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Rental of virtual land is subject to sales tax

This post is also available in: Deutsch

The Cologne Fiscal Court has ruled that the purchase and sale of virtual land in a computer game is subject to VAT.

The facts of the crime

Before the court, the parties disputed the question of whether the plaintiff had provided taxable services in the context of a virtual world in the years in dispute – 2013 to 2016.
The plaintiff registered a business in April 2011, the object of which is internet trade in goods of all kinds. As part of this business, he generated revenue by renting out virtual land as part of the game.

The game is an online 3D world simulation run by a US company based in California. The location of the servers on which the game is operated is also in the USA. The game is a virtual representation of the real world in a computer-generated, three-dimensional environment, which the provider’s customers can explore and walk through with their game characters. The program focuses on social interaction between users and content creation. The avatars and the virtual world in which they operate can be designed by the users as they wish.

Users can deposit a regular fee into premium accounts and then have the option to purchase virtual land. The virtual country can be designed according to your own wishes. Users who own land in the game rent web storage or server space from the provider. The provider receives a one-time fee for “purchasing” the land and setting it up, and a regular fee thereafter for service and maintenance. The user can create a virtual world of landscapes, buildings and virtual objects. According to the “Terms of Service” of the provider, the value of these services is due to the user. In para. 3.2. of the “Terms of Service” states in this regard:

“You retain copyright and other intellectual property rights with respect to Content you create in A, to the extent that you have such rights under applicable law.”

The plaintiff’s activity consisted of acquiring virtual land within the game by paying the relevant fees, parceling it and renting it out to other users within the game in return for payment of virtual currency. Accumulated virtual currency was then exchanged by the plaintiff with the operator via the exchange platform into U.S. dollars, which were credited to the established credit account of the plaintiff with the game operator. These U.S. dollars were initially used to pay the fees charged by the provider. The plaintiff had a remaining profit paid out by the provider to his PayPal account. PayPal in turn exchanged these U.S. dollars for euros, which the plaintiff had transferred to his account at his bank.

In his sales tax return for 2013, the plaintiff declared the net sales generated as taxable and calculated a residual sales tax, taking into account input taxes. The declaration was equivalent to a tax assessment subject to review. The statement from the tax office L, which was responsible for the plaintiff at the time, is dated July 20, 2015.

After the plaintiff had initially not submitted a VAT return for the year 2014, the defendant estimated the bases of taxation in the VAT assessment dated March 13, 2017, which was issued subject to review, and assessed the tax.

The plaintiff filed objections to this on Aug. 19, 2015 (sales tax 2013), March 21, 2017 (sales tax 2014), May 16, 2017 (sales tax 2015) and Oct. 16, 2017, essentially claiming that the sales were not taxable because there was no exchange of services between him and the other users of the game. Contractual relationships exist only between the users and the provider of the game. The tax office considered the objections to be only partially justified. The sales achieved are subject to sales tax pursuant to § 1 para. 1 No. 1 UStG, insofar as the place of performance is in Germany. The plaintiff is an entrepreneur. At first, it would seem to be contrary to the characteristics of a game to tax processes in the virtual world in reality. In the present case, however, the intention of generating income clearly outweighed the gaming character. The plaintiff had registered a business and explained his business model aimed at generating income in his letter of Jan. 24, 2014. The entire process makes it clear that the plaintiff’s primary objective is not to play a game, but rather to generate real income by crediting his account.

For the years in dispute from 2015 onwards, the services are other services rendered electronically within the meaning of Section 3a (1) of the German Civil Code. 5 sentence 2 no. 3 UStG. The same applies to the 2014 dispute year pursuant to Sec. 3a para. 4 No. 13 UStG. The virtual objects acquired or created by the users of the game were to be classified as incorporeal objects which represented individualizable asset objects over which legal power could be exercised and which could also be the subject of contracts. By leasing out regions, the plaintiff provides other users with benefits that are ready for consumption; it thus provides other services within the meaning of Section 3 (3) of the German Civil Code. 9 UStG. These would be provided via the Internet, would not be possible without information technology, require minimal human involvement, and therefore constitute other services provided electronically (Article 7 and Annex I of the VAT Regulation).

