Country specific updates: Germany

The German Federal Ministry of Finance (highest German Tax Authority; “BMF”) decided on 1 October 2021 to publish the decisions of the German Federal Tax Court dated 21 December 2016 (XI R 27/14) and 13 February 2019 (XI R 1/17) in the Federal Tax Gazette Part II. This means that the BMF has accepted and agrees on the content of the relevant decisions carried out by the German Federal Tax Court stating that warning notices are subject to German VAT. This should apply to warning notices issued after 1 November 2021.

The German Federal Tax Court has decided that by issuing a warning notice a taxable supply of services is provided to the recipient (i.e. the person being warned). A warning notice is a notice where the recipient is made aware of a legal violation. The supplier (i.e. the person issuing the warning notice) is providing a benefit to the recipient who is informed of a legal violation and receives the opportunity to avoid a costly and lengthy legal dispute. These decisions have been carried out in regard to the Act against Unfair Competition (2016) and the Act on Copyright Law (2019).

BMF has now agreed with these decisions, so warning notices issued after 1 November 2021 should be subject to German VAT at the standard VAT rate of currently 19% also from the tax authorities´ perspective. Warning notices issued before this date can be treated as non-taxable for VAT purposes if the recipient of the warning notice has not deducted input VAT on the warning notice. However, the BMF refers in its letter only to warning notices pursuant to the Act against Unfair Competition and the Act on Copyright Law, so it stays uncertain whether the reasonings should apply accordingly also in other areas (e.g., trademark law; in January 2021 the German Federal Supreme Court (civil law) decided that warning notices are subject to VAT in trademark law (I ZR 87/20)).

The supply is carried out at the time of receipt of the warning notice by the recipient. The taxable amount should be the reimbursement of expenses (e.g., in case of copyright law this would be the costs for the assertion of the cease-and-desist claim). Further, the taxable amount should also include the reimbursement of investigative expenses for identifying the service recipient. However, the compensation for damages should not be part of the taxable amount.

In case the recipient of the warning notice substantially denies the infringement, the taxable amount needs to be adjusted. Further, in case there is no justifiable claim, the warning notice would qualify as unauthorized so the supplier should owe VAT if he / she has already issued an invoice showing VAT seperately. Only after the elimination of such VAT threat, VAT should not be due.

Consequently, it needs to be ensured that VAT is shown in regard to warning notices issued after 1 November 2021. The warning notices should contain a well-structured breakdown of the compensation the supplier is claiming. The recipient should be entitled to deduct VAT if he / she qualifies as a taxable person for VAT purposes and if the breakdown shows VAT separately.