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VAT Newsletter Hot topics and issues in indirect taxation

November 2017

NEWS FROM THE CJEU

Leasing: supply of services or supply of goods? CJEU, ruling of 4 October 2017 – case C-164/16 - Mercedes-Benz Financial Services UK

The CJEU (Court of Justice of the European Union) ruling concerns the distinction between the supply of services and of goods for leasing operations. The CJEU concludes that very narrow conditions apply if leasing is to be considered as supply of goods. This is important from a cash flow perspectivefor the supply of goods, because the fee from all leasing instalments agreed is taxable as soon as the asset is handed over.

The case Mercedes-Benz Financial Services UK offers three standard agreements for financing motor vehicle use in the UK: 'Leasing', 'Hire Purchase' and 'Agility'. The company remains owner of the vehicle throughout the term of the agreement and the lessee pays monthly instalments.

The standard 'Leasing' agreement rules out any transfer of ownership. A mileage cap is

also set, with a contractual penalty for the customer in case the cap is exceeded. There is no question that this is an instance of a supply of services, which are taxed with each monthly payment.

The standard 'Hire Purchase' agreement, however, contains an option for transfer of ownership. In principle, the total monthly payments are equal to the overall purchase price of the vehicle including the financing costs. Only a small additional payment has to be made at the end of the agreement to acquire ownership. There is no question that this is an instance of the supply of goods as defined in Article14 (2) (b) of the VAT Directive. Consequently, the full amount of tax is due when the vehicle is handed over.

Transfer of ownership is also possible under the standard 'Agility' agreement. The stipulated monthly instalments only amount in total to around 60% of the price of the vehicle including financing costs. If the user wishes to exercise the option to buy, he has to pay around 40% of the purchase price.

Content News from the CJEU

Leasing: supply of services or supply of goods?

News from the BFH

Poker and VAT – the cards have been shuffled

Consequences of a VAT group

Building up a structured operation is l iable for tax

News from the BMF

Granting credit as an independent service

Zero-rating of revenue for sea shipping and air transport

In brief

Zero-rating for supplies of services in connection with the import of objects

Input VAT deductions of holding companies

Events

Cologne VAT congress

Tax courses from KPMG

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This charge is meant to be equal to the average estimated residual value of the vehicle at the end of the agreement. Customers are asked if they wish to exercise the option three months before the agreement ends. The court noted that just under half of all lessees exercise the option. The matter at dispute is whether this is an instance of services or goods being supplied.

Ruling Under Article 14 (1) of the VAT Directive, supply of goods is deemed to be the transfer of the right to dispose of goods as owner. At the same time, under Article 14 (2) (b) of the VAT Directive, handing over goods on the basis of a contract for the hire of goods for a certain period which provides that “in the normal course of events ownership is to pass at the latest upon payment of the final instalment,” is also considered supply of goods. The CJEU specified that two conditions must be met that the court must take into consideration in reaching its judgment:

Firstly, the agreement must expressly contain a clause on the transfer of ownership. However, an express clause is deemed to be present when the leasing agreement provides an option to buy.

Secondly, the agreement must make it clear that ownership will automatically pass to the lessee if the agreement is performed as scheduled until expiry. Where an option to buy is granted, this is only the case if exercising the (entirely non-binding) option appears in reality to be the only economically rational possibility for the lessee in view of the financial terms of the agreement. This may be the case, for example, where under the

agreement, at the time the option can be exercised the total of the contractual instalments is equal to the market value of the asset including financing costs. It is essential in this case that the lessee is not required to pay a considerable sum in addition for exercising the option.

Please note: The CJEU had already ruled in the past that the lessee acquires the right of disposal when ownership of the leased asset is transferred to the lessee under the agreement at the end of its term or substantially all the risks and rewards of ownership are transferred to the lessee and the discounted total of the leasing instalments is effectively equal to the market value of the leased asset (CJEU, ruling of 2 July 2015 – case C-209/14 – NLB Leasing, on real estate leasing; CJEU, ruling of 16 February 2012 – case C-118/11 – Eon Aset, on vehicle leasing, see VAT Newsletter March 2012).

In practice, however, the German tax authorities base their treatment of leasing agreements for VAT purposes closely on the income tax treatment of the leased asset (see in particular section 3.5 (5) of the German VAT Application Decree (UStAE)). This approach may well not be permissible if it leads to different results compared to CJEU case law. We must therefore await further developments in case law at national level to see whether and to what extent the tax authorities revise the principles they apply.

