The world of e-commerce has seen unprecedented expansion in recent years, with digital platforms and online commerce revolutionising the global market. However, with this growth comes complex challenges, particularly with regard to value added tax (VAT) and its application to cross-border trans-actions. The dynamic nature of e-commerce, combined with international business practices, has led to a complex legal landscape that poses new challenges for participants in e-commerce. The follow-ing article deals primarily with VAT issues in b2c trade (i.e. sales to consumers, as opposed to busi-nesses). This is a rough initial overview. The relevant regulations are complex and should therefore be examined on a case-by-case basis based on the specific business model. 

e-Commerce in the EU

No thresholds for third countries!

Anyone who provides b2b deliveries (and certain services) in the EU without having a fixed place of business in the EU may be liable to pay tax immediately (i.e. from the first euro of turnover). Special schemes for small businesses usually only apply to companies based in an EU member state.

  • Example: A Swiss retailer sells Pokémon trading cards via its webshop from a fulfilment cen-tre in Germany. Customers are private individuals in Germany, Austria and the Netherlands. Turnover amounts to EUR 3,700 p.a. in the first year.
  • Solution: The retailer must register in Germany for VAT purposes.

Settling VAT in 27 member states: the One Stop Shop

In the case of b2c deliveries to different member states (so-called distance sales) from an EU ware-house (duty paid goods), the VAT rate of the country in which the warehouse is located initially ap-plies.

  • Example: as above.
  • Solution: The retailer must pay VAT on his deliveries in Germany. He owes VAT at the rate ap-plicable in Germany for all deliveries, including deliveries to customers in Austria and the Netherlands.

If the turnover from such distance sales exceeds EUR 10,000 per year across the EU, the VAT rate of the country in which the customer is based applies. Until recently, e-commerce traders may have had to register for VAT separately in all member states in order to fulfil their reporting and accounting obligations. Since 2021, it has been possible for them to fulfil their reporting and accounting obliga-tions via a central registration, the so-called One Stop Shop ("OSS").

  • Example: as above, but the retailer now has a turnover of EUR 17,000 p.a., of which EUR 6,000 is generated in Austria and EUR 5,000 in the Netherlands.

  • Solution: The retailer must pay VAT in Germany on its deliveries to customers in Germany. Here he owes VAT at the VAT rate applicable in Germany. For deliveries to customers in Aus-tria and the Netherlands, he owes VAT at the rate applicable in Austria and the Netherlands re-spectively. The retailer has the option of registering for VAT in Austria and the Netherlands. Alternatively, they can register for the OSS in Germany in order to fulfil their reporting and ac-counting obligations in Austria and the Netherlands. Customers in other member states can later also be registered and invoiced via the OSS.

Delivering goods from a third country to the EU: the Import One Stop Shop

Like distance sales within the EU, distance sales from a third country are also subject to VAT at the VAT rate applicable in the customer's country. Up to a goods value of EUR 150, retailers have the option of processing the corresponding distance sales via the so-called Import One Stop Shop (IOSS).

If the application of the IOSS is waived, a special regulation may apply, according to which the import tax is collected by the freight forwarder directly from the respective customer. Freight forwarders regularly charge their customers additionally for their customs clearance services - so that this proce-dure appears expensive and less transparent from the customer's point of view.

Finally, it is possible for distance sellers to register in the respective member states of their custom-ers and invoice their deliveries to the national tax authorities themselves.

  • Example: A Swiss retailer sells Pokémon trading cards from stock in Switzerland to consum-ers in Austria, Germany and the Netherlands via its webshop. The value of the individual con-signments is between EUR 45 and EUR 85. 
  • Solution: The retailer can register for the IOSS (for this purpose, he must appoint a repre-sentative based in the EU). Deliveries of goods are exempt from import tax, and national VAT in Austria, Germany and the Netherlands is reported and settled via the IOSS.

    Alternatively, the retailer has the option of applying the "special regulations for the import of consignments with a material value of no more than 150 euros" (as described in the corre-sponding Section 21a of the German VAT Act). In this case, the freight forwarder collects the tax (and any handling surcharges) directly from the customer.

    Thirdly, Swiss traders still have the option of registering for VAT in Austria, Germany and the Netherlands and settling VAT locally.

Platform taxation

Special rules have applied in the EU for several years to distance sales that are initiated or processed via so-called "electronic interfaces", provided that the goods are dispatched within the EU and the seller itself is based in a third country. An electronic interface is, for example, an electronic market-place or an electronic platform that enables the buyer and seller to come into contact, resulting in the delivery of goods to the recipient of the service (e.g. Amazon Marketplace, ebay or Alibaba).

  • Example: A Swiss retailer sells Pokémon trading cards from a warehouse in Germany via an online marketplace operated by a third party. The customers are private individuals in Germa-ny, Austria and the Netherlands. 

In cases where an electronic interface is included in the supply chain in this sense, a so-called "supply chain fiction" occurs: While there is actually only a single sales transaction, two supplies are fictitious for VAT purposes by assuming a (first) supply from the trader to the operator of the electronic inter-face and a (second) supply from the operator of the electronic interface to the final purchaser. The fictitious supply from the online trader not established in the Community to the operator of the elec-tronic interface is exempt from VAT. The supply of the electronic interface to the end customer fol-lows the general principles for distance sales.

  • Example: as before.
  • Solution: This results in a fictitious supply chain, in which a supply from the Swiss retailer to the operator of the online marketplace and from the operator of the online marketplace to the end customer is fictitious. The supply from the Swiss retailer to the operator of the online marketplace is exempt from VAT. The supply from the operator of the online marketplace to the end customer is subject to VAT at the VAT rate applicable in the country in which the end customer is based.

