Sports clubs: VAT on membership fees

Facts

The plaintiff in this case was a non-profit recreational sports club that offered football, table tennis, swimming and many other sports. The men's first football team was run as a commercial enterprise and collected admission fees for home games. In 2015/2016, the club built an artificial turf football pitch, which was used, among other things, but not exclusively, for the men's first football team. It taxed the membership fees at the reduced rate and claimed the full input tax deduction for the artificial turf.

However, according to the tax authorities (section 1.4 (1)), membership fees are only taxable if they serve the special interests of individual members (so-called “non-genuine membership fees”). According to the BMF letter of 4 February, clubs that refer directly to the VAT Directive and treat this type of membership fee as taxable are generally eligible for tax exemption under Section 4 No. 22 letter b UStG. Accordingly, in the present case, the tax office denied the association the input tax deduction because of the tax-exempt output services. The tax court only recognised the input tax deduction insofar as the input turnover related to the men's first football team.

BFH decision

The BFH harshly criticises the tax authorities, stating that they have been adhering to an administrative practice that contradicts established supreme court case law for over 15 years. Membership fees are taxable even if they do not serve the special interests of individual members. This already follows from Article 2(1) of the VAT Directive, which defines transactions subject to VAT and does not provide for any exception for membership fees. The ECJ ruled accordingly in the Kennemer Golf & Country Club case (C-174/00 of 31 March 2003).

With regard to possible tax exemption, taxpayers cannot directly invoke Article 132 (1) (m) of the VAT Directive; the exemption is governed exclusively by § 4 (22) (b) of the German Value Added Tax Act (UStG). The Federal Fiscal Court points out that this provision does not apply to all supplies provided by non-profit sports clubs, but only to sporting events where the remuneration consists of the participation fee. The problem here is the term “event”. This is to be understood as “an organisational measure taken by the sports club that enables other athletes to actively participate in sports”. Although only minimal requirements are imposed on the organisational measures, the lower limit is not met in the case of the mere provision of sports facilities or mere specific services such as special training for individual athletes. Nor is it sufficient if the measures are limited to proper use. Any extension to supplies other than events would have to be made by the legislator.

The tax court had made insufficient findings in this regard, which would have to be made up for in the second legal proceedings. The Federal Fiscal Court instructed the tax court to first examine the question of the uniformity of the supply provided by the club. In the case of main and ancillary supplies, VAT liability/VAT exemption is based on the main supply; in the case of a complex supply with elements of varying weight, it is based on the dominant element. In the case of a complex supply with equivalent elements, VAT exemption as a whole is not possible if there is an element that is VAT taxable in itself. In the present case, the Federal Fiscal Court argues in favour of a complex supply with equivalent elements on the grounds that, within the framework of membership, supplies can only be obtained as a complete package.

In the case of VAT liability, the VAT rate is relevant. According to § 12 (2) (8) of the UStG, the reduced VAT rate may be considered for non-profit organisations, but only for a special-purpose operation. This interpretation is required, inter alia, by Article 98 (2) in conjunction with Annex III No. 15 of the VAT Directive, because this provision does not cover supplies provided by sports clubs insofar as they are not services for charitable purposes or in the field of social security. The Fiscal Court must examine whether taxable services are provided within the framework of a special-purpose operation.

Finally, the Federal Fiscal Court points out that it has referred the question to the European Court of Justice for a preliminary ruling as to whether there is a prohibition on implementation under state aid law for § 12 (2) (8) (a) UStG.

Analysis

The fiscal administration should now (finally) abandon their distinction between genuine and non-genuine membership fees. Sports clubs must adapt and generally subject their membership fees to VAT. This will make membership more expensive for members, as they are not entitled to deduct input tax. In return, clubs can claim input VAT deduction from incoming services, which can be factored into the calculation of membership fees and cushion the increase in costs. As long as the Federal Ministry of Finance (BMF) sticks to its previous position, clubs can still invoke this in their dealings with the tax office, but if legal proceedings are initiated, they cannot claim that the tax court will follow their line.

If the legislator takes action and includes club membership in Section 4 No. 22 letter b of the UStG, membership fees would once again be tax-exempt, without input tax deduction. Which option is more favourable depends on whether the club has an input tax surplus or not.

Many associations also offer passive memberships, in which the member has no right to use courses and other offers of the association. Here, it must be carefully examined whether the passive member is granted a consumable economic advantage – this is usually the case. Non-taxability of these membership fees should only be considered in exceptional cases.

Author: Nadia Schulte