NEWS FROM THE BFH

Poker and VAT – the cards have been shuffled BFH, ruling of 30 August 2017, XI R 37/14

As a result of recent CJEU case law, the German Federal Tax Court (BFH) has concluded that a professional poker player does not need to pay any VAT on winnings.

Facts An employee gave up his paying job and took part in poker tournaments, in so-called cash games and in internet poker events. He did not submit VAT returns. The tax authorities classified him as a sole trader and imposed VAT tax on him.

The Lower Tax Court rejected the legal action. By carrying out the activity of a poker player playing for money, the claimant, they said, had carried out miscellaneous services that are liable for VAT. With the intention of generating income, he participated in poker tournaments, cash games and games which took place on the internet. The participation took place with the rules prescribed for each game while assuming a risk – the loss of his stake – at these events. This must be viewed as an occupation for remuneration which is liable for VAT, they said.

Ruling The appeal before the BFH was successful. The BFH denied the existence of taxable revenue as a sole trader, because there was no direct connection between the participation in poker tournaments, cash games and internet poker events and the payments received (prize money and winnings from games).

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Refering to the CJEU ruling of 10 November 2016 ‒ case C-432/15 ‒ Pavlina Bastova (see VAT Newsletter December 2016), a professional poker player does not provide a service in the course of an exchange of services for payment, if he participates in games organized by third parties and receives prize money or winnings solely in the case of a successful participation. Between (mere) participation in the poker game and the prize money or winnings received if successful, the necessary direct connection for an exchange of services is absent. The CJEU predicated this on the fact that the payment depends on the achievement of a special performance and is subject to certain unpredictability.

Please note: In its ruling, the BFH differentiates between non-taxable income and prize money from taxable services in connection with a poker game. Hence, participation in a poker game is a service rendered in the scope of an exchange of services for a consideration, if the organizer pays a fee which is independent from the placement. This can be an admission fee for example. In such a case, the payment made by the organizer is an actual consideration for the service rendered by the player to take part in the poker game.

Consequences of a VAT group BFH, ruling of 10 August 2017, V R 64/16

The ruling concerns an agricultural operation whose proprietor is a controlling enterprise. In this case, deliveries of this business’ produce by the subordinate company were also subject to taxation based on average rates (§ 24 German VAT Law (UStG)). The BFH also concluded this based on the general principles of a VAT group.

Facts A farmer cultivated farmland and planted vegetables, sugar beets, potatoes and grains. He was also the sole shareholder-director of a limited liability company (GmbH). The farmer sold the vegetables he grew himself to the GmbH, which washed, hulled, packed and sold them.

The tax authorities assumed that a VAT group existed between the farmer and the GmbH. Therefore, the incoming and outgoing revenues of the GmbH must be attributed to the farmer, they said. However, it is disputed whether the GmbH’s revenue was subject to average taxation in accordance with § 24 UStG, which the tax authorities denied.

Ruling The BFH affirmed the question. The court held that the farmer had himself run an agricultural business in accordance with § 24 UStG. If he carried out deliveries using the products of this business, he was indisputably entitled to the use of § 24 (1) UStG.

This also applies for the revenue which the GmbH achieved as a subordinate company of the farmer, using the farmer’s products. The subordinate

company’s dependence, as mandated by § 2 (2) No. 2 UStG, leads to its activities being attributed to the controlling enterprise. The agricultural producer activity and the delivery of thus produced items could be performed by different companies in the VAT group. § 24 UStG is interpreted as revenue-based but not company-based.

§ 24 (2) sent. 3 UStG is not in dispute with this judgement. Accordingly, a commercial undertaking, by virtue of its legal form (for example GmbH) is not held to be an agricultural operation even if other characteristics of an agricultural operation are present. Due to the farmer’s legal status as a sole proprietor this provision is not relevant here. This also applies for the GmbH as a subordinate company, which must be treated as a permanent subsidiary of the farmer as a result of the VAT group pooling. Therefore the court must not make a decision on doubt about Union law regarding this provision. The BFH concluded by noting that “discounters” could also achieve revenue in accordance with § 24 UStG if they fulfill the prerequisites for that.

Please note: The BFH also discusses the general principles for VAT groups. Thus the VAT group does not only cause the attribution of revenue, but also influences the level of taxes which result for the controlling enterprise.

In this way, for example, the input VAT deductions for the controlling enterprise depend on the relationships of the entire VAT group. If the controlling enterprise buys a service which it passes on to the subordinate

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company, the input VAT deduction is determined in accordance with the use of the service by the subordinate company.

