Reimbursement of expenses for certain written warnings will be subject to VAT - BFH rulings XI R 27/14 and XI R 1/17

On 21 December 2016 (XI R 27/14) and 13 February 2019 (XI R 1/17), the Federal Fiscal Court (BFH) ruled that the reimbursed expenses paid by a person issued a written warning for copyright or competition law infringement is a service charge that is subject to VAT. The BMF also adopted this view in its letter dated 1 October 2021 and clarified some specific questions. The key details are summarised below.

Details of the VAT treatment

If an entrepreneur issues a written warning for copyright infringement or unfair competition, they are considered to have provided a service to the person being warned. The economic advantage for the person being warned is that they are alerted to the infringement and given the information necessary to fulfil the cease-and-desist claim of the party that issued the warning. The person receiving the warning is also being given the opportunity to satisfy the monetary claims of the party issuing the warning as cost-effectively as possible and/or avoid the costs of a cease-and-desist lawsuit.

The taxable basis for this service is everything that the person issuing the warning receives from the person being warned for this purpose, e.g., the reimbursement of expenses incurred in identifying the infringer (e.g., by obtaining information from an internet provider). However, damages resulting from the infringement are not taxable. Therefore, the invoice must make a distinction between payment for services rendered and compensation for damages, as only the former is subject to VAT.

The time of supply is the receipt of the warning - however, there should be no objection if the warning party already declares this turnover within the taxable period in which the warning was sent.

The standard VAT rate of 19% applies.

If the warned party denies the infringement in a substantiated manner and therefore does not reimburse the expenses, the person issuing the warning can adjust the VAT within the tax period of the denial in accordance with Sec. 17 (2) of the German VAT Code.

In the event of an unjustified warning, an invoice with VAT constitutes an unjustified tax statement pursuant to Sec. 14 (2) sentence 1 of the German VAT Code. Thus, the person issuing the warning owes the VAT shown until the risk of any loss of tax revenues has been eliminated. This requires proof that the warned party has not claimed an input VAT deduction or has repaid the input VAT and made a written application to the tax office.

Application and practical challenges

The BMF provides for a transitional period, but this is extremely short: the tax authorities will not object if the person issuing the warning notice and the person being warned treat the reimbursement of expenses as non-taxable in the case of warnings issued before November 1, 2021.

The BMF letter expressly refers only to cease-and-desist notices under the Copyright Act (UrhG ) and the Unfair Competition Act (UWG). How cease-and-desist letters in other areas of law are to be treated is thus left open.

In practice, it is not always easy to distinguish between a remuneration for services and a compensation for damages. The distinction should, however, be made carefully as the person warned is not permitted to claim an input VAT deduction if the VAT is wrongfully shown as applying to the damages. However, if no such distinction is made, the total amount must be regarded as a reimbursement of expenses and is therefore seen as remuneration for an exchange of services subject to VAT that has to be paid.

Unjustified warnings are not uncommon as the infringer is often difficult to identify. Classifying these cases as unjustified VAT statements makes it complicated for the person issuing the warning to correct the VAT from the erroneously issued invoice. It is therefore advisable to research such cases carefully to avoid issuing warnings "out of the blue" and being subject to the resulting VAT consequences.