ECJ C-695/19 (Rádio Popular) – Decision – Exempt Insurance commissions to be included in the turnover to calculate the denominator for proportional VAT deduction

On July 8, 2021, the ECJ issued its decision in the case C-695/19 (Rádio Popular).

Request for a preliminary ruling from the Tribunal Arbitral Tributário (Centro de Arbitragem Administrativa — CAAD) (Portugal) lodged on 20 September 2019 in case C-695/19 (Rádio Popular — Electrodomésticos, S.A. v Autoridade Tributária e Aduaneira)

Article in the EU VAT Directive

Article 135(1)(a)(b) and/or (c) and 174(2)(b) and (c) of Council Directive 2006/112/EC

Article 135 (Exemption)
1. Member States shall exempt the following transactions:

(a) insurance and reinsurance transactions, including related services performed by
insurance brokers and insurance agents;

(b) the granting and the negotiation of credit and the management of credit by the person granting it;

(c) the negotiation of or any dealings in credit guarantees or any other security for money and the management of credit guarantees by the person who is granting the credit;

Article 174 (Proportional deduction)
2. By way of derogation from paragraph 1, the following amounts shall be excluded from the calculation of the deductible proportion:
(a) the amount of turnover attributable to supplies of capital goods used by the taxable person for the purposes of his business;
(b) the amount of turnover attributable to incidental real estate and financial transactions;
(c) the amount of turnover attributable to the transactions specified in points (b) to (g) of Article 135(1) in so far as those transactions are incidental.

Facts

The applicant, Rádio Popular, is a company active in the sale of household appliances and computer and telecommunications equipment. In addition, Rádio Popular also sells extra warranty on behalf of the brand provider when the customer requests it. In this way, the customer receives an extension of the original warranty, with Rádio Popular acting as an intermediary between the insurance company and the end customer.
It does not charge VAT on the sale of additional guarantees, but deducts in full the VAT on the goods and services it acquires to carry out all of its business.
At Rádio Popular, a VAT audit was carried out by the AT which showed that the transactions carried out by Rádio Popular with regard to additional guarantee cannot be considered as financial transactions, as a result of which those transactions are not excluded from the calculation of the deduction pro rata as referred to in Article 23 (1) (b) of the CIVA.
As a result of those checks, the AT set the VAT and the related interest at a total of EUR 356 433.05 (EUR 328 107.08 in VAT and EUR 28 325.97 in interest).
Rádio Popular asks the referring court to set aside the VAT assessments and the associated interest and to order the AT to pay interest. It argues that its activities as an intermediary are negligible in relation to its overall activities. In order to exercise the right to deduct, the activity as an intermediary that the applicant party additionally carries out must, considered as an ancillary financial transaction not included in the calculation of the pro rata.
After all, the concept of a financial transaction must be interpreted broadly, under penalty of violation of the fundamental principle of neutrality regarding VAT.
The AT is of the opinion that the activity of the Rádio Popular at issue cannot be regarded as ancillary. According to the AT, the viability of the applicant depends on the sale of additional guarantee. In addition, the AT argues that the sale of additional guarantees does not fall under the concept of ‘financial transaction’, as required by Article 23 (5) of the CIVA. The AT is of the opinion that the activity of the Rádio Popular at issue cannot be regarded as ancillary. According to the AT, the viability of the applicant depends on the sale of additional guarantee. In addition, the AT argues that the sale of additional guarantee does not fall under the concept of ‘financial transaction’, as required by Article 23 (5) of the CIVA. The AT is of the opinion that the activity of the Rádio Popular at issue cannot be regarded as ancillary. According to the AT, the viability of the applicant depends on the sale of additional guarantee. In addition, the AT argues that the sale of additional guarantee does not fall under the concept of ‘financial transaction’, as required by Article 23 (5) of the CIVA.

Question

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 Council Directive 2006/112/EC of 28 November 2006?

AG Opinion

None

Decision

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.

Summary

Rádio Popular, a company selling household appliances and electronics, also sells extended warranties and acts as an intermediary between customers and insurance companies.
The company does not charge VAT on the sale of warranties but deducts VAT on all goods and services it acquires.
However, a VAT audit by the AT determined that the transactions related to extended warranties cannot be considered financial transactions and are not excluded from the calculation of the deduction pro rata. Rádio Popular argues that its intermediary activities are ancillary and should be excluded from the pro rata calculation. The AT claims that the viability of the company depends on the sale of extended warranties, which are not financial transactions.
The question is whether such intermediation transactions constitute financial transactions for the purposes of exclusion from the deductible proportion calculation.
The court ruled that such transactions do not qualify for exclusion under Article 174(2)(b) and (c) of Council Directive 2006/112/EC.

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