Furthermore, the treatment as a company also influences the tax law-based qualification of the revenue generated by the VAT group. If the controlling enterprise, for example, delivers a piece of land which is cultivated by the subordinate company, the treatment as a company leads to the existence of a VAT-exempt delivery as a single supply, in accordance with § 4 No. 9 a) UStG (BFH, ruling of 29 October 2008, XI R 74/07; see VAT Newsletter March 2009).

If the object disposed of is a letting enterprise, the purchaser must intend to continue the letting activities from a VAT law point of view. The transfer of a piece of land, which is leased to a subordinate company, to the controlling enterprise does not lead to a transfer of a business as a going concern, as the controlling enterprise does not continue any letting activities from a VAT law point of view. Rather, it uses the piece of land itself for the purposes of its business (BFH, ruling of 6 May 2010, V R 26/09; see VAT Newsletter November 2010).

Building up a structured operation is liable for tax BFH, ruling of 3 August 2017, V R 19/16

In this ruling the BFH takes position on VAT-exempt activities of an insurance agent and insurance broker (§ 4 No. 11 UStG). According to the BFH these do not include the building of a structured sales network for an insurance company.

Facts In a dispute, the claimant was engaged as the “structure superior” in an insurance company’s structured sales network and was required to build up the lower layers. For this purpose, he organized an advertising event, appeared as a speaker and recruited approx. 40 brokers. The remuneration payments were suspended after the structural measures ended by the insurance company. Apart from this, he concluded certain insurance contracts with his wife. Whether he procured VAT-exempt transactions for the insurance company as an insurance broker (§ 4 No. 11 UStG) through the establishment of a structured network or whether his revenue is liable for tax, is disputed.

Ruling For the BFH the support, training and monitoring of insurance agents, the fixing and payment of commissions and maintaining contact with the insurance agents, which typically accompany the establishment and maintenance of a structure network, are not included in the VAT-exempt activities of an insurance agent.

These types of services are only VAT-exempt if the contractor, by examining every contract offer, can indirectly influence the parties to the contract, whereby the possibility of carrying out such an examination in individual cases must be set aside.

There is no VAT-exemption for services which do not show any relation to individual brokered transactions, but at best serve, in the course of the administration of a sales organization which provides brokerage services, to support another company.

Based on these principles, in the case of dispute the services rendered are not covered by the VAT-exemption contained in § 4 no. 11 UStG. In the case at hand, the complainant merely had the task to ensure a satisfactory volume of insurance contracts for the insurance company by means of direct and indirect recruitment of insurance agents and insurance brokers.

The complainant’s activity had no specific and significant relationship to the individually brokered insurance contracts. Hence, the necessary influence of the complainant on the individual insurance contracts is absent.

Also the insurance contracts concluded by the complainant and his wife could not change anything. The insurance company refinanced the remuneration they paid to the complainant through the commissions based on these contracts, whereby the complainant did not receive payments for concluding his own agreements but for building up the structured business. The building up of a structured network is not covered by the VAT-exemption contained in § 4 no. 11 UStG.

As well as that, in the case of the contracts concluded by the complainant himself, brokerage was already absent (i.e. they were not brokered), as the complainant himself became a party to the contract. In the case of an interpretation which conforms to the provisions of § 4 No. 11 UStG, however, only revenue from an “insurance brokering activity” is VAT-exempt.

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Please note: For the BFH, taking Union law into account (see e.g. CJEU, ruling of 17 March 2016 ‒ case C-40/15 ‒ Aspiro), in order for an activity in accordance with § 4 no. 11 UStG to be VAT-exempt, two requirements must be fulfilled:

First of all, the supplier of services must be in contact with both the insurer and the person to be insured. This connection can also be of an indirect nature, if the supplier of a service is a subcontractor of the insurance broker or insurance agent.

Secondly, their activity must encompass significant aspects of an insurance brokering activity, such as searching for customers and bringing them together with the insurer. In the case of a subcontractor it is crucial that they participate in the conclusion of insurance contracts.

NEWS FROM THE BMF

Granting credit as an independent service BMF, guidance of 8 November 2017 – III C 2 - S 7100/13/10007

The BMF has changed its view on the granting of credit as an independent service (see Section 3.11 VAT Application Decree (UStAE)). The changes apply for all open cases.

