Spa taxes are not subject to VAT for freely and gratuitously accessible spa facilities – ECJ judgement "Gemeinde A" (C-344/22)

Judgement of 13 July 2023

If the spa tax is subject to VAT, the municipality can claim an input VAT deduction from all expenses for spa facilities – as a rule, this is extremely favourable for the municipality's budget. In 2017, the BFH (Federal Fiscal Court in Germany, V R 62/16) ruled that the spa facilities may only be allocated proportionately to the municipality's business if they are also accessible to the general public, meaning that the input VAT deduction is also only permitted proportionately. This was adopted by the BMF (Federal Ministry of Finance) in section 15.19, paragraph 2, sentence 3 UStAE (administrative guidelines to the German VAT Code). The ECJ now puts a complete stop to the VAT deduction.

Facts of the case and questions referred

The German state-recognised air spa town A levied a spa tax on certain non-residents as well as on certain residents subject to the spa tax, but not on day visitors, non-residents, and residents working or attending training within the municipality. The spa facilities were freely accessible to everyone; a spa card was not required for access. In its VAT returns, the plaintiff treated the spa tax as remuneration for an activity subject to VAT, namely the operation of the spa, and requested the deduction of the VAT paid for all input supplies related to tourism.

The BFH asked whether the municipality had carried out an economic activity for which the spa tax had been the remuneration, although the persons required to pay the spa tax had not received any economic benefit beyond that which was offered to the general public. Should there nevertheless be an economic activity, it must be clarified whether there are significant distortions of competition; this is required both by Art. 13 para. 1 subpara. 2 VAT Directive and § 2b UStG (German VAT Code) to be able to assume entrepreneurial status in the case of legal persons under public law. If only the territory of municipality A itself is considered, there is no distortion of competition, as only municipality A itself is allowed to operate spa facilities here. If one were to look at the whole of Germany, distortions of competition would be conceivable.

ECJ: No economic activity

From the ECJ's point of view, there is not the necessary legal relationship between the municipality and the visitors who are allowed to use the spa facilities, in the context of which mutual services are exchanged. The spa tax is unrelated to use of the spa facilities, and municipal by-laws determine who (among those staying in the municipality) is charged the tax. Accordingly, the municipality did not perform any economic activity for which the spa tax was to be regarded as remuneration.

Because there was no economic activity, the ECJ did not need to address the issue of distortions of competition.

Practical implications

The decision only affects spa facilities that are also open to the general public. Facilities that are reserved for those people required to pay the spa tax are still likely to constitute an economic activity of the municipality so an input VAT deduction would be permitted for the related expenses. In such a case, however, whether or not there is access control via a spa card could be a decisive factor.

Dated: 01 August 2023