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Video Game Transaction Isn't Subject to VAT, German Tax Court Says

Posted on Mar. 22, 2022

Renting out “land” in an online game is not a taxable service, and the exchange of game currency into U.S. dollars through a U.S. corporation is out of scope of the European VAT system’s territoriality.

In a decision published on March 17 (V R 38/19), the German Supreme Tax Court (Bundesfinanzhof, or STC) overturned the holding by a lower court, the Tax Court of Cologne (8 K 1565/18), and granted the appeal of the taxpayer. The STC ruled that his receipts in U.S. currency for renting out virtual land on an online 3D video game platform on servers located in the United States of a U.S. game operator (referred to as "Inc.") were not subject to VAT in Germany for the 2014-2016 tax years.

Users can explore and traverse the virtual mirror image of the real world hosted on Inc.’s computers with their game characters (the so-called avatars), create content in it, and interact socially with the avatars of other users. In particular, users can create details of the virtual environment (such as buildings, works of art, clothing, or cars) and "sell" or "rent" them to other users within the virtual world against payment of virtual C dollars.

According to Inc.'s terms of use, a C dollar is a limited license right in the form of a virtual token that makes specific content, applications, services, and user-developed functions of the video game available to the user. The C dollars may be transferred to other users within Inc., in particular in exchange for the use of content, applications, and other functions. The C dollars can also be transferred to other users via an exchange managed by Inc. for U.S. dollars. According to the terms of use, a user with a sell order can apply to Inc. to list C dollars for sale on the exchange at the requested price. With a buy order, a user turns to Inc. to match his application with an open sell order at the requested price and to enable the completion of the sale of the C dollars. In doing so, Inc. reserves the right to refuse any sell or buy order regardless of a reason. Upon completion of a sale of C dollars via the exchange managed by Inc., the respective amount of money will be credited to the account held by the user transferring the C dollars with the help of Inc. A balance on this account can be offset against fee claims from Inc. arising from hosting virtual user landscapes or C dollar exchanges, or transferred to the PayPal account of the respective user.

The plaintiff acquired virtual land in Inc.’s game for a fee payable to Inc., parceled it out, and "rented" it to other users of Inc.’s game for payment of C dollars. The plaintiff then sold accumulated C dollars via Inc.’s stock exchange in return for payment of U.S. dollars.

The STC held that the renting of virtual land by the plaintiff is not a taxable event under the German VAT Act (section 1, paragraph 1, No. 1), contrary to the lower tax court’s holding. According to the STC, an exchange of services only occurred through the exchange of the game currency as a contractual right into a legal currency tender (U.S. dollars) via a stock exchange managed by the gaming operator. The participation in a game (“renting out virtual land to another gamer”) is not an identifiable business benefit in the real economy subject to VAT. Otherwise, the STC pointed out, the plaintiff would in principle be entitled to deduct input VAT from purely in-game “input services,” such as the virtual “development” of the virtual land by other users. According to the outcome of the oral argument, the tax authorities do not appear to assume this either.

By transferring C dollars for consideration by way of assignment via the exchange offered by the gaming operator, the plaintiff provided so-called other services to Inc. Unlike the in-game "rental" of virtual land, the transfer of the C dollars took place on a real market. The transfer of the C dollars via the exchange operated by Inc. was not limited to the mere participation in a game event. Rather, the plaintiff provided the respective recipient with the C dollars, a virtual game object for later use in the game and thus a consumable benefit. With the transfer of the C dollars, the plaintiff took over an aspect of the preparation of the game, as would normally also be done by the organizer of a game, who provides the necessary tools of the game.

Inc. acted in its own name on behalf of the plaintiff as an intermediary in transferring the C dollars on his stock exchange. This is comparable to a broker who acts as a financial service provider and sells stocks for his clients. Inc. brought together price-identical sales and buy orders of the users, whereby the sale of C dollars for consideration was intended to benefit the respective selling user — in this case, the plaintiff — so that Inc. as the gaming operator was active in the interest of others.

The plaintiff, however, did not carry out the other service provided to the gaming operator in Germany. His service to the gaming operator as an entrepreneur depends on the place where the gaming operator carries out its business (section 3, paragraph 2, sentence 1 of the German VAT Act). Since Inc. as the gaming operator is resident in the United States, where it also operates the servers for the video game, the service by plaintiff to Inc. was supplied in the United States and therefore out of scope of the European VAT system.

However, for the 2013 year in dispute, the STC confirmed the dismissal of the motion by the lower tax court on procedural grounds, since the applicant's objection to the 2013 VAT assessment was not filed within the prescribed monthly time period and hence time-barred from being pursued in court.

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