Section 25 of the German VAT Act provides special regulations for travel services. According to Section 25 paragraph 1, sentence 4, of the German VAT Act in conjunction with Section 3a paragraph 1 of the German VAT Act, such transactions are deemed to be carried out in the place where the company (tour operator) operates its business. Companies that provide travel services pursuant to Section 25 of the German VAT Act must apply a margin taxation and cannot claim input tax deduction from the travel input services used. This VAT simplification is known as the Tour Operators Margin Scheme (TOMS).
The German Federal Ministry of Finance clarified, with its decree published on 29 January 2021, that Section 25 of the German VAT Act shall not apply to non-EU companies that do not have a fixed establishment in the EU. Due to the exclusion from the scope of application of TOMS rules by the new decree, the determination of the place of taxation for each individual service supplied by such non-EU tour operators, e.g. hotel accommodation, flight, etc., would have to be made based on the general rules for determining the place of services according to Sections 3a, 3b and 3e of the German VAT Act. This could result in different places of taxation, e.g. for:
- Accommodation services where the accommodation is located (Section 3a, paragraph 3 no. 1, sentence 2, letter a of the German VAT Act)
- Catering services in which catering is provided (Section 3a, paragraph 3, no. 3, letter b, of the German VAT Act)
- Passenger transport where the transport takes place (Section 3b, paragraph 1 of the German VAT Act).
Depending on the particularities of the individual case, such services may lead to taxable services in Germany, whereby registration obligations for VAT purposes in Germany may arise. Furthermore, the VAT liability for some input services rendered by a subcontractor not resident in Germany might also be shifted to the recipient according to the reverse-charge procedure, ref. Section 13b of the German VAT Act, what eventually could also result in an obligation of the tour operator to get registered for VAT purposes in Germany. It also needs to be clarified which VAT rate might be applicable for which individual services, e.g. for catering services and accommodation services, the reduced VAT rate applies.
At this point, it should be underlined that also companies from non-Member State countries within Europe, such as the United Kingdom, Switzerland and Norway, are affected by this decree. In summary, given the retroactive nature of this new decree and its wide-reaching implications, affected businesses should urgently consider its impact, e.g. whether:
- their business model is subject to registration needs for VAT purposes in Germany;
- what effects the taxation will have on previously calculated profit margins; and
- how business processes should be adapted in order to reduce the disadvantages associated with the change and to use existing advantages.
In accordance with this decree, it will not be objected by the tax authorities if affected non-EU companies would continue applying Section 25 of the German VAT Act for travel services rendered until 31 December 2020.
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