CJEU gives precedence to national legislation over concept of principal and ancillary supplies
A recent judgment of the Court of Justice of the European Union (CJEU), arising from disputes in Germany, shows that an “all-inclusive” package may be split into a part subject to the reduced rate and a part subject to the standard rate, without this being contrary to the VAT Directive.
German providers of accommodation offered stays in hotels or guesthouses together with ancillary services (typically breakfast, parking, wellness, Wi-Fi) for a single price, or for an additional charge. They regarded the entire package as a composite supply, with the ancillary services taking on the VAT rate of the principal supply, i.e. the reduced VAT rate applicable to accommodation.
German law, however, provides for a reduced rate only for the accommodation itself, while the other services are subject to the standard rate. The tax authority therefore carved out from the package price the part corresponding to the ancillary services and taxed it at the standard rate. Owing to the opposition by accommodation providers, the case eventually reached the CJEU.
The CJEU joined several similar cases in judgment C-409/24 to C-411/24 J-GmbH and rejected the argument claiming a composite supply. It confirmed that the VAT Directive allows member states to apply a reduced rate only to certain categories of services, in this case accommodation itself, and to leave the other components of the package subject to the standard rate.
A clear definition in national law is essential in this respect. According to the CJEU, the concept of a single supply, under which an ancillary supply takes on the tax treatment of the principal supply, does not serve to impose a single rate on all components. Rather, it serves to determine what the supply consists of and how the taxable amount should be established.
The principle of tax neutrality plays a key role
Comparable supplies that compete with one another must be taxed in the same way – for example, breakfast in a hotel and breakfast in a standalone restaurant should be subject to the same rate. If breakfasts in restaurants are taxed at the standard rate, then, under the principle of neutrality (so that equal market conditions are maintained), a hotel must also tax breakfast at the standard rate even if it forms part of an accommodation package that is otherwise subject to the reduced rate. The same applies to parking, wellness and other ancillary services.
In practice, this means two things: tax authorities now have a firm basis for splitting package prices into components subject to the reduced rate and the standard rate, provided that such an approach is consistent with local law. And businesses in the accommodation sector operating in states with legislation similar to that in Germany should respond by allocating the price transparently between accommodation and other services. Before doing so, however, they should consider allocation keys that will stand in a tax inspection.