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In the VAT Revision Act of 1997 dated 12 December 1996, the German legislature added "other supplies in the field of telecommunications" as sec. 3a (4) no. 12 of the German VAT law to the catalogue in sec. 3a (4) of the VAT law (see article no. 61). In addition, an item no. 2 was inserted into sec. 1 (1) sentence 1 of the VAT implementing regulations (abbreviated UStDV) according to which the place of performance of other supplies within the meaning of sec. 3a (4) no. 12 is shifted to Germany to the extent effected by a taxable person (an "entrepreneur") operating his enterprise from a country outside of the European Union. In such cases, the place of performance of the "other supply" is in Germany if the telecommunication service is used or exploited in Germany. These changes in the law constitute German extension of the so-called "location-of-recipient" rule to other supplies in the field of telecommunications.
Behind the new rule in sec. 3a (4) no. 12 of the German VAT law is the desire of the EU member states to minimise distortion of competition in the field of telecommunications, especially as regards what are known as "call-back services". Under the prior regime, enterprises rendering telecommunication services from a location within the European Union would generally have had to charge VAT on these services at the rate in effect in the respective Member Country. This put them at a competitive disadvantage vis-a-vis enterprises located outside of the European Union in a country which had no tax comparable to the European Union's VAT system. Since the applicable VAT rates in the EU vary from 15 % to 25 %, non-EU enterprises were able to offer their telecommunication services at considerably lower prices. The fear existed that this advantage would so distort competition that jobs would be transferred outside of the EU. To forestall such a development, the EU Member States agreed unanimously to implement the location-of-recipient rule for telecommunication services in anticipation of a planned amendment to the 6th EEC VAT Directive. Germany made use of this authorisation and changed its laws effective 1 January 1997.
The following section explains the new law in more depth, contrasts it with previous law, and calls attention to a number of open questions in connection with implementation of the location-of-recipient rule. Particular attention is paid to online service providers since the proper VAT treatment of their services has still yet to be finally resolved.
2. VAT treatment
2.1 Legal history
In the past, German VAT law has made no explicit mention of telecommunication services.
Telecommunication services, which included the services of online service providers, were classified as "other supplies" within the meaning of sec. 3a (1) of the German VAT law. Under this provision, "other supplies" are generally performed at the location from which the service provider operates his enterprise. If the "other supply" is rendered from a permanent establishment, this permanent establishment is regarded as the place of performance. Accordingly, online service providers and other telecommunications providers could render services to German customers without charging German VAT as long as they operated from outside the country and had no fixed establishment here.
Under the 1993 version of sec. 1 sentence 1 UStDV (German VAT implementing regulations), services provided by entrepreneurs established in (i.e. operating from) non-EU countries were deemed to be performed in Germany if used or exploited here. It developed, however, that this provision was not authorised under Article 9 (2) (e) of the 6th EEC VAT Directive and thus violated controlling EU law. As a result, sec. 1 sentence 1 UStDV was amended effective 21 October 1995. From this time on, telecommunication services provided by foreign-based enterprises to German resident persons, whether taxable persons (entrepreneurs) or private consumers, were no longer subject to German VAT.
2.2 Current state of the law
The VAT Revision Act of 1997 extended the location-of-recipient rule to telecommunication services by adding "other supplies in the field of telecommunications" to the list of services governed by this principle in sec. 3a (4) of the German VAT law.
From 1 January 1997 on, the place of performance of telecommunication services is determined as follows under sec. 3a (4) no. 12 and sec. 3a (3) of the German VAT law:
If the recipient of the telecommunication services is a taxable person (entrepreneur), the services are performed where the recipient operates his business. If the services are provided to a specific permanent establishment of an enterprise, the location of the permanent establishment is instead the place of performance.
If the recipient of the telecommunication services is a non-taxable person (not an entrepreneur) who is resident outside of the European Union, the service is performed at the recipient's place of domicile or at its legal seat, as the case may be.
If the recipient of the telecommunication services is a non-taxable person (not an entrepreneur) who is resident within the European Union, the general "location-of-the-provider" rule of sec. 3a (1) of the German VAT law in principle applies. This rule situates the service at the place from which the provider operates his enterprise. However, if the service provider operates his enterprise from a non-EU country, an amended version of sec. 1 sentence 1 of the VAT implementing regulations now shifts the place of performance of telecommunication services to Germany to the extent these services are used or exploited here.
Telecommunication services provided to German recipients by a provider located e.g. in the United States would thus be subject to the following VAT treatment in Germany:
The services provided by the U.S. enterprise fall within the scope of the German VAT law and in fact give rise to tax (since no exemption applies) to the extent they are rendered to a taxable person (entrepreneur) resident in Germany or to the German permanent establishment of a taxable person (entrepreneur) resident outside Germany. Telecommunication services rendered to non-taxable persons (non-entrepreneurs) who are resident in the European Union likewise fall within the scope of the German VAT law and in fact give rise to tax (since no exemption applies) if they are used or exploited in Germany. The U.S. entrepreneur is required to register in Germany as a foreign taxable person (entrepreneur) unless he can come under a simplified procedure for reporting and remitting VAT.
The VAT rate currently applicable to telecommunication services is 15 %.
