In two letters dated 11 May 2021 and 18 June 2021, the tax authorities have adopted the latest decision of the Federal Fiscal Court regarding warranty commitments granted for remuneration originating from the practices in the motor vehicle trade. The tax authorities have made it clear that the new principles will apply across all sectors and thus also beyond the motor vehicle trade, with far-reaching consequences for VAT and insurance tax. The new rules will be mandatory for all warranty commitments issued after 31 December 2021.
Background
When trading motor vehicles, it is common for the buyer to be able to acquire so-called warranty commitments from the seller of the motor vehicle. In return for an additional fee, the seller agrees to grant a warranty, in the event of damage, allowing the buyer to claim for the repair or the reimbursement of repair costs.
VAT
Up to now, the VAT treatment of warranty commitments granted for remuneration has depended on several criteria: does the buyer only have a claim against the seller or, if applicable, also against another insurance company, or can the buyer choose to claim reimbursement of repair costs from the seller or their actual performance.
According to the changed tax administration interpretation, in the future, warranty commitments granted for remuneration will no longer constitute ancillary supplies (being treated in the same way as the main supply, e.g. the sale of the motor vehicle). Instead, they are deemed independent services, which are then exempt from VAT as insurance transactions (Section 4 No. 10 German VAT Act, Article 135 (1) (f) VAT Directive). The VAT-exemption now applies to both scenarios, the assistance in kind – the actual performance of repair work – and the promise to reimburse repair costs incurred. Moreover, it is no longer necessary to differentiate whether a claim for reimbursement of repair costs, in addition to the repair claim, is directed against the seller himself or against another insurer (possible if the seller concludes an insurance contract in favour of the buyer).
For practical purposes, it is important to note that VAT-exempt insurance transactions generally lead to the loss or limitation of the input VAT deduction on the part of the warrantor. On the one hand, this may affect the warrantor’s input VAT deduction, e.g. from purchased third-party services or goods acquired for the performance of the repair, and on the other hand, the VAT-exempt services may also have a negative effect on pro-rata calculations for partial input VAT deduction. Finally, such transactions may also impact the rental of business premises by the warrantor, as the option to pay tax may no longer be permissible for the lessor.
Furthermore, special rules may apply in the case of warranty commitments in connection with the conclusion of a “full maintenance contract”, in the event that the buyer only has warranty claims against the seller. So far, there is no definition of this term; in practice, one encounters this concept in plant construction, but also in the leasing of machines and cars: these contracts regularly include the assumption of all relevant maintenance work (“full maintenance”) by the seller in combination with the seller’s assurance to compensate for any damage that occurs (“warranty promise”).
Insurance tax
The letters also contain new regulations which, among other things, lead to a significant expansion of the insurance tax liability of such warrantees. Ultimately, this means that the seller (warrantor) becomes a tax debtor as defined by the Insurance Tax Act, with the result that they must collect insurance tax from their customers (with no corresponding relief option as with input VAT), account for it, declare it and pay it. This change also has an impact on constellations in which the seller insures themselves with an insurance company against a possible claim by the buyer (warrantee): Whereas this “reinsurance”, in the absence of an insurance relationship between the warrantor (seller) and the warrantee (buyer), was previously subject to insurance tax as so-called primary insurance, it now becomes reinsurance – which is exempt from insurance tax. This means that coordination between the warrantor and the warrantor’s insurer is essential to ensure correct taxation and to avoid unnecessary cost.
So far, there are no detailed statements from the tax authorities on the actual scope of application and the factual requirements, e.g. determination of the consideration, of these new principles. It is clear, however, that a number of affected industries and companies will be facing insurance tax compliance requirements for the first time as well as changes in the general conditions under VAT law. On top of that, additional complexity will arise in the case of cross-border scenarios: the German VAT treatment is based on the rules and interpretations of the German Insurance Tax Act, which will not necessarily coincide with regulations in other EC member states and thus give rise to potentially deviating VAT treatment and EC-Sales List reporting.
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