GamblingCompliance: German Online Casinos Brace for 2015 VAT Hit

By Daniel Macadam, published on GamblingCompliance

Legal experts have warned that in just over two months‘ time all EU online gaming operators will be liable for VAT in Germany in the latest setback for companies targeting Europe’s largest economy.

The European Union’s new VAT directive, designed to capture more tax from internet giants such as Amazon and Apple, will change the way the sales tax is collected from where the company is located to where the customer is based.

A warning at the European iGaming (EiG) Congress in Berlin last week that the new directive would apply to internet gaming in Germany has left some online casino and poker operators reassessing the market.

Henrik Bremer, a German tax lawyer and auditor at Wirtschaftsrat Recht, Bremer & Heller, told executives at EiG that online casino games would be covered by Germany’s 19 percent sales tax when the directive starts on January 1.

He said German tax authorities would likely follow the same calculation as for land-based casinos and charge VAT on gross gaming revenues.

Unlike many EU countries, Germany does not exempt online casino from VAT, leaving operators based in member states such as Malta facing the prospect of paying German tax for the first time.

Online sports betting, horse race betting and lottery are not affected as they are VAT exempt in Germany.

Matthias Spitz, a lawyer at Melchers, said: “The decision many operators will have to take is: either pay the tax or leave the market.

“Someone who does not pay the tax for the next six or even ten years they are still at risk.”

Under German tax law, company directors face jail time of six months to ten years for failing to declare tax returns of more than €50,000 a year.

Directors may also be liable for tax debts if taxes have not been declared correctly.

Many companies have been preparing for the VAT all year, but for some the work is becoming more urgent as the 2015 start date approaches.

EU online gambling operators can challenge the tax in Germany but only once it comes into effect next year, according to Claus Hambach, a founding partner at Hambach and Hambach law firm in Munich.

“There will definitely be cases in the upcoming future. I also believe some operators will take a stand and say they do not need to pay because of breaches of EU and other laws,” Hambach said.

The VAT charge is the latest difficulty for online gambling companies in the country after years of delays to betting licences and warning letters sent last month about payment blocks against online poker and casino sites.

A meeting of Germany’s 16 regional prime ministers two weeks ago decided to keep a contentious limit on the number of betting licences, despite the cap resulting in legal challenges that have tied up the licensing process for more than two years.

In a sign that the premiers will continue to restrict online gambling, they also decided to send representatives to Brussels in November to justify the interstate gambling treaty that set the licence cap and banned online casino and poker.

Operators have paid a 5 percent turnover tax on German online sports betting since July 2012, despite the sector being unregulated in most parts of Germany.

The new VAT directive, which was originally designed to distribute sales tax from web giants Amazon, Google and Apple more fairly between EU member states, will apply to a broad range of electronic, broadcast and telecommunication services.

Hambach said: “The changes are so enormous that gambling is of course only a small portion.”

However, German tax authorities are expected to waste no time in collecting the VAT from foreign gambling companies by viewing online gaming as an electronically provided service.

Spitz said: “The tax authorities in Germany are rather strict in enforcement once they discover a new source of tax revenue.

“It’s likely they will start digging deeper. It’s not difficult after all to work out who’s offering online casino gaming to German customers.”

Arguments that the tax cannot be collected because online casino is illegal in Germany are also likely to fail, he said.

German tax law states that even if an activity is unlawful it is still taxable so as to prevent tax evaders from hiding funds in illegal activities.

But Hambach said the VAT changes would still raise complex legal issues on the status of different online gambling products and the use of customer data.

“You can imagine what huge data protection issues will come up when any online service provider will practically be obliged now to find out where the customer is located: are they in Germany or abroad?” he said.

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