2.3 Concept of telecommunication services
The German VAT law does not itself define the concept of "other supplies in the field of telecommunications". Based on the legislative history of the VAT Revision Act of 1997, the concept on telecommunication services found in the German Telecommunications Act was intended to apply for VAT purposes as well. Section 3 no. 16 of the Telecommunications Act defines telecommunications as the technical process of emitting, transmitting, and receiving intelligence of any sort in the form of signs, language, images, or sounds by means of telecommunications facilities. The concept of telecommunication services is defined in sec. 3 no. 18 of the Telecommunications Act as the commercial offer to provide telecommunication including the means of transmission for third persons.
At the European Community level, the concept of telecommunications is governed by the Melbourne Convention. This defines telecommunications as "any transmission, emission or reception of signs, signals, writing, images and sounds or intelligence of any nature by wire, radio, optical or other electromagnetic systems".
Under the Tele-Service Act (Teledienstgesetz) which went into effect in Germany on 1 August 1997, the concept of "tele-services" is defined in contradistinction to that of telecommunication. Under sec. 2 (2) of the Tele-Service Law, tele-services comprise without limitation the following:
- Offers in the field of individual communications (e.g. telebanking, data exchange)
- Offers for information or communications to the extent not primarily concerned with the editorial formation of public opinion (data services such as traffic, weather, environment, and stock market data; dissemination of information on offers to provide goods and services)
- Offers for use of the Internet or other networks
- Offers for the use of tele-games
- Offers for goods and services in electronically accessible databases with interactive access and direct order possibility.
Section 2 (4) no. 1 of the Tele-Service Act provides that it shall not apply to telecommunication services or to the commercial rendering of telecommunication services pursuant to sec. 3 of the Telecommunications Act. The Tele-Service Act thus distinguishes sharply between "tele-services" and "telecommunications". In our opinion, this distinction must apply for VAT purposes as well.
2.4 VAT treatment of so-called "Online Services"
The VAT treatment of the supplies of so-called "online services" is the subject of continuing controversy. The term "online services" is used to refer in particular to enterprises which provide their members with access to information databases and to the Internet. The services rendered include providing access to third party databases, storing and providing access to third party data (e.g. operation of a mail server, providing access to third party newsgroups, allowing third party mailing lists to use the provider's own list server - known collectively as "hosting), and providing access to the Internet or to other database providers through so-called gateways.
In conjunction with the tax authorities of the various German states, the German Federal Ministry of Finance is currently preparing a tax directive dealing with this subject. Based on the information presently available to us, we can state the following with respect to the directive's anticipated content:
Firstly, the concept of telecommunication services within the meaning of the new no. 12 in sec. 3a (4) of the German VAT law is understood as referring primarily to genuine network services and to the e-mail services of service providers.
Such services will be subject to German VAT pursuant to sec. 3a (4) no. 12 of the VAT law (as described in section 2.2 above).
Secondly, the tax authorities are still undecided as to the VAT treatment of "tele-services" (above all access to information, individual communications services such as tele-banking and data exchange, and access to the Internet or to other databases). According to our information, the present intention is, however, to treat these tele-services as not constituting "telecommunications" within the meaning of sec. 3a (4) no. 12 of the VAT law.
For VAT purposes, tele-services could thus either constitute "information services" within the meaning of sec. 3a (4) no. 5 of the VAT law or "other supplies" pursuant to sec. 3a (1).
Classification of tele-services as information services would mean that the place of performance for recipients who are taxable persons (entrepreneurs) would generally be the place from which the recipient operates his enterprise. If the information service is provided to a specific permanent establishment of the enterprise, then its location would instead control. If the recipient of the information service is a non-taxable person (non-entrepreneur) with residence (domicile or "legal seat") outside the European Union, the place of performance is his place of residence. All other cases are covered by the general rule of sec. 3a (1) of the VAT law, which locates the service at the place from which its performer operates his enterprise.
For online service providers located outside the EU, in particular in the United States, the consequence would be that information services would be subject to German VAT to the extent rendered to German entrepreneurs (or to the German permanent establishments of foreign entrepreneurs). To the extent such services were provided to non-entrepreneurs (non-taxable persons), they would escape German value added taxation.
If, on the other hand, tele-services were to be classified as "other supplies" within the meaning of sec. 3a (1) of the VAT law, the arrangement in effect prior to this year would continue in force, under which tele-services were treated as "other supplies" and were hence subject to VAT (if at all) under the laws of the country from which the provider operated his business.
To the extent online service providers offer both telecommunication services (such as e-mail) and tele-services, the intention is to permit a pro rata division of the standard fee (e.g. the basic user fee) into a taxable part for telecommunication services and a potentially non-taxable part for tele-services.
The position actually taken by the German tax authorities on the VAT treatment of the services under discussion will naturally depend on the final wording of the directive to which we referred at the outset of this subsection. Issuance of the directive is not expected before the end of October 1997.
The extension of the location-of-recipient rule to the VAT taxation of telecommunication services is resulting in considerable implementation difficulties in particular for providers located in non-EU countries which have no VAT system comparable to that in force inside the European Union. While this article has focused on the tax problems posed, the change in the VAT law has also given rise to legal and also computer technology problems with regard, for instance, to invoicing in accordance with German law and to the display of the prices charged to the final user.
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