VAT exemption for an unauthorised private hospital

Background: private hospital with higher standards

In 2014, the plaintiff operated a hospital that was not licensed as a university, planned or contract hospital in accordance with § 108 of the German Social Code, Book V (SGB V) in the version applicable in 2014. Patients with statutory health insurance were therefore not entitled to be treated there. They could only use the hospital's services as self-payers. The treatment costs were considerably more expensive for patients than in a public hospital. In return, the plaintiff's hospital offered an increased nursing ratio, single rooms as standard and treatment at chief physician level. Provided that the treatments were medically indicated (unlike, for example, cosmetic surgery), the plaintiff treated its services as VAT-exempt hospital treatments in accordance with § 4 No. 14 letter b) double letter aa) German VAT Act (UStG).

According to the current version of this provision, hospital treatment is VAT-exempt if it is provided by hospitals that are publicly funded, approved in accordance with § 108 of the German Social Code, Book V (SGB V), or, alternatively, provide their services under social conditions comparable to those of publicly funded hospitals. The alternative was not yet included in the law in the disputed year 2014, which was, however, incompatible with Art. 132 para. 1 letter b) of the VAT Directive as the basis for tax exemption under EU law. According to the case law of the Federal Fiscal Court (BFH) (V R 20/14), hospitals can also invoke the directive directly for this alternative even before the amendment to the law.

BFH: Only what is medically necessary is economically viable

The BFH ruled that the plaintiff had not provided its services under conditions comparable to those of public institutions in social terms. It was true that the hospital's capacity to provide the necessary services were even higher because there were more nursing staff and no shared rooms. However, the hospital was not operated economically, because it is not a question of a balanced relationship between performance and costs, but rather of the extent to which the services and costs for medical care are necessary. Due to the increased nursing ratio, the single rooms and the chief physician standard, the hospital's personnel and material resources were considerably more expensive than required by the care mandate. The plaintiff's management was therefore not economical from a social law perspective. Another argument against comparability in social terms is that the plaintiff charged more than twice as much as authorised (public) hospitals. The same applies to the fact that statutory health insurances do not reimburse the treatment costs, not even on a pro rata basis. If private health insurance companies handled this differently, this reimbursement was “purchased” by increased insurance premiums and was therefore irrelevant.

Impact: Private clinics are generally not tax-exempt.

Only medically necessary hospital treatment is VAT-exempt. Anything beyond that is considered a luxury, so to speak, and is not exempt. A partial exemption up to the amount incurred for medically necessary treatment is not provided for in VAT law. Since lowering the standard to what is medically necessary would generally contradict the business model of private clinics, they are largely excluded from VAT exemption.

Author: Nadia Schulte