ECJ: Loyalty points are not multi-purpose vouchers

Facts

The Swedish cosmetics company Lyko Operations AB (hereinafter: Lyko) wanted to set up a customer loyalty programme and applied to the competent tax authority for a tax ruling on the correct VAT treatment. Customers were to collect loyalty points with every purchase, which they could redeem on a subsequent purchase to receive an additional, lower-priced item from a points shop free of charge. These products could be subject to different VAT rates: cosmetic products are subject to the standard VAT rate of 25%, while food supplements are subject to the reduced VAT rate of 12%. The points were not to be transferable and would expire if not redeemed within two years. The products in the points shop were to be issued only in exchange for points, not for a combination of points and money.

Lyko argued that this constituted a multi-purpose voucher. The basis for assessing the value of the products issued when the points were redeemed was zero. The tax authorities, on the other hand, took the view that this could not be a voucher because the points had no specific monetary value and were granted to the customer without consideration.

The competent court asked the ECJ for a preliminary ruling on whether the loyalty points constituted a so-called multi-purpose voucher within the meaning of Article 30a(1) in conjunction with Article 30a(2) of the VAT Directive and, if so, what the taxable amount was in this case pursuant to Article 73a of the VAT Directive.

ECJ ruling

The ECJ's answer is relatively brief. Article 30a(1) of the VAT Directive defines a voucher as an instrument which, firstly, is subject to an obligation to be accepted as consideration or part consideration for a supply of goods [...]. Secondly, the goods to be supplied [...] must be specified either on the instrument itself or in related documents [...]. However, the loyalty points in question do not entail any obligation on the part of Lyko Operations AB to accept them as consideration for a supply of goods. They merely entitle their holder, if he decides to make another purchase, to receive additional goods of low value as a bonus. This means that the first requirement for a voucher is not met. The ECJ therefore did not need to examine the second requirement, and the question of the taxable amount was also irrelevant.

General analysis

The arguments put forward by the Advocate General in her opinion make the view that there is no obligation of Lyko more comprehensible than the brief reasoning of the ECJ. She argues that the points do not oblige Lyko to deliver a non-cash bonus, but only entitle the customer to a cheaper (discounted by the value of the non-cash bonus, author's note) further purchase. Lyko was not obliged to deliver a non-cash bonus solely on presentation of the points, without a further purchase. It was therefore not a voucher, but a price reduction instrument not covered by Article 30a of the VAT Directive.

In our view, another interpretation would have been conceivable, arguing that Lyko was indeed obliged to deliver the non-cash reward, but only on condition that the customer made a further purchase. It is revealing that, in addition to Lyko, the European Commission and Belgium have spoken out in favour of the existence of such an obligation. The Advocate General and Sweden, on the other hand, were opposed. This makes it clear that the answer to this question is not obvious.

The Advocate General further clarifies: in her opinion, a multi-purpose voucher would exist if the customer were not obliged to make a further purchase in order to redeem the points for a product from the points shop. The fact that the value of the points is only determined when they are redeemed for the purchase of a specific product is not an obstacle. Although this finding was not included in the judgment, it can be a significant aid to interpretation for businesses offering loyalty points.

In her opinion, the Advocate General also states that the real question here is how unredeemed points should be treated for VAT purposes. If a multi-purpose voucher is not redeemed, no VAT is payable on the value of the voucher. The same applies if one assumes that it is a discount instrument: this has no effect if it is not redeemed.

Regardless of these questions, businesses are well advised to offer products at different VAT rates for vouchers wherever possible. In this case, the voucher is no longer a single-purpose voucher that would be taxable upon issue and regardless of whether it is redeemed.

Analysis Germany

In the area of loyalty points, the Payback system is particularly relevant in Germany. On 12 September 2011 and 5 November 2012, the OFD Frankfurt ruled that the redemption of points is generally to be regarded as a subsequent reduction in remuneration for the original turnover, provided that the customer is free to choose whether to receive a discount or a non-cash bonus. The prerequisite is that there is a cash payment obligation for the value of the points and that this corresponds to the minimum redemption value for a non-cash bonus. After the points have been redeemed, the partner companies must receive the information relevant for VAT purposes in order to correctly apply the reduction in remuneration in accordance with Section 17 of the German VAT Act (UStG).

Author: Nadia Schulte