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In article no. 89, we reported on the changes in the German VAT treatment of telecommunication services which took effect on 1 January 1997. In this article, we noted that the tax authorities were preparing to issue a directive clarifying the scope of telecommunication services and distinguishing this service category from that of so-called "tele-services."

1. Tele-services and telecommunication services

The tax authorities released their directive in late 1997 (DB 1997, 2403 - 18 Nov. 1997). As expected, the directive provides that tele-services are not identical to telecommunication services and hence are potentially subject to different VAT treatment.

Telecommunication services are defined as the transmission, emission, or reception of signals, writing, images, sounds, or information of any sort. They include providing transmission or reception capacity and providing access to communication networks including, among others, the Internet. The specific content of the services offered through communication networks is, on the other hand, a tele-service. Tele-services include such things as tele-banking, online weather and stock market information, and online advertising.

In terms of the new directive, most online service providers offer a mixture of telecommunication services (e.g. e-mail and Internet access) and tele-services.

2. VAT treatment of telecommunication services

Since 1 January 1997, telecommunication services constitute a specific VAT service category governed by sec. 3a (3) and (4) no. 12 UStG and sec. 1 (1) no. 2 UStDV. Telecommunication services provided by a company established outside the EU to German residents, whether taxable persons (entrepreneurs) or not, are generally subject to German VAT because they are deemed to be performed at the recipient's location, if the recipient is an entrepreneur, and where the service is used or exploited, if the recipient is a non-taxable person. For services rendered to taxable persons, the withholding or zero procedures will apply.

If the service provider is located within the EU, a location-of-recipient rule applies if the German recipient is an entrepreneur. If the German recipient is not a taxable person, the general location-of-provider rule applies.

It is assumed that, as a factual matter, telecommunication services cannot fall under one of the special rules of sec. 3a (2) UStG. Should the assumption not hold in some instance, these special rules would take precedence over those set forth above. The special rules are discussed briefly towards the end of section 3 below.

Similar provisions should have been put into effect in all EU countries. The change in the law is pursuant to a European Council Decision dated 17 March 1997 authorising Member States to enact the new telecommunication service rules in derogation of the 6th VAT Directive. The authorisation expires on 31 December 1999 unless a new directive on point is adopted and takes effect before then. For the period through 30 June 1997, transition rules applied to telecommunication service providers resident in other EU countries except France (see VAT directive of 29 April 1997 - DB 1997, 909).

There are suggestions in the literature that the derogation from the 6th VAT Directive may lack sufficient foundation in EU law (see Lejeune/Vanham/Verlinden/Verbeken European Taxation 1998, 2, 5).

The new rules do not appear very practical as regards the treatment of non-taxable persons receiving telecommunication services from providers established outside the EU. Such services are subject to German VAT if used or exploited in Germany. If a German private individual takes his laptop with modem along on vacation and uses it to send and receive e-mail, the resulting telecommunication service will be used or exploited wherever the vacationer happens to be at the moment. This location is not known to the service provider. In recognition of this problem, some EU Member States, though not Germany, have adopted rules deeming telecommunication services to be used in the recipient's country of residence (see p. 4 of above cited article by Lejeune et. al.). In practice, non-EU service providers would seem to have little choice but to charge VAT to non-entrepreneurs based on their place of residence.

3. VAT treatment of tele-services

Unlike telecommunication services, tele-services do not constitute a single service category for VAT purposes. Each tele-service must therefore be separately analysed to see which VAT rubric it fits into.

The directive of 18 November 1997 suggests that tele-services will often constitute one of the so-called "catalogue" services listed in sec. 3a (4) UStG. It cites the following catalogue services as possibilities:

i. Grant, transfer, and exploitation of patents, copyrights, trademarks, and similar rights (sec. 3a (4) no. 1 UStG);

ii. Advertising or public relations services including the services of advertising intermediaries and advertising agencies (sec. 3a (4) no. 2 UStG);

iii. Legal, economic, and technical consulting services (sec. 3a (4) no. 3 UStG);

iv. Data processing services (sec. 3a (4) no. 4 UStG);

v. Information services including information on commercial/industrial experience and processes (sec. 3a (4) no. 5 UStG).

