If you are giving away free samples, using influencers, or giving away products through sweepstakes you need to be aware of the VAT rules behind it.
What you need to know and how it can impact your business.
Are there new EU-harmonized rules on the horizon?
Consideration VAT is a central topic, and with recent developments in the EU, changes may be on the way that could affect your business, especially when it comes to giving gifts to your customers, including influencers.
Understanding Consideration VAT
But first, let's define what Consideration VAT really is.
According to tax law, VAT is normally due when goods and services are delivered.
However, when goods or services that have been acquired with VAT deductions are used for purposes not directly related to the taxable business, it is tax-wise considered as if there is a delivery for consideration.
In other words, VAT must be paid.
When should business owners calculate Consideration VAT, and how should it be paid to the tax authorities?
This happens when you use goods or services for which you have previously claimed VAT deductions in your business for private use or other non-taxable purposes. This can include situations such as use for personal consumption, marketing, employee benefits, or prizes.
Payment of Consideration VAT is made by reporting it as additional output VAT in the VAT period in which you withdraw the goods or services for private or non-taxable purposes.
A Surprising EU Case in Portugal
On October 5, 2023, a groundbreaking judgment was handed down in the case of Deco Proteste (C-505/22) before the European Union Court of Justice.
The case shed light on the tax consequences of offering introductory gifts as part of a subscription campaign.
In the case, it concerned a company that primarily sold subscriptions to private customers and ran a campaign where new subscribers could receive a tablet or smartphone as an introductory gift. Deco Proteste sent the introductory gift to new subscribers after the first monthly subscription payment and did not charge any additional fees for the gift.
Even if subscribers canceled their subscription after the first payment, they could still keep the introductory gift.
The Portuguese tax authorities decided that the introductory gift should be considered a separate taxable supply and imposed significant additional VAT charges.
However, the EU Court of Justice has now changed this decision.
A new interpretation of VAT rules
The EU Court of Justice ruled that the introductory gift did not constitute a separate delivery of goods.
It was deemed an ancillary service to the main service - the delivery of magazines, i.e., the subscription. Therefore, only the reduced VAT rate should apply to the main service.
In this specific case, the EU Court of Justice also ruled that the introductory gift was "an integral part of the commercial strategy" of Deco Proteste. The publisher had successfully used the gifts solely to increase subscription sales, and thus, it was considered as a whole.
Positive outlook for Consideration VAT
This decision can have a positive impact on the out-of-pocket VAT regime throughout the EU.
Our advice to businesses using gifts as a promotional strategy is, therefore, to reconsider the tax consequences.
It's worth noting that the EU Court of Justice seems to adopt a new and more positive approach than before. Gifts that are part of a company's commercial strategy should not necessarily result in additional tax burdens.
The Danish version for exemption from Consideration VAT
In Denmark, there is something called the ULU rule, where goods with a value of less than DKK 100.00 excluding tax, marked with a logo, and for an unspecified group, can fall under advertising gifts and thus obtain exemption from Consideration VAT.
The rule can be found under §5 of the Danish VAT Act, which states:
The removal, including the use, of goods from the company is equated with a supply against consideration if full or partial deduction has been obtained for the purchase, production, etc., of the goods in question. This applies when the removal is for the private use of the company's owner or for the company's personnel or for gratuitous transfer or for purposes other than those relating to the registered company's supply of goods and services. The removal of advertising articles, etc., with a value of less than DKK 100, excluding tax, and samples, is not equated with a supply.
We welcome this decision, which emphasizes that gifts not included in the company's regular product range should not necessarily affect your VAT status. Therefore, we recommend carefully considering your strategies, especially if they have a promotional intent. As each campaign has its own unique characteristics, it often pays off to discuss these issues with the authorities or us.
Do you have questions or need advice on VAT and your business decisions? Don't hesitate to contact us on the contact form. We are here to help you understand and navigate complex VAT situations and ensure that you make the best possible decisions for your business.