Instalment payments: the entrepreneur must pre-finance the VAT - ECJ ruling "X-Beteiligungsgesellschaft mbH" (C-324/20)

If the parties agree to pay in instalments for a one-off supply that is not a continuous supply, the supplier must pay the VAT in full when the supply is performed. The supplier also cannot rely on a reduction of the taxable basis. This was decided by the ECJ on 28 October 2021 (C-324/20) following a referral by the German Federal Fiscal Court (BFH).

Facts of the case: Payment by instalments agreement

The plaintiff had mediated the sale of a property for their client. The intermediary fee was to be paid in five annual instalments. Accordingly, the plaintiff also reported and paid the VAT in five annual instalments. After a tax audit, however, the tax office deviated from this and assessed the full amount of VAT for the taxable period of the intermediary supply. The appeal on the level of the tax office was unsuccessful, but the tax court ruled in favour of the plaintiff. The tax office appealed this judgement, and the Federal Fiscal Court (Bundesfinanzhof, BFH) referred the case to the ECJ for a preliminary ruling.

No proportional VAT taxation

The BFH wanted to know whether the facts of the case fell within the scope of Article 64 of the VAT Directive. Under that provision, supplies giving rise to successive invoicing or payments are deemed to have been supplied at the end of the period to which those invoices or payments relate.

However, the ECJ denied this. It can be inferred from the wording and the purpose of Article 64 of the VAT Directive that the provision only covers supplies that are not provided on a one-off basis, but rather repeatedly and continuously. However, the intermediary supply to be assessed in this case was completed when the intermediary was successful and was therefore a one-off service. The argument that the taxpayer is only a tax collector for the state and that it cannot therefore be expected to pre-finance the payment of a tax in instalments is also not valid.

The ECJ's decision in the "baumgarten sports & more" case, C-548/17, does not show otherwise. This case concerned the placement of a player with a football club, which was remunerated in instalments depending on how long the player in question remained with the club. In this case, it was not a one-off service.

No reduced taxable basis

In the event that Article 64 of the VAT Directive was not relevant, the BFH wanted to know whether one could assume a reduced taxable basis under Article 90 of the VAT Directive (roughly corresponding to Section 17 of the German VAT Code). This recourse could prevent the pre-financing of VAT, which the BFH considered problematic.

The ECJ did not follow this approach either. The taxable basis could only be reduced if the recipient of the supply did not pay the consideration owed. However, an agreement on payment by instalments was only a mutually agreed postponement of the due date, i.e., a payment method that did not affect the taxable basis.

Repercussions in Germany

The ECJ's decision corresponds to the legal situation in Germany: according to Section 13 (1) no. 1 a) of the German VAT Code, the VAT only arises pro rata in case of partial supplies. This is the case if the remuneration for certain parts of an economically divisible supply is agreed upon separately. According to this definition, there is no partial supply in the present case because the intermediary success occurs once. The BFH's sense of disruption concerning the pre-financing could not impress the ECJ. However, the comparison with the "baumgarten sports & more" case shows that each situation must be looked at very closely. At first glance, both decisions are based on intermediary services; however, there may be cases in which the intermediary success has a continuous effect. It is therefore worthwhile to also check other supplies for such a continuous effect and, if necessary, to argue accordingly in communication with the tax office.

The BFH has implemented the ECJ ruling "baumgarten sports & more" in its follow-up decision (V R 8/19, 26 June 2019). However, it also relieved the taxpayer in a somewhat different situation (V R 31/12, 24 October 2013) with Section 17 of the German VAT Code from the pre-financing of VAT by stating that if the supplier is partially unable to enforce the consideration over a period of two to five years due to a warranty retention, the consideration is temporarily uncollectible to that extent. This situation differs from the ECJ ruling C-324/20 because in the case of a warranty retention, not only is the due date postponed but even the "whether" of the payment is in question. It is questionable whether this difference justifies the continued assumption of temporary irrecoverability for warranty retentions despite the current ECJ case law.

(Dated: 18 November 2021)