Assuming the special rules of sec. 3a (2) UStG do not apply, the place of performance of these and other catalogue services is generally as follows:

  • At the recipient's location (place of operation or relevant permanent establishment) if the recipient is a taxable person (entrepreneur - sec. 3a (3) UStG);
  • At the recipient's location (domicile or legal seat) if the recipient is a non-taxable person resident outside the EU (sec. 3a (3) UStG);
  • At the provider's location (place of operation or relevant permanent establishment) if the recipient is a non-taxable person resident within the EU (sec. 3a (1) UStG).

If the special rules of sec. 3a (2) UStG apply, then the place of performance varies depending on the particular case involved. These rules locate the performance of services in connection with real property at the property site and situate intermediary services at the place of performance of the principal service. Artistic, scientific, educational, athletic, entertainment, or similar services, including the services of a program organiser, take place where the entrepreneur in fact carries out his activities. Work on movable tangible goods is also subject to special rules.

While many tele-services will be catalogue services, this need not be true in every case. The place of performance of non-catalogue tele-services follows the general rules:

  • At the provider's location (place of operation or relevant permanent establishment) unless the special rules of sec. 3a (2) UStG apply;
  • Otherwise, at the place stipulated by sec. 3a (2) UStG (see above).

4. Tentative conclusions

It is now relatively easy, in theory at least, to identify telecommunication services and to determine their proper VAT treatment. The services of online providers which are not telecommunication services may be lumped together under the heading of "tele-services." This is not a particularly helpful classification, however, since tele-services do not form a separate category under German VAT law. Each specific service must therefore be separately analysed to determine its VAT consequences.

Subject to certain exceptions, the general picture which emerges for providers of online services which operate from outside the EU is as follows:

  • Telecommunication services to persons resident in Germany will by and large be subject to German VAT whether provided to a German entrepreneur or not.
  • At least many tele-services to German entrepreneurs will probably constitute catalogue services and hence be subject to German VAT just like telecommunication services.
  • Most tele-services to German private persons will probably not be subject to German VAT, however, because they will be deemed performed outside of the EU at the provider's foreign location.

With respect to services rendered to entrepreneurs, consideration should be given to the implications of the withholding and zero procedures.

If both taxable telecommunication services and non-taxable tele-services are rendered, which is likely to be the case at least for online services to private persons, the fee paid must be divided into a taxable and a non-taxable part. Some online providers may be able to show separate charges on the monthly invoice for certain tele-services. However, in many cases the provider will charge a uniform overall fee. To the extent no specific breakdown is possible, the tax authorities state in their new directive that they will accept a reasonable estimate based on the percentage of total user time allocable to the various types of services. Although such a breakdown may sound easy, it poses considerable problems in practice because most online service providers are no in a position to measure and allocate with precision the total time which users spend in specific service categories.

While the new directive addresses the major issues in a general way, it remains to be seen what consequences the approach it outlines will have in practice.

Disclaimer and Copyright

This article treats the subjects covered in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Specialist advice must be sought with respect to your individual circumstances. We in particular insist that the tax law and other sources on which the article is based be consulted in the original, whether or not such sources are named in the article. Please note as well that later versions of this article or other articles on related topics may have since appeared on this database or elsewhere and should also be searched for and consulted. While our articles are carefully reviewed, we can accept no responsibility in the event of any inaccuracy or omission. Please note the date of each article and that subsequent related developments are not necessarily reported on in later articles. Any claims nevertheless raised on the basis of this article are subject to German substantive law and, to the extent permissible thereunder, to the exclusive jurisdiction of the courts in Frankfurt am Main, Germany. This article is the intellectual property of KPMG Deutsche Treuhand-Gesellschaft AG (KPMG Germany). Distribution to third persons is prohibited without our express written consent in advance.