the sales price;
  • there is an uncertain risk of financial loss against which the customer is willing to be protected.

 

Impact for your business?

The ECJ dispelled the doubt as to the VAT treatment applicable to the warranty coverage offered by companies independent of a second-hand motor-vehicle dealer. This judgment may have significant consequences for the retail sector and breakdown assistance companies in Belgium offering such kind of warranty services.  

These economic players should now anticipate the impact of this case-law and take the necessary steps to avoid and/or mitigate possible difficulties with regard to their VAT deduction position and the consequences in terms of insurance premium tax.  

Retail and breakdown assistance businesses will have to examine in detail the various services provided in the framework of warranty services and analyze whether these services are similar to the fact pattern under the Mapfre Warranty case. Should this be the case, they would need to comply with the position of the ECJ and may have to revise their contractual arrangements. 

© 2017 KPMG Tax and Legal Advisers, a Belgian civil cooperative company with limited liability, and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

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