On July 8, 2021 the CJEU ruled that Article 174(2)(b) and (c) of Council Directive 2006/112/EC of 28 November 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 involving intermediation in the sale of warranty extensions that are performed by a taxable person in the course of its main activity consisting in the sale to consumers of household electrical appliances and other computer and telecommunications equipment, with the consequence 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.

 

·     Rádio Popular is a limited company whose main activity is the sale of household electrical appliances and other computer and telecommunications equipment.

·     In addition, it offers purchasers of its goods a number of ancilliary services such as, in particular, the extension of the warranty on purchased items. That extension is the result of an insurance contract by which the insurance undertaking guarantees to the purchaser, in the event of a claim, the repair of the article purchased or, possibly, its replacement, for a period beyond the period covered by the warranty provided by the manufacturer. That insurance contract is concluded between an insurance undertaking and the purchasers of the articles sold by Rádio Popular.

·     Acting as an intermediary in the sale of insurance products, Rádio Popular charges the customer, in return for the extension of the warranty taken out, an extra amount in addition to the price of the article purchased. The sales of warranty extensions thus takes place at the time of the sale of articles and is performed using, in principle, the same material and personnel resources as those allocated to the sale of those articles.

·     Taking the view that the sales of warranty extensions constitute insurance transactions exempt from VAT, Rádio Popular did not pay VAT relating to those sales but nevertheless deducted in full the input VAT paid for all its activity during the financial years 2014 to 2017.

·     Following audits carried out by the AT in respect of Rádio Popular relating to those financial years, that authority concluded that that company had wrongly deducted all the VAT paid in those tax years, on the ground that the sales of warranty extensions made by Rádio Popular were exempt from VAT and therefore did not give rise to the right to deduct VAT. Taking the view that the tax paid on the acquisition of mixed-use goods and services is deductible only in proportion to the annual amount of the transactions giving rise to the right to deduct, that authority issued, in respect of Rádio Popular, four assessments concerning VAT and compensatory interest totalling EUR 356.433,05.

·     After Rádio Popular requested the establishment of an arbitration tribunal, seeking a declaration that those assessments were unlawful, the Tribunal Arbitral Tributário (Centro de Arbitragem Administrativa – CAAD) (Tax Arbitration Tribunal (Centre for Administrative Arbitration – CAAD), Portugal), declared itself established on 11 April 2019.

·     According to that tribunal, it is common ground between the parties to the main proceedings that the activity of Rádio Popular consisting in the sale of warranty extensions qualifies for the exemption for insurance transactions provided for in Article 135(1)(a) of the VAT Directive, which was transposed by the VAT Code. Since that part of the transactions performed by Rádio Popular does not therefore give rise to a right to deduct, the referring tribunal states that it is necessary, in principle, to apply the proportional deduction provided for in Articles 173 and 174 of that directive for mixed-use goods and services.

·     Rádio Popular submits, however, that the sales of warranty extensions constitute ‘financial transactions’ which are incidental to the main activity of selling household electrical appliances and other computer and telecommunications equipment and, accordingly, pursuant to the exception laid down in both Article 23(5) of the VAT Code and Article 174(2)(b) and (c) of the VAT Directive, the amount relating to those transactions must be disregarded for the purpose of calculating the deductible proportion. The concept of ‘financial transactions’, within the meaning of those provisions, must be interpreted broadly to avoid infringing the fundamental principle of neutrality governing that directive and the principle of non-distortion of competition.

·     In contrast, the AT contends that those operations cannot be classified as either ‘financial transactions’ or as ‘incidental transactions’ within the meaning of those provisions. In that regard, it states, first, that insurance transactions, such as those at issue in the main proceedings, cannot be treated as ‘financial transactions’, since the VAT Directive clearly distinguishes between those two concepts. Secondly, in the light of the judgment of 29 April 2004, EDM (C‑77/01, EU:C:2004:243), sales of warranty extensions do not constitute ‘incidental transactions’.

·     In that regard, the AT observes, inter alia, that Rádio Popular sells warranty extensions on a regular basis and that Rádio Popular receives a profit of approximately 35% of the amount paid by each purchaser of a warranty extension, with that profit being necessary for its economic viability.

·     The referring tribunal considers that the AT’s assessment that those sales are not incidental to sales of household electrical appliances and other computer and telecommunications equipment is vitiated by errors of fact and of law. It also states that it has not been proved that the economic viability of Rádio Popular depends on the sale of warranty extensions. With reference to the settled case-law of the Court on ancillary services, the referring tribunal notes, in particular, that only a small percentage, estimated at 0.62% of the total value of the goods or services acquired by Rádio Popular for the pursuit of its activity is attributable to the sale of warranty extensions.

·     In any event, the question arises as to whether those transactions may be classified as ‘financial transactions’ within the meaning of Article 174(2)(b) and (c) of the VAT Directive, read in conjunction with Article 135(1)(b) and (c) of that directive. The referring tribunal considers that a combined reading of those provisions shows that amounts relating to insurance transactions are not excluded from the calculation of the deductible proportion.

·     In those circumstances, the Tribunal Arbitral Tributário (Centro de Arbitragem Administrativa – CAAD) (Tax Arbitration Tribunal (Centre for Administrative Arbitration – CAAD)) decided to stay the proceedings and to refer the following question to the Court of Justice for a preliminary ruling:

‘Do transactions involving intermediation in the sale of extended warranties on household electrical appliances, which are carried out by a taxable person under VAT law whose principal activity consists in the sale of household electrical appliances to consumers, constitute financial transactions, or are they to be treated as such pursuant to the principles of neutrality and non-distortion of competition, for the purposes of exclusion of the amount represented by them from the calculation of the deductible proportion, in accordance with Article 135(1)(b) and/or (c) of [the VAT Directive]?’

 

As mentioned above the CJEU ruled that Article 174(2)(b) and (c) of Council Directive 2006/112/EC of 28 November 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 involving intermediation in the sale of warranty extensions that are performed by a taxable person in the course of its main activity consisting in the sale to consumers of household electrical appliances and other computer and telecommunications equipment, with the consequence 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.

 

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