Consideration of BFH case law The changes are based on the BFH ruling of 13 November 2013, XI R 24/11 (see VAT Newsletter March 2014). In its ruling, the BFH came to the conclusion that ‒ contrary to the statements in Section 3.11 (2) sent. 2 No. 2 UStAE ‒ a numerical fixed annual interest

rate is not decisive. This applies, if, taking the circumstances of the individual case into consideration, providing credit for the payment of work deliveries must already be assessed as an independent service.

Change to UStAE As a consequence, the BMF deleted Paragraph 2 of Section 3.11 UStAE and has lifted the mandatory requirement for a separate service for the granting of credit. From now on, it depends on the general differentiation criteria in Section 3.10 UStAE for each individual case. The indicators for a separate service are, however, inter alia

‒ separate agreement on delivery or other services and the granting of credit;

‒ independent creation of service prices;

‒ separate issuance of invoices.

An indicator can therefore be an otherwise determined rate of interest as a “service price”, instead of a fixed annual interest rate. For the assessment the previous Paragraphs 3 and 8 of Section 3.11 UStAE continue to apply.

Please note: The BMF guidance also mentions the particular forms of granting credit. Thus, if granting credit in the course of Public-Private-Partnership projects, the work delivery and financing must be separated. This is not the case if both components are coordinated in such a way that the intertwining makes it impossible for only one of the two services to be made use of. For grant credit in connection with debt purchasing, the tax authorities continue to refer to Section 2.4 UStAE.

Zero-rating of revenue for sea shipping and air transport BMF, guidance of 6 October 2017 – III C 3 – S7155/16/10002

In its ruling of 4 May 2017 ‒ case C-33/16 ‒ A, the CJEU commented on the zero-rating (VAT exemption with entitlement of input VAT deduction) of supplies of services in the area of loading and unloading of a ship in line with Article 148 (a) VAT Directive. The CJEU ruled (see VAT Newsletter May 2017) that according to Article 148 (d) of the VAT Directive not only those supplies can be zero-rated, which are provided during the final trade step.

Supplies of services which are those rendered at a previous trade level could also be zero-rated. This includes, for example, a service supplied by a subcontractor to a client, who then charges the service on to a freight or transport company. Loading and unloading services can also be zero-rated, which are rendered to the parties who are authorized to dispose of the cargo, perhaps the exporter or importer.

Change to the UStAE The BMF has adjusted the UStAE in line with the CJEU ruling. The zero-rating cannot be extended to turnover from the preceding steps, if at the time these services are carried out, their final use for the requirements of a seafaring ship is not definite due to their nature. If, at the time of the services are carried out, their final use for the requirements of a seafaring ship has been determined and, if the final intended purpose of the service does not only become comprehensible following special control and monitoring mechanisms, the zero-rating can also be extended to preceding steps.

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Timing of the scope of application The principles of this guidance must be used for all open cases. If the parties involved have applied the UStAE in the previous version for turnover generated by 31 December 2017, this will not be objected to, even for the purposes of the service recipient’s input VAT deductions.

Please note: Due to 8.2 (1) UStAE, the above principles of the BMF guidance also apply for turnover for air transport. This may also apply for the transition regulation until 31 December 2017.

IN BRIEF

Zero-rating for supplies of services in connection with the import of objects CJEU, ruling of 4 October 2017 – case C-273/16 – Federal Express Europe

The CJEU ruling concerns the interpretation of Article 144 VAT Directive. According to this, Member States zero-rate supplies of services which relate to the import of objects and the value of which, in accordance with Article 86 (1) (b) VAT Directive, is contained in the tax base (see § 4 No. 3 sent. 1 a) aa) UStG in Germany).

From a submission from Italy, the CJEU comes to the conclusion that the zero-rating on ancillary services, including transport services, only requires that their value is included in the tax base. In contrast, it is not required that import VAT has to be levied actually on these services upon import. This is the case for low value goods for example.

German administrative practice is in accordancewith the CJEU’s decision. Hence a zero-rating for items which are tax-exempt, such as goods which are part of move or exhibition goods, comes into consideration also (see Section 4.3.3 (2) UStAE).

Input VAT deductions of holding companies Request for a preliminary ruling (Denmark), case C-502/17 – C&D Foods Acquisition

Denmark’s request for a preliminary ruling from the CJEU concerns the input VAT deduction from due diligence investigations performed for a holding company.

