Judgment summary
This is a reference for a preliminary ruling from the Bundesfinanzhof (Germany) concerning the interpretation of Article 26 of Sixth Council Directive 77/388/EEC on the special VAT scheme for travel agents (1). The dispute concerned P-GmbH & Co. KG, which organised so-called 'coffee trips' combining coach excursions with sales events, and Finanzamt Q, over a VAT assessment relating to those excursions (2).
The Court held that Article 26 applies to the excursions even though the fee charged did not cover the full cost of the transport services and the shortfall was financed by revenue from goods sales, and that this results in a negative margin (31). The Court further held that the first sentence of Article 12(1) and the third sentence of Article 26(2) of the Sixth Directive do not confer any right to a refund of input VAT where the margin on a single supply is negative (43).
Background
Between 1997 and 1999, P organised excursions combined with the sale of goods, commonly known in Germany as 'Kaffeefahrten' (coffee trips) (7). Participants were transported by coach to tourist sites, received a meal, could take part in an additional tourist programme, and were invited to sales events at which P offered goods for sale (7).
P purchased transport services from other taxable persons and offered them in its own name to participants, who paid a fee that did not fully cover the cost of those services (8). The remainder of the costs, and the costs of other services not charged to participants, were covered by revenue from the sale of goods, purchase of which was not mandatory (8). Over time, P offered an increasing number of free trips in respect of which all costs were covered by goods sales revenue (8).
P initially applied the general VAT rules and deducted all input VAT on services purchased from other taxable persons, which the German tax authority did not initially dispute (9). Following tax audits and subsequent proceedings, P's right to deduct VAT on transport costs was recognised only for transport services not charged to participants (9). For excursions where participants paid a fee partially covering transport costs, the Niedersächsisches Finanzgericht held, by decision of 12 May 2022, that those services fell under the special scheme for travel agents, meaning P could not deduct the VAT paid on those services (9). P appealed to the Bundesfinanzhof, the referring court (9).
Core dispute
The referring court was uncertain whether the 'excursions' component of P's activity should be subject to the special scheme for travel agents under Article 26 of the Sixth Directive, given that, unlike the situation typically faced by travel agents, that component of P's activity systematically generated a negative margin (10).
The questions referred were, first, whether an 'excursion organised by the trader away from his business premises' within the meaning of Directive 85/577 falls within 'transactions performed by the travel agent in respect of a journey' under Article 26(2) of the Sixth Directive (11). Second, if so, whether the special scheme applies even where the margin is negative because actual costs exceed the amount payable by the traveller (11). Third, if the first two questions were answered affirmatively, whether Article 12(1) applies to a negative margin such that it results in a refund to the taxable person (11).
Court findings
The Court recalled that the special scheme under Article 26 applies to traders who organise travel or tour packages in their own name using services of other taxable persons, even where not formally travel agents or tour operators, and that the only relevant criterion is the nature of the travel service, whether ancillary or not (13, 20).
The Court found that the coach excursion could constitute an end in itself for customers, not merely a means of enjoying the sale of goods, and noted that the transport fee covered on average 60% of the cost of that service, so the travel services could not be classified as purely ancillary (22, 23). The fact that revenue from those services systematically generated a negative margin did not affect that assessment (23).
On fiscal neutrality, the Court held that this principle is a principle of interpretation, not a rule of primary law capable of conditioning the validity of a derogation, and cannot undermine the effectiveness of a derogation expressly provided for by the legislature (27). The Community legislature did not intend to restrict the scope of Article 26 based on the objective of the travel or the results of the transactions (28). The inclusion of loss-making travel services within the scheme, and the resulting apparent exception to VAT neutrality, is the consequence of the conditions for application of Article 26 (29).
On the third question, the Court noted that under Article 26(2) and (4), VAT charged to the travel agent by other taxable persons is not eligible for deduction or refund in any Member State (36, 39). The Court also observed that granting a refund in the event of a negative margin could impose on the Member State of establishment a budgetary burden corresponding to tax imposed by another Member State, undermining the fair distribution of VAT revenue among Member States, and would conflict with the prohibition on calculating the margin on an overall basis by allowing a set-off between losses and profits (41, 42). The Court noted that P had freely chosen its business model with full knowledge of its structurally loss-making nature (42).
Outcome
The Court ruled, first, that Article 26 of the Sixth Directive must be interpreted as applying to a situation in which a taxable person purchases tourist services from third parties, in particular transport services, to sell them in his or her own name to consumers as excursions, where the fee received does not cover all the costs and the remainder is financed by revenue from the sale of goods offered during those excursions.
Second, the Court ruled that the first sentence of Article 12(1) and the third sentence of Article 26(2) of the Sixth Directive must be interpreted as not conferring on the taxable person any right to a refund of input VAT where the margin of a single supply is negative.
Major issues / areas of contention
- Whether coach excursions organised away from business premises and combined with goods sales fall within Article 26(2) of the Sixth Directive as 'transactions performed by the travel agent in respect of a journey'.
- Whether the special scheme for travel agents under Article 26 applies where the taxable person's travel services systematically generate a negative margin.
- Whether the travel services could be regarded as merely ancillary to the sale of goods, given that participation in the excursion did not require any purchase and the transport fee covered on average 60% of the cost of that service.
- Whether the principle of fiscal neutrality precludes application of Article 26 where it results in the taxable person being unable to deduct input VAT on loss-making travel services.
- Whether Article 12(1) and Article 26(2) of the Sixth Directive confer a right to a refund of input VAT where the margin calculated under the special scheme is negative.