BFH: taxation of withdrawals/input VAT correction

Facts

The claimant, a sports club, transferred its men’s football team’s match operations to a limited liability company (GmbH). This was done to minimise liability risks and to protect the club’s assets. The club made the stadium stands and floodlighting available to the GmbH for use free of charge; the land itself belonged to the local authority. The club had previously claimed input VAT deduction on the costs of these facilities.

The sole shareholder of the GmbH was the sports club. The managing directors were two members of the club’s executive committee.

The question was whether the club was entitled to the input VAT deduction in view of the provision of the facilities free of charge.

BFH ruling

The BFH (Federal Fiscal Court) first addressed the club’s status as a taxable person, referring to its case law according to which, contrary to the Federal Ministry of Finance’s view, membership fees constitute consideration for the club’s taxable supplies, thereby establishing its status as a taxable person.

The club and the GmbH do not form a VAT group as there is no economic integration. It is true that this could be established by more than insignificant reciprocal supplies between the parties involved. However, the supplies must be provided for consideration, which was not the case with the association’s provision of the stadium stands and floodlighting system. Nor was there any service provided by the GmbH to the association in the sense of a management service; even if there were, the provision of the stadium stands and floodlighting system would not constitute consideration in the sense of a barter-like transaction, but rather a free issue equipment.

The BFH then ruled that the provision of the stadium stands and floodlighting system free of charge did not constitute a transaction which must be treated as made for consideration within the meaning of § 3 (9a) (1) of the German Value Added Tax Act (UStG), as this requires the use of an item for non-business purposes. However, the transfer of match operations to the GmbH, in connection with which the provision took place, had been for business reasons, namely the protection of the club’s assets from liability. A direct and immediate link between the use of an item free of charge and an output transaction was not required for this (unlike in the context of input VAT deduction). Any additional economic interest on the part of the GmbH was irrelevant.

However, the association must make an input VAT correction in accordance with § 15a of the German Value Added Tax Act (UStG), as the circumstances relevant to the input VAT deduction have changed as a result of the provision free of charge. The provision free of charge does not constitute an economic activity and therefore does not entitle the association to an input VAT deduction. The grounds leading to the rejection of a non-business purpose in the context of withdrawal taxation are not sufficient (at least in the present circumstances) to assume an economic activity.

Nor does a right to deduct input VAT arise from the ECJ rulings in Mitteldeutsche Hartstein-Industrie (C-528/19), Iberdrola (C-132/16) and Voestalpine Giesserei Linz (475/23). Those decisions also concerned a supply made free of charge. Unlike in those cases, the supply made free of charge in the present case was in the club’s interest. However, it did not serve to enable the club to carry out taxable output transactions within the scope of its economic activity as a sports club.

The correction period within the meaning of § 15a (1) sentence 2 UStG amounts to ten years for both the stadium stands and the floodlighting system (land). Even if the floodlight system is, for income tax purposes, a business asset and thus an independent movable asset, this does not mean that the five-year adjustment period for assets that are not immovable property applies. 

Analysis

In this case, various VAT categories play a role. It would very likely have turned out differently if the club had transferred the stadium stands and the floodlight system to the GmbH for consideration. The club would then have continued to carry out an economic activity even after the transfer of match operations. Furthermore, this would have led to economic integration within the meaning of a VAT group – whether a tax group would actually have existed in the end of course depends on further conditions. The input VAT deduction would have been saved.

Author: Nadia Schulte