Prepared by Alessia Zanatto, Luca Ghelli and Beatrice Pelo
The Court of Justice, in its recent decision dated July 8th, 2021 in Case C-695/19, has affirmed the principle that intermediation transactions in the sale of warranty extension, carried out by subjects whose main activity is the sale of goods, constitute supplies of services relating to insurance transactions carried out by insurance brokers and insurance intermediaries (VAT exempt according to article 135(1)(a), of the Directive no. 112/2006/EC (“Directive”) which are relevant for the calculation of the pro rata of VAT deduction.
The case referred to the Court concerns a Portuguese company (Rádio Popular – Electrodomésticos SA, “the Company”) that was primarily engaged in the retail or wholesale sale of household appliances and other goods in the electronics/computer sector.
The Company also provided its customers with a number of additional services, including the warranty extension on purchased items. This extended warranty resulted from an insurance contract between the insurance company and the purchasers of the items sold by the Company, whereby the insurance company guarantees the purchaser, in the event of a claim, that the purchased item will be repaired or, if necessary, replaced, for a period that goes beyond the period covered by the standard warranty provided by the manufacturer.
According to the facts of the case, by acting as an intermediary in the sale of insurance products, the Company charged the customer, in exchange for the extension of the warranty subscribed, an additional amount on top of the purchased product price. The sale of extended warranties was carried out using the same material and personal resources as for the sale of the articles.
With regard to the transaction described above (i.e. the extension of the warranty), the Company did not charge any VAT, because considered the transaction VAT-exempt. However, the Company deducted the whole input VAT for all purchases carried out.
The Portuguese tax authorities started a challenge against the Company, addressing the undue deduction of VAT, since they deemed that the Company should have deducted the VAT on purchases according to the pro-rata deduction method.
Specifically, the Portuguese tax authorities questioned that the sale of warranty extension should be included in the pro-rata calculation. In fact, the intermediation activities carried out by the company, although constituting insurance transactions exempted from VAT, according to article 135(1)(a), of the Directive, could not be qualified as financial and ancillary activities. Only the latter activities, in fact, according to the provisions of article 174(2)(b) and (c) of the Directive, shall not be taken into account for the calculation of the VAT pro rata.
On this point, article 174 excludes from the calculation of the pro-rata (i) the amount of turnover attributable to incidental real estate and financial transactions; and (ii) the amount of turnover attributable to the transactions specified in points (b) to (g) of Article 135(1) in so far as those transactions are incidental, that is to say, transactions of a financial nature, where they are ancillary. On the other hand, it does not provide for the exclusion of the transactions referred to in letter a) of the aforementioned article 135, such as insurance services and related intermediation.
In support of its arguments, the Company justified the exclusion from the calculation of the pro-rata as in its view such transactions should be included in the category of “ancillary financial transactions”, as referred to in article 174(2)(b) and (c) of the Directive.
In this respect, the Court pointed out that the concept of “insurance transaction”, which is exempt under article 135(1)(a) of the Directive, and that of “financial transaction”, which is referred to in article 174(2)(b) of that Directive, cannot be confused.
On the basis of the principle of fiscal neutrality, similar transactions covered by the Directive are subject to the same treatment for VAT purposes and cannot be defined by different concepts.
In order to interpret the present case, the Court examines the content of the services (warranty extension) offered by the company, in order to verify that they are in fact VAT-exempt transactions as “services relating to those (insurance) transactions, carried out by brokers and insurance intermediaries”. On the basis of the facts reported by the referring court, the answer is affirmative, according to the activity carried out by the company in that regard, and the contractual structure in place.
Subsequently, the following principle of law is affirmed by the Court, i.e. that for the purposes of calculating the pro rata, the intermediation in the sale of warranty extensions carried out in the context of the activity of selling household appliances is relevant, regardless of its ancillary nature:
“Article 174(2)(b) and (c) of Council Directive 2006/112/EC of November 28th, 2006 on the common system of value added tax, read in conjunction with article 135(1) of that directive, must be interpreted as meaning that it does not apply to transactions consisting in the intermediation in the sale of extended warranties carried out by a taxable person in the context of his principal activity consisting in the sale to consumers of domestic appliances and other items in the IT and telecommunications sector, so that the amount of turnover relating to those transactions must not be excluded from the denominator of the fraction used to calculate the deductible proportion referred to in article 174(1) of that directive”.
For the sake of completeness, it is worth noting that the conclusion reached by the Court of Justice are not in line with the implementation of the said provisions in Italy.
From an Italian perspective, insurance brokerage transactions, which are exempt from VAT pursuant to article 10(1)(2) and (9) of Presidential Decree no. 633/1972, are excluded from the calculation of the pro rata, according to article 19-bis (2) of Presidential Decree no. 633/1972, if they are not part of the main business activities or are ancillary to taxable transactions.
In other words, the Italian legislator would have implemented the exclusions set forth in article 174(2)(b) and (c), of the Directive in a broader manner, including also insurance transactions and related brokerage services where they are ancillary to taxable transactions or do not form part of the main activity (i.e. they are carried out occasionally/incidentally).
This provision has also been interpreted and confirmed by the Italian tax authorities in various guidelines (e.g. Legal Advice 954-49/2014 where they confirmed the exclusion from the calculation of the pro rata deduction of intermediation transactions on insurance policies carried out by certain leasing companies, as they do not form part of the leasing company’s main activity).
Thus, as a result of the prohibition of the so-called “reverse direct effect”, the Italian State could not assert the effectiveness of a judgment of the Court of Justice in the presence of national legislation which is not in line with the Directive.
Therefore, the judgment of the Court of Justice should have no effect on the past. In the future, the national legislation should instead be amended to take account of these principles.
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