There is also an exchange of services between the plaintiff and his fellow players. Users would be represented in the virtual world by their avatars. However, these could not develop a life of their own, but would be guided and led in their actions exclusively by the people behind them. Therefore, all legal relationships and other obligations would not exist between the avatars, but between the users directly. The legal relationships of the users among themselves are to be distinguished from the legal relationships of the users to the provider. The provider charges user fees for its own services. As an entrepreneur not resident in the territory of the European Union who exclusively provides other services in the territory of the European Union by electronic means (Section 3a (5) sentence 2 no. 3 UStG), the entrepreneur levies VAT as the person liable for the tax insofar as services are provided to non-entrepreneurs resident in the EU. Sales to entrepreneurs based in the EU are not subject to VAT. The User shall prove its entrepreneurial status to the Provider by presenting its VAT identification number. The services that the plaintiff provides to its players are shown separately in the provider’s statements under the designation “Payment for D2 Transaction.” According to the terms of the game, the asset value of these services belongs to the user and not to the operator. The consideration for the plaintiff’s services was in virtual currency, which in turn could be exchanged for real currency (dollars). Since a virtual currency does not constitute money in the sense of civil law, the services are to be regarded as barter-like transactions within the meaning of Section 3 (3) of the German Civil Code. 12 UStG to be assessed.

The place of other services provided electronically is determined in accordance with Section 3a (1) of the German Civil Code. 5 sentence 1 UStG if the recipient of the service is a non-entrepreneur (UStAE section 3a.12 in conjunction with section 3a. 1 para. 1) and according to § 3a para. 2 UStG in the case of a business recipient of services. According to this – at least as of 2015 – the place of the other service provided electronically for non-entrepreneurs is in principle the place where the recipient of the service has his domicile, his habitual residence or his registered office (Section 3a (5) sentence 2 no. 3 UStG). As a rule, the place of performance of other services rendered to an entrepreneur for his business is the place from which the recipient conducts his business (§ 3a para. 2 UStG). It was not clear from the provider’s statements whether the plaintiff’s sales came from services to non-entrepreneurs or to entrepreneurs and where the service recipients were located. Since the true identity of the characters acting in the virtual world is generally not known to the users within the game, the plaintiff can ultimately also hardly provide reliable information on the recipients of the services provided by him. A precise breakdown of sales between entrepreneurs and non-entrepreneurs with their place of residence or business in Germany or abroad – for 2013 and 2014, a distinction may have to be made between Community territory and third-country territory – is therefore not possible. Therefore, an apportionment would have to be made by way of estimation. In this context, it can be assumed that the game character is the main focus for the majority of users of “A” and that the majority of service recipients are correspondingly non-entrepreneurs. Since the plaintiff was a German national, it also seemed likely that a high percentage of the beneficiaries were German nationals or at least German-speaking persons due to the language communication possibilities. Based on these assumptions, the share of sales attributable to the domestic market is estimated at 70% of total declared sales.

The plaintiff, on the other hand, claims that there is no performance relationship between him and the other users. An exchange of services presupposes that there is a service provider and a service recipient and that the service is matched by a service in return. Performance and consideration would have to be interrelated. There must be a legal relationship between the service provider and the service recipient in the context of which mutual services are exchanged, whereby the remuneration received by the service provider constitutes the actual countervalue for the service provided to the service recipient.

In this case, there was already no legal relationship between the individual users. A contractual relationship exists only between the respective users on the one hand and the provider on the other. According to the General Terms and Conditions, both the “virtual land” and the virtual currency, which are the subject of the interactions between the users, are limited licenses granted by the provider to the users against payment. The provider allows users to use certain set up functions within the program according to the given guidelines. The provider charges users for the granting of the respective authorizations. While permissions could be shared between users under the program according to predetermined guidelines. However, a genuine re-licensing to third parties who are not users of the program is expressly excluded in the General Terms and Conditions and is not possible. Each user therefore uses the rights of use granted by the operator against payment within the closed system without participating in the general market and legal transactions. As a rule, the users of the program also meet anonymously, which also speaks against the existence of a legal relationship. In addition, legal enforcement of the benefits will also not be possible. Thus, the users do not provide any services to each other electronically, but merely make use of the electronic services provided by the provider within the framework of the program.

There was also a lack of immediacy between performance and consideration. The provider was not obliged to take back or compensate the virtual objects created by the users. Only the virtual currency could be exchanged back according to the rules of the game. However, the provider had also reserved the right to change the file-sharing platform at any time or to terminate it without compensation. The virtual currency is neither currency, substitute currency nor any other financial instrument, it cannot be used or exchanged outside the game.

If one were to affirm an exchange of services for consideration in the present case, this would take place solely between the provider and the respective user. Only in this relationship does a real exchange of services take place. D

The decision of the Cologne Fiscal Court

According to the court, the claim is unfounded.

