Online (gaming) providers will pay 19% VAT in Germany from 01 Jan. 2015 on- wards – is there any room for manoeuvre?
From 01 January 2015 onwards, significant changes with regard to VAT will apply for providers of telecommunication, radio, TV and other services provided by using electronic media („electronic services“). The place of performance for all electronic services provided to private consumers will in future be the consumer’s place of residence, without having additionally to differentiate with regard to the place of establishment (third country or EU territory) or with regard to the place of usage or analysis. In practice, this change in the law leads to significant additional financial and administrative efforts for the providers of electronic services. Numerous online gaming providers are already preparing for 2015 by optimising their electronic business transactions with regard to issues of company law and contract law.
An example will show the problem: G from the UK offers games of chance on the internet. His services are deemed to be „other services using electronic media“ in accordance with the definition in section 3a (4) 2 no. 13 of the German VAT Act (UStG) in conjunction with part 3a.12 (3) no. 7 of the Decree on the Application of VAT (UStAE) from the point of view of the financial authorities. Players from Ireland and Germany take part in the online games. All players are private consumers. In UK a VAT exemption of the services to G applies.
Currently (up until 31 Dec. 2014): Under aspects of German VAT law, G’s services are considered to have been provided pursuant to section 3a (1) of the UStG at the place of establishment of the provider, i.e. in the UK. Section 3a (4) 2 no. 13 of the UStG is not applicable, because the consumers‘ places of residence are not located in a third country. Section 3a (4) 2 no. 13 of the UStG is not applicable either, because the provider’s place of establishment is not in a third country. If the services of G are VAT tax-exempt in UK no VAT would be due.
New (from 01 Jan. 2015 onwards): As G provides the services to private consumers, he has to fulfil the obligations under VAT law in Germany (and Ireland), because the principle of the country of destination is intended to apply in such cases from 2015 onwards. This means that G has to pay 19% German VAT on the sales revenue generated in Germany.
Options for adaptation measures: Whether and how much VAT can be saved always depends on the specific electronic business processes and the options for the adaptation of the business relations in the individual case. If, for instance, it is possible to exclude the classification as an electronic service, the principle of the country of origin, and thus, in the above example, taxation in the UK, would once more apply. In many cases, skilled adaptation of the standard terms and conditions can lead to optimisation under aspects of VAT of the business relationships. It is furthermore typical for providers of electronic services that the services provided to the private consumer consists of a bundle of services. By deliberately allocating tasks and functions, it is possible to amend the value-added chain in a manner which ensures that the remuneration for the service which is subject to VAT in the country of destination is kept to as low a level as possible, or can even be avoided entirely.
Summary: Online (gaming) providers who generate revenue with German private consumers face the threat of having to pay 19% VAT to the German treasury on the sales revenue generated in Germany from 2015 onwards. It doesn’t have to be this way! The revision of the law should not be seen as a threat, but rather as a chance to adapt the corporate and contractual structures in order to optimise performance relationships under aspects of VAT law. In some cases, smart adjustments can lead to savings of millions – especially if the provided services in the specific case are VAT tax-exempt in the country of origin!