A Regional Fiscal Court in Cologne (Germany) ruled around a year ago that the virtual rental of virtual land constituted a taxable transaction. In this case, a German taxpayer generated extra income by renting out virtual land. In return for the virtual land, the taxpayer – or rather, his avatar – earned virtual currency. This virtual currency was then traded for actual fiat money.
In its decision, the Regional Court decided to keep the category of the service open. As a result, if one of the parties elected to appeal the ruling, we anticipated better clarity on this point from the higher court in the appeal decision. The taxpayer did file an appeal. The Federal Finance Court of Germany (Bundesfinanzhof, BFH) deviated from the Regional Court’s verdict on appeal.
Federal Finance Court’s decision:
Unlike the Regional Finance Court, the BFH deemed the procurement of the virtual money to be taxable consumption; hence, a transaction occurred prior to the real rental transaction. As a result, the actual rental transaction was not taxable. In contrast, the Regional Court ruled that converting legal cash into in-game currency was not a taxable transaction. It only considered virtual world rentals to be taxable transactions.
The German Federal Tax Court’s judgment was good for the claimant and, if the tax authorities adopt the ruling, for users of similar gaming worlds. However, it also raises an important issue about “legal counsel in the Metaverse.” At first appearance, the judgment suggests that VAT taxes in the Metaverse can only arise in extreme cases, providing the relevant “income” occurs only between users and inside the virtual reality.
Nonetheless, three conclusions could be drawn from the decision:
The finding that Metaverse is VAT-exempt is premature. The case’s facts may present too many opportunities to analyze it differently than the German Federal Tax Court did. How long can the distinction between “actual” and “virtual” market activity be maintained, given the Metaverse’s rapid evolution?
You may watch our webinar to get more insights: VAT ON DIGITAL SERVICES
Source: bundesfinanzhof.de