The tax office was right to subject the net amount of 70 percent of the undisputed income generated by the plaintiff from his activities in the virtual world to value added tax.

According to § 1 para. Pursuant to Section 1 No. 1 Sentence 1 of the German Value Added Tax Act (Umsatzsteuergesetz – UStG) applicable in the years in dispute, the supplies of goods and services by an entrepreneur in Germany for consideration within the scope of his business are subject to value added tax. This provision finds its basis in Union law in Art. 2 para. 1(a) and (c) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax – VAT Directive .

The plaintiff was an entrepreneur within the meaning of the above-mentioned provision in the years in dispute. According to § 2 para. 1 sentence 1 UStG, who exercises a commercial or professional activity independently. A commercial or professional activity is any sustained activity for the purpose of generating income, even if the intention to make a profit is absent or an association of persons acts only in relation to its members (Section 2 (1) sentence 3 UStG). These conditions were met in the years in dispute. This is because the self-employed plaintiff had not primarily used the platform as a “gaming platform”, but rather to generate virtual currency by parcelling out virtual land and subsequently renting it out, and then converting it into money as a result. The plaintiff himself did not question his status as an entrepreneur in the years in dispute; accordingly, he had submitted a VAT return for 2013 as an entrepreneur. The Senate therefore refrains from further comments on this question.

According to consistent case law of the ECJ and the BFH, a “service for consideration” requires the existence of a direct connection between a service and a consideration actually received by the taxpayer. For this purpose, a legal relationship must exist between the service provider and the service recipient within the framework of which mutual services are exchanged, whereby the remuneration received by the service provider constitutes the actual countervalue for the service provided to the service recipient.

These requirements would be present in the relationship between the plaintiff and its customers.

The plaintiff had rendered a service to its customers within the meaning of § 1 para. 1 sentence 1 no. 1 UStG in the form that it has provided an individual benefit to its customers as recipients of the service. This is because, according to his own submission, he acquired virtual land within the framework of “A”, parceled it out and rented it out to other users of “A” in return for a payment from M. The other users were thus able to enjoy the virtual land processed by the plaintiff, which they could use directly for their own purposes. This is an other service of its own kind. For this qualification, it was irrelevant that the service was provided in the context of a virtual world. Accordingly, customers were willing to pay virtual currency to the plaintiff for this purpose.

These services were also provided to the plaintiff’s customers as recipients of services within the framework of a legal relationship existing between them in each case. To the extent that the plaintiff argues in this regard that there are no legal relationships between it and the other users, the court does not agree with the plaintiff. That these exist between the plaintiff and the provider on the one hand and the other users and the provider on the other hand is beyond question. This is because access to the virtual world requires a legal relationship with the provider in each case.

However, the assessment of these service relationships is not the issue. Rather, the question is how the legal relationships of the users are to be assessed when they interact with each other via their “avatars”. It is not evident why the terms of use of the game should speak against the users entering into legal relationships with each other. Just as in the real world an organizer can provide access to a market for a fee so that visitors to the market can trade with each other, the game in the virtual world allows users to interact with each other via avatars and “buy/sell” or “rent/lease” items for virtual currency or earn virtual money by performing “jobs.” The fact that the provider grants the respective user the rights of use under copyright law to the goods virtually created by him even speaks in favor of the users being able to commercialize such goods in their own name.

If, on the other hand, the plaintiff claims that further licensing to third parties who are not users of the provider is not permitted, so that each user uses the rights of use granted by the operator against payment “within a closed system” without participating in the general market, this is irrelevant to the fact that an exchange of services takes place between the plaintiff and the respective other user.

Finally, the court does not share the plaintiff’s view that the fact that the users are merely anonymous to each other via their avatars speaks against the existence of an exchange of services between the users. The Senate considers it sufficient in this respect that the persons behind the avatars, insofar as their identification – for whatever reasons – should prove necessary, can at least be determined via the IP address used.

In the years in dispute, the plaintiff also provided other services for consideration within the meaning of Section 1 (1) of the German Civil Code. 1 No. 1 Sentence 1 UStG in the form of money and not – as the defendant believes – barter-like transactions within the meaning of Section 3 (1) UStG. 12 sentence 2 UStG transacted with the other users. A barter-like transaction exists if the consideration for another service consists of a delivery or other service, but not if the consideration consists of money. According to the court, the virtual currency in the game, although not money in the sense of legal tender, are to be treated as money. In this respect, the Senate follows in principle the BMF letter of 27 February 2018 III C 3 – S 7160b/13/10001, 2018/0163969, BStBl I 2018, 316, issued following the ECJ judgment of 22 October 2015, C-264/14, Hedqvist, according to which bitcoins and other virtual currencies can be treated as money for the purposes of Section 4 No. 8 letter b UStG.

