"Warranties will be labelled insurance policies"

Germany’s Federal Ministry of Finance positions itself -  Hundreds of thousands of warranties could be affected 

Warranties are a well-known instrument for companies to create added value. The seller can offer a warranty that goes beyond the legal warranty rights - if desired, for a separate fee. The nature and type of warranties can vary, depending on the services covered: These services may include repair or refund of the current value or purchase price, or the replacement of an item “in the case of a case”, covered by the warranty.   

Warranties increase revenues and help to improve customer relationships and customer retention, e. g. customers return after several years. It also helps to have a positive experience when a product is out of order. Recently, the tax aspect of warranties has been hotly debated and will continue to be so. But why is this the case? After a prolonged period of uncertainty, the Federal Ministry of Finance (BMF) of Germany has taken significant steps to clarify the underlying regulation. 

The original BMF letter as of 11 May 2021 was applicable to guarantee commitments made after 30 June 2021. It states - in non-legal terms - that anyone who co-sells a car warranty for a fee for that car must pay insurance tax. This means (economically) in most cases that you have to sell ann insurance and not a warranty.  

Three things are noteworthy:  

  1. The BMF letter suggests that a large number of players in the automotive sector must and can convert their business within a few days. 
  2. it became clear very quickly that not only car warranties are affected, but warranties across all industries. 
  3. that under German insurance supervisory law (and related laws), there is still a difference between a warranty and an insurance policy. 

In other words, the BMF letter says:   

Please convert your warranty business to insurance - across all industries for billions of warranty sales. Knowing fully well that for many industries, margins in the core business are shrinking, annexes such as warranties have become much more critical. Changes here need to be taken seriously as they can lead to significant challenges.  

 

What does this mean for entrepreneurs?  

As an entrepreneur operating in Germany, you should familiarise yourself with the legal and tax implications of the BMF letters under discussion to ensure compliance with the regulation and a smooth transition.  

A major risk is being taxed twice if you do not comply with the regulations. This means: If you continue to sell warranties, you will pay VAT. The tax authorities could then claim the insurance tax later. So you pay 2x19% tax.  

Apart from the "small" risk of going bankrupt because of double taxation, the new regulation poses some challenges:  

Warranties are often very company or industry-specific. Since you need an insurance licence to sell insurance, you need an insurance partner here. This means you now need a flexible insurer who can offer a quick translation of the old highly specific warranty into a very specific insurance product.  

Selling insurance instead of warranties makes a company a seller of a regulated commodity. Strict rules apply here, and most companies need guidance on how to do this in accordance with regulations.  

Changing the risk-return profile: When an insurer is involved, the profit margin has to be shared with a new player. On the other hand, the insurer now bears the risk if "the warranty" goes wrong.   

"Fire and Forget" + "Cash in the Täsch" could change.   

For warranties, the standard is a one-time commission. Insurance can be designed that way, but it might make much more sense to design the cover (as insurance can) to renew to generate recurring profits. Companies have to deal with this because their salespeople are used to a one-time profit. Solving this problem can create a liquidity gap - again, the insurer can help.  

Why is it changing?  

In my personal opinion, there are three common theories:  

  • A clerk at the BMF has interpreted an old court ruling unfavourably.  
  • Tax increase: In the case of warranties and VAT, only the dealer commission is effectively taxed. All other parts of the warranty are part of the input tax deduction and thus =0. With insurance tax, everything is taxed. As a rule of thumb. Tax revenues could be doubled here.  
  •  Increase in regulation: many companies have dealt with warranties in 8-digit portfolios. No one has checked whether the warranty management is adequate - at least the controls applied are far less stringent than for insurers and Solvency II.1  

What to do?  

If you think your company is struggling to keep up with the rapid changes in the insurance industry, let's examine together how ELEMENT can help you to adapt to the new trends in the industry. 

One example of how we can help is portrayed in the video on our cooperation with Intec:

 

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