On 16 July 2015 the Court of Justice of the European Union (CJEU) delivered a judgment in the Mapfre case (C-584/13) regarding the VAT characterization of warranties covering mechanical breakdowns provided by the parties not involved in the sale of the cars.
Mapfre Warranty SpA (Mapfre) offered warranties covering a mechanical breakdown of second-hand cars. These warranties were offered to the purchasers by independent car dealers selling the second-hand cars. The dealers collected the premium and passed it on to Mapfre.
Specifically, once the purchaser decided to take out the additional warranty, he was supplied – in return for an additional payment – with a warranty booklet in the name of Mapfre. In the event of a mechanical failure, the purchaser was able to take the car to a garage of his choice, which provided an estimate of the costs to Mapfre. Once the estimate had been accepted by Mapfre, the garage repaired the car and charged Mapfre for its work.
In order to hedge the risk against a financial loss arising from Mapfre warranty’s obligation to cover the repair costs of the vehicles for which the warranty booklet was issued, Mapfre re-insured its risk with an associated company. On the basis that it did not have a contractual relationship with the purchaser of the second-hand vehicle (i.e. the warranty was offered by the car dealers), Mapfre took the view that the car dealers simply commissioned it to perform the above obligations. As a result of this, Mapfre warranty treated its services as normal supplies of services subject to VAT.
However, the French tax authorities considered the warranties to be insurance transactions for VAT purposes which should have been treated as exempt from VAT and subject to French insurance tax.
The Court of Justice of the European Union (“CJEU”) ruled that Mapfre’s services should be regarded as VAT exempt insurance transactions. This conclusion was made on the basis that:
(a) the insurer was an economic operator independent of the car dealer;
(b) the insured person was the purchaser of the second-hand car;
(c) the insured risk constituted the cost of the repairs that the purchaser would need to pay in the event of a mechanical failure of its car which Mapfre committed to cover;
(d) the payments made by the purchasers constituted a lump-sum;
(e) the insured person was not allowed to receive a refund if the cost of repairs during the warranty period was lower than the price of the warranty;
(f) the insured person was not obliged to make any further payment if the cost of repairs exceeded the price paid for the warranty.
Specifically, relying upon the principle of the fiscal neutrality, Mapfre claimed that its services should be treated identically to additional warranties offered by car dealers as those traders are regarded as offering after-sales services that are subject to VAT. However, the court denied to address this point as it was not included in the request for a preliminary ruling.
Additionally, the court did not agree with Mapfre’s further argument that the warranty is so closely linked to the sale of the car that is should follow the VAT treatment of the sale of the car.
Impact on businesses
The above judgment appears to impact retailers’ extended warranties that are issued by third parties which are not currently treated as insurance transactions. Retailers offering warranties that are provided by the parties independent to them should review their position in order to confirm whether they fall within the scope of the above judgment.
For further information, please contact your usual PwC advisor.