German Federal Fiscal Court’s view of VAT treatment on competitive warnings
Thomas Streit of KÜFFNER MAUNZ LANGER ZUGMAIER considers the impact of a recent court decision concerning the VAT treatment of competitive warnings that are used to mitigate further litigation among businesses.
The German Federal Fiscal Court issued a judgment on the VAT treatment of competitive warnings on December 21 2016 (Case No. XI R 27/14), which was published this year. The case raises debate over whether a warning, regardless of its nature, can be considered as providing a service in VAT terms.
Facts of the case
In this case, the Federal Fiscal Court assumed a taxable supply from the admonisher to the competitor, based on the following facts.
The plaintiff worked, inter alia, in the hardware and software trading field. In the relevant years, she warned various competitors and subsequently claimed injunctive relief against them based on wrongful terms and conditions pursuant to the Act Against Unfair Competition. The plaintiff engaged a lawyer to assist her in this process. The competitors, against whom the injunctive relief was sought, ultimately refunded the plaintiff’s legal fees, exclusive of VAT. The amount of the fees was directly transferred from the competitors to the plaintiff’s lawyer’s account. The VAT amount was duly paid by the plaintiff to the lawyer and later deducted by the plaintiff.
After a special VAT audit, the tax office considered that the plaintiff had provided a taxable supply to the respective competitors by issuing them with a warning pursuant to the Act. The Fiscal Court Münster allowed the plaintiff’s appeal (judgment of April 3 2014, 5 K 2386/11 U). The court found that there was no supply of services. However, the Federal Fiscal Court disagreed with the Fiscal Court Münster and consequently dismissed the appeal.
Reasons for the decision
The Federal Fiscal Court found that each individual warning did indeed constitute a taxable supply, which the plaintiff provided to the respective warned competitors in exchange for payment. It stressed that the content of such a service is the opportunity to avoid any further dispute. The remuneration for this service is the amount of the reimbursement that the admonisher pays.
Prior to an entrepreneur taking action against a competitor for unfair competition, he shall first admonish him on the basis of section 12, paragraph 1, sentence 1 of the Act Against Unfair Competition. This involves the entrepreneur communicating a cease and desist declaration to the competitor thereby affording the competitor an opportunity to settle the dispute. The entrepreneur is entitled to demand reimbursement of any necessary expenses that he has incurred in complying with this legislative requirement.
According to the case law of the civil courts, the issuance of a warning usually serves in the best interests of both parties. It is intended to terminate the dispute in a simple, cost-effective manner prior to any proceedings being instituted, thereby avoiding a formal legal dispute.
By issuing the warnings, the plaintiff provided a concrete advantage to her competitors, the avoidance of a legal dispute, and, as a result, a service was supplied by the entrepreneur to her competitors, within the meaning of the VAT law.
Although the German Federal Fiscal Court found that there was a supply of services, it seems questionable whether a warning would actually constitute an economic advantage for the party being admonished.
Looking at it from the average consumer’s point of view, it is unlikely that any person would feel enriched with an advantage in these circumstances. Moreover, a reminder, which reminds you to pay your invoices, is not classified as a taxable supply (see section 1.3, paragraph 6, sentence 2 of the VAT Circular). However, a reminder that an invoice is due also ultimately serves to avoid further legal dispute. It would have been interesting to know the European Court of Justice's view on this issue. Nevertheless, entrepreneurs will need to take into account the Federal Fiscal Court’s case law regarding warnings made pursuant to the Act Against Unfair Competition.
Whether this case law could be transferred to other areas, such as, for example, trademark or copyright law, is questionable and doubtful. Entrepreneurs who issue warnings in these areas do so with the intention of warding off any intervention by the party admonished as regards to their intellectual property. They certainly do not intend to give the infringer any advantage.
It remains to be seen how the courts will deal with these types of cases. With regard to the field of copyright law, there is a case currently pending in the German Federal Fiscal Court (XI R 1/17). A decision is expected in the coming months.
This article was written by Thomas Streit, lawyer at KÜFFNER MAUNZ LANGER ZUGMAIER in Munich and Düsseldorf.