Subscription gifts as an ancillary supply to a magazine subscription

ECJ judgement "Deco Proteste - Editores Lda" of 5 October 2023 (C-505/22)
Nowadays, magazine subscribers often receive a gift when subscribing, and this gift is often quite valuable. The question here is whether this constitutes a free of charge disposal of goods. If, on the other hand, there is a supply against payment, it must be clarified whether this is considered an independent supply or whether the subscription gift together with the supply of magazines is considered a uniform supply. This has an impact on the VAT rate.

The facts: Subscription with a subscription gift

In this Portuguese case, magazine subscriptions were sold together with a gift in kind, each of which was worth less than € 50. The gifts were smartphones and tablets. The subscription could be cancelled after only one month and the customer was allowed to keep the gift. The first monthly payment for the subscription was the same as the following ones. In the invoices issued, the magazines were subject to the reduced VAT rate. However, the invoices made no reference to the subscription free gift. The tax and customs authorities made the supply of the gifts subject to VAT, using their purchase price as the taxable amount at the standard VAT rate of 23%.

Questions submitted

The referring Portuguese court asked the ECJ whether the gift was considered

a free of charge disposal of goods...
or part of a complex supply...
or an ancillary supply to the supply of the magazines.

It also posed further detailed questions for cases involving a free of charge disposal of godds, relating to specifics of Portuguese law.

ECJ decision

In its earlier case law, the ECJ has already identified two sub-cases involving a single supply: the complex supply and the ancillary supply to a principal supply. In the case of a complex supply, the elements must be so intertwined that they form a separate entity. The ECJ did not consider this to be the case here.

According to previous ECJ case law, an ancillary supply is characterised by the fact that it does not fulfil any purpose of its own for the recipient but is merely the means to make use of the principal supply under optimal conditions. In the present case, the ECJ also reiterates that the deciding factor is how the average consumer would view the situation. However, in its detailed examination, the ECJ then takes a different approach and focuses instead on the supplier’s perspective (instead of the customer’s) when examining the purpose. The ECJ emphasises that the gift’s sole purpose is to attract new subscribers and thereby increase the number of subscribers and increase the applicant's profits. Another argument in favour of the secondary importance of the gift is that customers are allowed to keep the gift even if they cancel the subscription after only one month. In the ECJ’s opinion, however, the result is that even from the perspective of the average consumer, there is no distinct purpose. As the ECJ states: "The provision of such a gift therefore [emphasis by the author] has no distinct purpose from the point of view of the average consumer, who agrees to pay at least one month’s subscription in order to obtain the gift." Only secondarily does the ECJ refer to the argument that the gift enabled new subscribers to benefit, under the best possible conditions, from the service provider’s main service, namely the reading of the magazines for which the subscription was taken out, in so far as a tablet and a smartphone make it possible, for example, to consult a digital version of those magazines.

Since the gift is an ancillary supply to the supply of the magazine, it is clear to the ECJ that it cannot be a free of charge disposal of goods. The ECJ therefore did not need to answer the question of whether it was a gift of low value that would exempt it from taxation.

Practical implications

Classifying the gift as an ancillary supply means that it is subject to the same VAT treatment as the principal supply, i.e., it also benefits from the reduced VAT rate of the magazine supply. Accordingly, the remuneration does not have to be split, which simplifies the process.

What is surprising about the present decision is that the ECJ focuses on the supplier’s concerns and interests with regard to the question of the gift's distinct purpose. This is contrary to previous case law on the subject of ancillary supplies. Whether the argument that a tablet and smartphone are suitable for reading the digital version of the magazine alone would justify the decision seems at least questionable. As one can do so much more with the tablet/smartphone than just read the digital magazine, one could probably have affirmed a distinct purpose.

This ECJ decision also contradicts recent case law in Germany.

On 19 January 2022, the Regional Fiscal Court Hamburg (6-K-16/20) ruled that subscription gifts were not ancillary supplies to magazine supplies. The gifts in this case were books, DVDs, accessories for the household and bathroom, lifestyle and beauty accessories, and multimedia and technology items. The court argued mutatis mutandis, among other things, that a subscription can also be optimally used without the gift and that the magazine and the gift each serve independent purposes. The court thus applied the same criteria as the ECJ but came to a different conclusion. In doing so, the Hamburg Fiscal Court also rejected the circular of the Frankfurt/Main tax office of 7 August 2007, which assumed an ancillary supply. The Hamburg Tax Court also rejected Section 3.3 paragraph 20 UStAE, according to which subscription gifts should regularly be considered as supplies for consideration or uniform supplies for consideration. However, it seemed questionable to the Hamburg Fiscal Court whether the Federal Ministry of Finance intended to make a statement on the uniformity of the service at all because the section mentioned was in the context of remuneration.

As the Hamburg Regional Tax Court did not consider the gift to be part of a uniform supply, it then had to deal with the question of whether there was a free of charge disposal of goods in the form of a gift within the meaning of Section 3 (1b) no. 3 UStG. The court responded No because the subscriber has a contractual claim to the gift. As a result, the Hamburg Regional Tax Court assumes that the gift is a separate supply for consideration. This is subject to the standard VAT rate, and the remuneration for the magazine subscription must be divided accordingly. The judgement is final and cannot be appealed.

Whether there is a single supply is not actually decided by the ECJ but by the national court. In the present case, the ECJ also states that although the circumstances of the main proceedings appear to speak in favour of an ancillary supply, this is a matter for the referring court to determine. The Hamburg Fiscal Court also takes the same view of the distribution of competencies and refers to the earlier ECJ decisions "Bog" and " Wojskowa Agencja Mieszkaniowa w WarszawieAccordingly, the German fiscal courts are still free to assess the question of the uniformity of the supply themselves. The question also arises as to whether the Hamburg Fiscal Court would have decided the case differently if, as in the ECJ case, the gift had been tablets and smartphones, items which also allow the user to read magazines. For affected companies, there is now considerable uncertainty given the contradictory rulings. As far as possible, it is advisable to obtain a binding ruling.

Dated: 23 October 2023