However, with regard to the treatment of virtual currency, the court does not share the further approach taken there that the principles set out in the letter do not apply to virtual play money, i.e. game currencies or “in-game currencies”. In this respect, the Senate rather follows the comments of Liegemann in BB 2018, 1175. According to this, virtual currencies are to be classified into three types in line with the European Central Bank’s classification, namely “closed” virtual currency systems that have no connection to the real economic cycle (type 1), “unidirectional” virtual currency systems in which the virtual currency is acquired with real money but redemption is excluded (type 2) and “bidirectional” virtual currency systems in which the currency is acquired with conventional money and can also be redeemed for conventional money (type 3). According to this, the virtual world belongs to type 3 and is thus closest to conventional money. This suggests that it should be recognized as a means of payment for VAT purposes in accordance with the principles set out in the aforementioned BMF letter.

However, even if one were not to follow this and were to regard the handing over of the virtual currency as the provision of another service as consideration, this would not change anything in the result here, because it is still a service for consideration, namely a service in return for a monetary consideration in the form of a barter-like transaction.

The plaintiff had rendered the other services at issue here in Germany to the extent assumed by the defendant.

However, in determining the place of performance, the court does not share the approach of the tax office that the services provided by the plaintiff are “other services provided by electronic means” within the meaning of Section 3a (1). 4 sentence 2 no. 13 of the VAT Act in the version applicable until 2014 or within the meaning of § 3a para. 5 sentence 2 no. 3 of the UStG in the version applicable from 2015. This is because the term “other services provided by electronic means” as defined by VAT law includes services that are provided via the Internet or a similar electronic network, the provision of which is essentially automated due to their nature and involves only minimal human involvement, and which would not be possible without information technology. With regard to “minimal human involvement”, the decisive factor is whether “human involvement” relates to the actual performance process. Therefore, neither the (initial) commissioning of the electronic system nor its maintenance constituted substantial “human involvement.”

On this basis, there would be no “other services provided by electronic means” here because the “human involvement” constitutes the actual service process. The exchange of services in this case is characterized by the fact that the plaintiff performed a creative service, which consists of creating a plot of land from an unworked virtual land purchased, which is immediately usable within the scope of the game and, if applicable, immediately habitable due to a house built on it and, if applicable, fully equipped with furnishings.

Overall, however, the exact classification was also irrelevant:

If the services in question – which could be a possibility – were other services in the form of granting, transferring and exercising patents, copyrights, trademark rights and similar rights (Section 3a (4) Sentence 2 No. 1 of the VAT Act in the version applicable until 2014 or within the meaning of Section 3a (4) Sentence 2 No. 1 of the VAT Act in the version applicable from 2015), there would be no deviations from the legal opinion of the defendant. Because it would be the same benefit catalog of § 3a para. 4 sentence 2 (no. 1 or no. 13) UStG is affected.

With regard to the legal situation applicable as of 2015, the following would apply: If “other services rendered by electronic means” are accepted, the place of performance of services rendered to a non-entrepreneur would be determined by the non-entrepreneur’s place of residence. In the case of licensed services, this would only be the case if the non-entrepreneurial service recipient were also domiciled in the third country territory.

The tax office had to estimate the group of these persons due to the lack of investigation possibilities. If license services were accepted, the group of persons for whom the customer’s domicile or registered office determines the place of performance would be narrower. This is because it would additionally depend on their residence or registered office in the third country territory. Therefore, the number of customers for whom the place of performance is determined by the plaintiff’s registered office will, in case of doubt, be larger than estimated by the tax office.

If the services were general other services, the result of the tax office was also correct. Because then the place of performance is determined according to § 3a para. 1 sentence 1 or § 3a para. 2 sentence 2 in both versions of the UStG applicable in the years in dispute. The relevant place of business is then again the plaintiff’s registered office for its non-entrepreneurial customers or, in the case of entrepreneurial customers, their registered office. Since the circle of the plaintiff’s customers is not known in detail in this respect either, an estimate would again have to be made according to the standards applied by the defendant.

Marian Härtel

Marian Härtel

Marian Härtel is a lawyer and entrepreneur specializing in copyright law, competition law and IT/IP law, with a focus on games, esports, media and blockchain.


03322 5078053


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