On February 4, 2015, the Advocate General (AG) M. Szpunar at the Court of Justice of the European Union (CJEU) issued his Opinion in the French case Mapfre Asistencia and Mapfre Warranty SpA versus Directeur général des finances publiques. The case concerned the question whether the payment of a predetermined (fixed) amount in exchange for the provision of a warranty for a particular period to cover the cost of repairing defects in used cars, must be regarded as an insurance premium for the purposes of VAT. The case is important for the scope of the insurance exemption for VAT purposes.
Under the European VAT Directive “insurance and reinsurance transactions” are VAT exempt. In a number of cases, the CJEU has provided some guidance on the scope of the term “insurance transactions”. This term undoubtedly concerns an autonomous concept of EU law, and a general characteristic is the assumption that the insurer, in return for prior payment of a premium, undertakes to provide the insured, in the event of materialization of the risk covered, with the service agreed when the contract was concluded. It is also a foregone conclusion that taxpayers that do not have the status of an insurance company may – from a VAT perspective – nevertheless provide VAT-exempt insurance services.
Mapfre Warranty SpA (“Mapfre W”) provides a warranty (for a limited period) for the proper functioning of certain components in used cars. Used car dealers offer this warranty to their customers when buying a used car. If a defect (covered by this warranty) occurs, the buyer of the car can report to a garage (which is not necessarily the garage of the used car dealer) and the estimate for the repair is submitted for approval to Mapfre W. Following approval, the garage repairs the car and the repair costs are paid by Mapfre W. Mapfre W receives a fixed fee from the used car dealers for this service, for which it covered itself against possible losses by taking out an insurance with Mapfre Asistencia.
Instead of 9% French insurance premium tax, the French tax authorities want to levy French insurance premium tax at a rate of 18% on the Mapfre Asistencia - Mapfre W relationship. This issue is not addressed further in the case currently pending before the CJEU. The French tax authorities believe that the service provided by Mapfre W qualifies as a VAT-exempt insurance service and not (as argued by Mapfre W) as a service subject to VAT. The AG’s opinion concerns this disputed issue.
The AG follows the earlier guidance from the CJEU on the characteristics of insurance from a VAT perspective. The case does not clarify the legal relationship between the participants in the transaction. Although the AG noted that this should be determined by the relevant national court, he believes that the issue is not essential to the interpretation of the VAT exemption for insurance transactions. In his view, the VAT exemption for insurance in any case applies in the following three situations:
- Mapfre W concludes an agreement with the buyer of the car and the dealer acts as an intermediary;
- the dealer concludes the agreement with Mapfre W in its own name but on behalf of the buyer of the car;
- the dealer of the car transfers the rights from an agreement concluded with Mapfre W in its own name and for its own account to the buyer.
The AG notes that the risk covered by the warranty does not lie with the dealer but with the buyer of the car, and that the essence of insurance is that the insured takes out insurance against the risk of an uncertain but potentially serious financial loss in the future by payment of a specific, but limited amount (which is non-refundable). He also argues that Mapfre W spreads the insured risk since the premiums paid for all cars covered by the warranty cover the cost of repairs to cars that actually have defects. The method of calculating the amount of the premium and controlling the repair costs is a matter of internal organization and is not relevant to the question of whether there is an insurance transaction for VAT purposes. He considers it incompatible with the principle of tax neutrality if the VAT exemption for insurance would depend upon internal aspects of a company’s economic model, which do not affect the substance of the transactions performed by it.
Mapfre W’s assertion that after sales services by car manufacturers/dealers are subject to VAT, and that the principle of tax neutrality is violated with the exemption of its services, is overruled by the AG with a number of arguments. He notes that car manufacturers and dealers, rather than undertaking to perform a particular service if a certain risk occurs, guarantee that the risk will not materialize; the warranty obligation is thus ancillary to the main object of the agreement, i.e. the sale of the vehicle.
All in all, the AG believes that this case does not involve a warranty by the used car dealer, and that Mapfre W’s services are separate from the agreement for the sale of the car. Therefore, in the view of the AG, Mapfre W performs a VAT-exempt insurance service.
The outcome of the Mapfre Warranty case, which is still to be determined by the CJEU, is important for the scope of the term ‘insurance’, especially in cases where it is agreed that (repair) services are performed on goods for a fixed amount in the case of mechanical defects. An important aspect appears to be that the party that ‘guarantees’ the repair services for a fixed fee is not the manufacturer/seller of these goods. Note, however, that the legal relationships are not clear in this case. The Opinion issued by the AG does not examine the situation where the dealer purchases Mapfre W’s services in its own name and for its own account, and the dealer does not, as such, recharge these costs to the buyer of the car.
In concluding that a service qualifies as VAT exempt insurance, insurance premium tax rather than VAT will apply; this will also be the case in the Netherlands. In that case, it will have to be examined whether the insurance exemption precludes the right to recover VAT on repair costs, and whether this consequence could be mitigated by assuming insurance in cash rather than insurance in kind.
The advisors of the Indirect Tax Financial Services Group of Meijburg & Co would be pleased to assist you further with this issue. Feel free to contact one of these tax advisors or your regular contact at Meijburg & Co for more information.