In a ruling dated December 21, 2016, the Federal Fiscal Court (case reference: XI R 27/14) ruled that the entrepreneur issuing the warning must always claim the warning costs from the opponent plus VAT. This applies regardless of whether the party issuing the warning is entitled to deduct input tax or not. If a subsequent tax audit is carried out, the party issuing the warning may have to make additional payments for previous years.
Competition law warning from a competitor
A GmbH trading in hardware and software had its competitors warned several times by a lawyer it had commissioned. The subject of the warning was the use of incorrect general terms and conditions. In addition to demanding the cessation of the use of the general terms and conditions, the lawyer also demanded the out-of-court legal fees incurred. However, he only charged the net amount of his expenses. VAT was not claimed, as the GmbH was entitled to deduct input tax and the VAT did not represent a loss for the entrepreneur issuing the warning.
After payment of the net warning costs to the lawyer, the lawyer issued a fee invoice to his client and deducted the net warning costs already paid. As a result, the GmbH was only invoiced for the VAT, which the client then deducted as input tax in its VAT returns.
Tax office: Warning is a service subject to VAT
However, during a special VAT audit, the responsible tax office took the view that the GmbH had provided a service subject to VAT by issuing a warning to its competitors. Accordingly, it issued an amended VAT assessment notice. However, this also inevitably increased the GmbH’s taxable turnover for the previous years.
Following an unsuccessful appeal, the GmbH took legal action against this decision. The tax court upheld the GmbH’s action at first instance (judgment of 03.04.2014 – 5 K 2386/11). According to the tax court, the case law of the Federal Fiscal Court on warnings issued by so-called warning associations cannot be applied to warnings issued by a competitor. After all, the warning associations are not themselves harmed by the anti-competitive behavior of a market participant.
Federal Fiscal Court overturns decision of the tax court – warning letter is subject to VAT
The Federal Fiscal Court opposed the ruling of the Fiscal Court by referring to its case law on warning associations – such as the Wettbewerbszentrale – in its ruling. Warning parties always provide a service for consideration within the meaning of Section 1 para. 1 no. 1 sentence 1 UstG. The reimbursement of expenses is always a consideration for the warning service.
This principle could also be applied to the warning of a competitor. Here, too, the warnings are taxable and taxable services:
A service in return for payment also regularly exists if the service provider takes on a task on behalf of the service recipient and acts in this respect in return for reimbursement of expenses (…). The same also applies if an entrepreneur acts for another as a managing director without a mandate and can demand reimbursement of his expenses from him in accordance with Section 683 of the German Civil Code (…).
[…]
According to this case law, a warning notice issued as a result of an infringing act generally serves the well-understood interests of both parties, as it is intended to end the dispute in a simple, cost-effective manner prior to litigation and avoid a legal dispute (…). Accordingly, the explanatory memorandum to the draft bill expressly refers to the warning notice as a means of out-of-court dispute resolution in competition matters, through which the majority of competition disputes are settled (…).
With the warning, the GmbH had shown its competitors a way in which the infringement could be remedied without judicial assistance. This was a concrete advantage that led to consumption within the meaning of VAT law. As a result, the fees charged by the lawyer are also taxable transactions that are subject to VAT.
Not only competition law warnings affected by VAT liability
However, the ruling of the Federal Fiscal Court does not only apply to warnings under competition law. Every time an entrepreneur carries out management without a mandate for a third party, this regulation is applied:
The classification of the disputed warnings as services within the meaning of sec. 1 para. 1 no. 1 sentence 1 UStG is not precluded by the fact that the plaintiff could not only claim reimbursement of its legal costs on the basis of sec. 12 para. 1 sentence 2 UWG, but that these costs may (also) be part of the damages to be compensated due to a tortious act if the other requirements are met (…).
The question of whether there is an exchange of services in the sense of VAT law is not to be answered according to civil law, but exclusively according to the VAT law requirements shaped by Union law (…). The principles of equal treatment and neutrality of VAT (…) require that the warning service provided by the warning party to the warned party be taxed in the same way, whether it is based under civil law on Section 9 UWG or on Section 12 UWG.
Value added tax can be claimed back from the warning parties
At the latest at the request of the person being warned, thought should be given to whether and how the invoice should be issued. Because according to these principles on warnings in competition law, it is not far-fetched to think that warnings due to the infringement of an absolute property right (patent, trademark or design right infringements) as well as copyright warnings may also be subject to VAT.
Companies therefore have the opportunity to claim the VAT that was not claimed – at least if no lump sum payment was agreed as part of a settlement; in this case, it is likely to depend on the divisibility of the payment or breakdown. In the context of warnings under competition law, the missing VAT can be claimed up to 6 months later. In the case of warnings relating to the infringement of intellectual property rights or copyright disputes, it is certainly possible to assert claims for the last three years.
However, there is also hope for the companies issuing warnings that claims dating back longer can be demanded. This is because in the event of an unclear and doubtful legal situation, the start of the limitation period is postponed until the point in time at which it is reasonable to pursue the claims. In this case, this would be the date on which the ruling of the Federal Fiscal Court was published, i.e. April 12, 2017.