VAT and insurance tax treatment of guarantee commitments - BMF circular letter dated 11 May 2021

On 14 November 2018 (XI R 16/17), Germany’s Federal Court of Finance (BFH) ruled that the guarantee commitment of a motor vehicle dealer against payment is not a dependent ancillary service to the supply of the vehicle, but an independent insurance service. In its letter of 11 May 2021, Germany’s Federal Ministry of Finance (BMF) adopts this case law in the VAT Application Decree (UStAE), clarifies the most important cases of application, and makes additions in its letter of 16 June 2021. We summarise the VAT aspects below.

Buyer's right to choose between repair and reimbursement of repair costs

For VAT purposes, the dealer's guarantee commitment against payment is a service based on an insurance relationship and is therefore VAT-exempt pursuant to Section 4 No. 10 letter a of the German VAT Code. This service includes the granting of insurance cover and the service provided by the dealer in the event of damage. Whether the buyer is entitled to a repair by the dealer itself or to reimbursement of the repair costs is irrelevant. If the dealer insures itself against the occurrence of a guarantee claim with an insurance company, this generally establishes a reinsurance relationship. The dealer's input tax deduction on input services related to the guarantee commitment (e.g., material for the repair) is generally excluded.

So-called full maintenance contracts are an exception: These do not establish an insurance relationship between the dealer and the customer, but a service of its own kind that is generally subject to VAT. A primary insurance relationship then exists between the dealer and its own insurance company for the guarantee case.

Buyer's right to choose between repair by the dealer and reimbursement of repair costs by an insurance company

The service provided by the dealer is either a service based on an insurance relationship in terms of Section 4 No. 10 letter a of the German VAT Code or the provision of insurance cover in terms of Section 4 No. 10 letter b of the German VAT Code. Both are exempt from VAT. The older German Federal Court of Finance (BFH) case law to the contrary is outdated. As a rule, the dealer has no input VAT deduction.

Application and transferability

In its letter of 16 June 2021, the BMF amends the original application rule from the letter of 11 May 2021 to state that the new principles are now to be applied to all guarantee commitments issued after 31 December 2021. However, there will be no objection if taxpayers already apply them before this date.

Furthermore, the BMF clarifies that these principles apply not only to the motor vehicle sector. This opens up a broad scope of application for guarantees for products of all kinds that go beyond the statutory warranty.

Buyers/guarantee holders who receive an invoice for a guarantee commitment that includes a line showing a 19 % tax should take a close look at this invoice. As the tax rate for both insurance tax and VAT is 19 %, this can easily cause confusion because the insurance tax may not be deducted as input tax.

The legal system stipulates that services subject to an insurance tax should be exempt from VAT in order to avoid double taxation. The BMF letter therefore also contains statements on insurance tax. The fact that different principles are used when allocating risk to a particular state depending on whether this is for insurance tax purposes or for determining the place of supply for VAT may cause distortions in cross-border situations. We recommend that such situations be examined particularly carefully.

(Dated: 08.07.2021)