The end of the use of margin taxation for entrepreneurs established in third countries

With one single sentence in a recently published letter, the BMF has caused a buzz in the travel industry, which has already been battered by the Corona crisis. In the letter dated January 29, 2021, it simply states in a very concise manner: "§ 25 UStG does not apply to travel services provided by entrepreneurs established  in a third country and without a fixed establishment in the Community territory.” Pursuant to the BMF, this regulation, which is now included in the UStAE, is to be applied in all pending cases, while it is not objected if third-country entrepreneurs still apply the special regulation of § 25 UStG to travel services performed up until December 31, 2020.

Pursuant to its wording, § 25 of the UStG applies to travel services provided by an entrepreneur to the extent that he acts in his own name towards the recipient of the service and makes use of advance travel services. This essentially includes tour operators who typically offer transportation services, accommodation and meals, tour guide  services, organization of sightseeing tours, etc. For the purpose of the regulation, these services are to be deemed as a single service performed at the place where the service provider operates its business (§ 3a (1) UStG). While the German provision does not provide for any restriction to entrepreneurs established in EU Member States, this can be concluded from Art. 307 VAT Directive, where it is regulated that the (uniform) service is taxed in the Member State of residence or the Member State of the fixed establishment of the supplying entrepreneur.

This may be the rationale behind the German tax authorities' regulation. Furthermore, in the past there have already been efforts at the European level not to apply the special regulation to tour operators based in third countries (according to the EU VAT Committee as early as 2014) in order to avoid competitive advantages due to a possible lack of sales taxation in the respective country of residence.

So what is the consequence of the BMF's new regulation? As a result of the discontinuation of the special regulation for tour operators domiciled in a third country (and without a permanent establishment in the Community), the general provisions of German VAT law now apply, which not only include the principles on the uniformity of the service (clarification of the question of whether a bundling of the above-mentioned (travel) services continues to result in a uniform service or whether there are services to be assessed separately), but also the provisions on the place of supply, VAT exemption, VAT rate (e.g. temporary reduced VAT rate for catering services), VAT liability and input VAT deduction. As a result, third-country entrepreneurs are now faced with a registration obligation when providing services in Germany, for example because they offer hotel accommodation here. In B2B cases, the VAT liability in the country of travel (Germany) is transferred to the entrepreneurial customers. Also, the purchase of input services, which the entrepreneur based in the third country receives from subcontractors not being established  in Germany, can trigger a VAT registration obligation in Germany as a result of the transfer of the VAT liability.

In practice, tour operators established  in a third country and without a fixed establishment in the EU Community territory as well as German entrepreneurs who purchase travel services from such entrepreneurs are now faced with various questions or considerations as to whether and how their business should be adjusted in order to take advantage of the positive aspects resulting from the provision or to avoid negative consequences.