In its recent decision in the case C-695/19 (Rádio Popular), the European Court of Justice provided answers to preliminary questions regarding VAT assessment and impact for so-called extended warranties. In the given situation, the Portuguese company Rádio Popular sold home appliances and other similar products, offering a number of complementary services to buyers, including, among others, extended warranty for the purchased goods, beyond the standard statutory warranty. In case of using this warranty, the buyer entered into a respective insurance contract directly with the insurance company, and the company then charged buyers an amount for its mediation.

Rádio Popular did not return VAT on the given amounts, but at the same time it did not reduce related tax deductions in any way, due to the fact that it considered these amounts secondary financial activities, which are not reflected in the calculation of the reduction coefficient (according to article 174 paragraph 2 letter b) of the EU VAT Directive, or similarly according to article 76 paragraph 4 letter b) of the VAT act). The tax administrator challenged the non-inclusion of these amounts in the calculation of the reduction coefficient and this dispute was the subject of a preliminary question posed to the Court of Justice. 

For the purpose of answering the submitted question, the Court of Justice first examined, if the activity of Rádio Popular indeed relates to exemption under article 135 paragraph 1 letter a) of the EU VAT Directive, or under our VAT act according to article 55, and assessed it in the way that it truly is an activity related directly to insurance activity, which is exempted from VAT under the given stipulation. At the same time, Rádio Popular meets the necessary condition of relation both to an insurance company and to the insured (buyer), and this activity includes basic characteristics of an insurance broker or agent, that is search for clients and forming contacts between them and the insurance company for the purpose of entering into insurance contracts. As regards the option of non-inclusion of the respective amounts in the calculation of the coefficient for reduction of deductions, the Court of Justice decided that only secondary financial activity is excluded from its calculation, but not insurance activity, and therefore the given amounts for mediating provision of extended warranty cannot be excluded from the calculation of the reduction coefficient. 

Although the question if prolonging extended warranty represents an insurance activity exempted from VAT was itself not subject to dispute in the proceeding, according to our opinion, this particular question has not been clearly answered yet. It follows from the decision of the EU Court of Justice, though, that provision of extended warranty is exempted from VAT without entitlement to deduction, on the assumption that it constitutes a separate performance for the purposes of VAT, of course, and at the same time, the respective turnovers need to be included in the denominator of the reduction coefficient according to article 76 of the VAT Act. This conclusion then also leads to the obligation of differentiating between the individual types of taxable transactions received, in terms of whether full entitlement to deduction can be applied on them, or it is not possible to apply entitlement to deduction, or entitlement to deduction reduced by a coefficient can be applied.

We are, of course, available in case of any questions regarding the given decision or in case of its potential implementation.