In the dispute, a holding company provides administrative and IT services, which are liable for value added tax, to a subsidiary. The shares in the subsidiary are supposed to be sold. In this respect, due diligence investigations were ordered. The sale, however, did not go through. The submitting court asks the CJEU whether the holding company is (nonetheless) entitled to the full deduction of VAT on services received in connection with the due diligence investigations.

Further, the submitting court would like to know if the fact that the price for the holding company’s VAT-liable administrative and IT services corresponds to its salary costs plus a mark-up of 10%, is important for the answer of the previous questions.

Ultimately, the CJEU should issue an opinion on whether, independently of the responsibility for answering the previous question, a right to a VAT input deduction exists for

the advisory costs as overhead costs and, if yes, under which conditions.

EVENTS

Cologne VAT Congress

We would like to draw your attention to the topic-related venue of the publishing house Dr. Otto Schmidt KG in cooperation with KPMG.

Cologne VAT Congress

On 7 and 8 December 2017 in Cologne

Topics ‒ Input tax deduction in case

of holding structures ‒ Invoices and invoice

requirements ‒ VAT-Deduction and abuse ‒ Coupons ‒ Implementation

of the EU Directive ‒ Current CJEU and BFH

rulings ‒ Latest developments from

the administrative perspective

‒ Latest developments from the international business perspective in particular concerning consignment stocks

Please find further information and the registration form for the venue on the website of the publishing house Dr. Otto Schmidt KG.

VAT Newsletter | 7

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Tax courses from KPMG

The tax courses from KPMG are an ideal preparation for challenges in tax matters. The courses are provided in the form of online courses and in-house course modules:

Online courses The current range of online courses can be found here. In particular, we would like to draw your attention to the following course:

Online course on 28 November 2017: Recent changes in the area of energy and electricity taxes

In-house course modules With our in-house course modules our trainers can put you and your team on the right track in selected tax subjects. The current range of courses can be found here.

The focus of the tax in-house course modules is on VAT on the topics:

‒ VAT groups ‒ Input tax deduction /

invoice requirement ‒ sale-and-lease-back

transactions

If you are interested in a tax course or if you have questions about the course fees, please ask your KPMG contact person or send us a course inquiry. We will get back to you right away.

VAT Newsletter | 8

Impressum Issuer KPMG AG Wirtschaftsprüfungsgesellschaft THE SQUAIRE, Am Flughafen 60549 Frankfurt/Main Editor Ursula Slapio (Responsible***) T +49 211 475-8355 uslapio@kpmg.com Christoph Jünger T + 49 69 9587-2036 cjuenger@kpmg.com VAT Newsletter and Customs & Trade News – Free Subscription To subscribe, please register here (VAT Newsletter) and there (Customs & Trade News). *** Responsible according to German Law (§ 7 (2) Berliner

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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Our services are provided subject to our verification whether a provision of the specific services is permissible in the individual case.

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Contacts KPMG AG Wirtschaftsprüfungsgesellschaft Stuttgart Dr. Stefan Böhler Head of Indirect Tax Services T +49 711 9060-41184 sboehler@kpmg.com Berlin Martin Schmitz T + 49 30 2068-4461 martinschmitz@kpmg.com Duesseldorf Peter Rauß T +49 211 475-7363 prauss@kpmg.com Ursula Slapio T +49 211 475-8355 uslapio@kpmg.com Frankfurt/Main Prof. Dr. Gerhard Janott T +49 69 9587-3330 gjanott@kpmg.com Wendy Rodewald T +49 69 9587-3011 wrodewald@kpmg.com Dr. Karsten Schuck T +49 69 9587-2819 kschuck@kpmg.com Hamburg Gregor Dzieyk T +49 40 32015-5843 gdzieyk@kpmg.com Antje Müller T +49 40 32015-5792 amueller@kpmg.com

Cologne Peter Schalk T +49 221 2073-1844 pschalk@kpmg.com Munich Dr. Erik Birkedal T +49 89 9282-1470 ebirkedal@kpmg.com Günther Dürndorfer* T +49 89 9282-1113 gduerndorfer@kpmg.com Kathrin Feil T +49 89 9282-1555 kfeil@kpmg.com Claudia Hillek T +49 89 9282-1528 chillek@kpmg.com

International Network of KPMG If you would like to know more about international VAT issues please visit our homepage KPMG International**. Further on this website the periodical publication “Global Indirect Tax Brief” (KPMG International) are published. We would be glad to assist you in collaboration with our KPMG network in your worldwide VAT activities. You can also get up-to-date information via our homepage. * Trade & Customs

**Please note that KPMG International does not provide any client services.