Taxation of travel services according to Sec. 25 German VAT Code - BMF circular letter dated 29 March 2021

According to a circular letter from Germany’s Federal Ministry of Finance (BMF), dated 29 March 2021, the special provision of Section 25 of the German VAT Code will no longer apply to travel services provided by companies having their registered office in a third country and without a permanent establishment in the EU as of 1 January 2022. This decision is surprising because it has no basis in the wording of Section 25 of the German VAT Code.

No more margin taxation for tour operators from third countries

The decision of the BMF is very concise and provided without reasoning or explanation. It is to be applied in all open cases, however, there will be no objection if margin taxation as defined in Sec. 25 of the German VAT Code is applied to any travel supplies performed before December 31, 2020 by entrepreneurs with their registered office in a third country and without a permanent establishment in the EU.

Section 25 of the German VAT Code does not include any such restriction in its wording. The BMF may be deriving its interpretation from Article 307 of the EU VAT Directive, which states that the travel supply "...shall be taxed in the Member State in which the travel agency has its seat of economic activity...". This could lead one to conclude that travel services from third countries are excluded. However, this interpretation does not seem definitive.

Without Sec. 25 of the German VAT Code, the complex general rules apply

The brevity of the BMF letter leaves many questions unanswered. If Sec. 25 of the German VAT Code is not applicable, then the general rules for determining the place of supply must be applied. However, Sec. 25 of the German VAT Code is unique in that it combines all the elements of a travel supply into a uniform supply that is taxable uniformly at the place of the supplier. This applies regardless of whether these elements fulfil the strict general requirements pertaining to a single, uniform supply (an inseparable bundle of supplies) or actually consists of primary and ancillary supplies. We can assume that from now on it will be necessary to carefully examine whether the conditions of a uniform supply are met. If necessary, all or some of the  components will have to be treated as separate supplies, meaning that each can have a different place of supply -  for example, accommodation services, transportation services, catering services, etc. to which special rules will apply with regard to the place of supply and the tax rate.

A distinction between B2B and B2C must also be made, and the reverse charge procedure should then probably be applied to B2B services. For the B2C transactions, it must be clarified whether the tour operator can use the one-stop-shop procedure from July 1, 2021 onwards. This may result in new VAT registration obligations.

There may also be cases of double taxation or non-taxation, also in relation to other Member States.

Recommendation: Determine which is more favourable - Sec. 25 of the German VAT Code or the general rules

Tour operators from third countries should now carefully examine their respective business models to assess whether it is more favourable for them to apply Sec. 25 German VAT Code by invoking the non-objection rule. Nevertheless, decisions for the time after the expiration deadline should be made timely. Customers receiving invoices from a tour operator in a third country that include the German VAT should carefully check whether the tax shown is justified. Interesting tax situations may arise if the tax assessment period has already expired for the supplier but not for the customer.

Dated: May 5, 2021