CONCLUSION

Dropshipping and other modern sales channels offer tantalising opportunities to tap into new sources of income. It is essential to consider the (value-added) tax consequences right from the start. If you wait until your business has reached a critical size, you will be chasing your own past failures. With a clever setup, the business can be scaled without major risks and the administra-tive effort can be kept within reasonable limits.

In a recent ruling (BGer 9C_154/2023 of 3 January 2024), the Fed-eral Supreme Court dealt with the admissibility of input tax deduction for acquisition tax (VAT on services purchased from abroad) for con-sultancy services in connection with the sale of shareholdings. Ac-cordingly, a person liable for VAT in Switzerland is only entitled to claim the declared purchase tax as input tax if the corresponding ser-vices were provided in a period in which the taxable person was al-ready liable for VAT (registered). The taxable person is responsible for providing proof of this.

Facts of the case

A AG, which was only entered in the VAT register as a taxable person on 1 April 2019, planned the sale of shares in two companies. To this end, it commissioned several foreign service pro-viders to prepare, plan and implement the sale, who were to provide advice in the areas of in-vestment, auditing, tax and law, depending on their expertise. The consultancy agreements be-tween A AG and the consultants were concluded in 2014 and 2018 respectively, i.e. before A AG was registered as a company subject to VAT. The project was then completed in May 2019 with the successful sale of the shares. All consultants invoiced their services after 1 April 2019, whereby A AG, which was now liable for VAT, duly declared the purchase tax and reclaimed the resulting VAT amount as input tax. None of these purchased services were capitalised during the duration of the project from 2014 to May 2019.

Following an examination, the FTA largely refused the input tax deduction, arguing that the tax-payer could only deduct the input tax on services that (regardless of the invoice date) had actu-ally been provided after it was entered in the VAT register on 1 April 2019 (cut-off date). Due to a lack of detailed information on which consultant provided which services at exactly what time, the FTA methodically assumed an even, linear purchase of services according to the duration of the contracts (pro rata temporis). The input tax deduction was therefore only permitted to the extent that the services were provided after the reference date according to this proportional distribution of fees.

CONSIDERATIONS OF THE FEDERAL SUPREME COURT

Requirement of an existing tax liability while receiving services

The position of the FTA, according to which the right to deduct input tax can only cover supplies that were received during the period of existing tax liability, was not (or no longer) disputed in the proceedings before the Federal Supreme Court.

Proof of the date on which the service was received

The court therefore focussed on the question of proving when the advisory services were actu-ally provided. In accordance with the principle that facts justifying and increasing the tax must be proven by the tax authority, and facts reducing and excluding the tax must be proven by the per-son liable to pay the tax, the court held that A AG had the burden of proof that the services from the consultancy agreements concluded long before the VAT registration were only provided after entry in the register of taxable persons. A AG had failed to provide this evidence. In the absence of any other evidence, the approach of the FTA, which assumed a continuous provision of services over the period since the conclusion of the contract and accordingly divided the fees "pro rata temporis", was not objectionable in the present case.

Subsequent input tax deduction

In the sense of a contingent application, A AG had argued that it was entitled to a claim for sub-sequent input tax deduction. This is the possibility of correcting the input tax deduction (pro rata) at a later point in time than the purchase of the service if the conditions for the input tax deduc-tion subsequently materialise, Art. 32 VAT Act.

The input tax deduction on goods and services put to use can be corrected if they are still avail-able and have a current value at the time when the conditions for input tax deduction have mate-rialised, Art. 72 para. 2 sentence 1 VATO.

However, there is a legal presumption that services in the areas of consulting, accounting, re-cruitment, management and advertising are already consumed and no longer available at the time they are purchased, Art. 72 para. 2 sentence 2 VATO. In the opinion of the court, the standard codifies, to a certain extent, an obligation for immediate depreciation, solely in relation to the VAT treatment. The accounting treatment (which Art. 70 para. 1 sentence 1 of the VAT Ordi-nance generally prescribes) is cancelled out by this special standard.  

CONCLUSION

The generally generous regulations on input tax deduction in Switzerland can sometimes lead to a certain carelessness in the area of VAT. The judgement makes it clear that early VAT registra-tion of the parties involved in connection with potential transactions should always be carefully checked and is usually advisable.

The judgement is not only relevant in the context of transactions, but also, for example, in the case of business start-ups, especially if a mandatory tax liability is not necessarily assumed at the beginning of the entrepreneurial activity.

In addition, the judgement shows that particular attention should be paid to documenting the timing of the provision of services - for example, through detailed invoicing or the documentation of certain "project milestones".

Under the current VAT Act, the right to deduct input VAT is broadly defined. Accordingly, the taxable person can in principle deduct the in- put VAT invoiced to him and paid by him within the scope of his busi- ness activity, Art. 28 para. 1 MWSTG. However, one of the require- ments is that the input tax was incurred as part of the taxable person's "entrepreneurial activity". Naturally, this raises the question of how to distinguish between entrepreneurial and non-entrepreneurial activities.

In its judgement 9C_651/ 2022, the Federal Supreme Court dealt with this distinction between the entrepreneurial and non- entrepreneurial spheres and the corresponding consequences for input VAT deduction.

BACKGROUND

The complainant in the underlying dispute was an association whose purpose was to support and promote ecclesiastical and charitable causes in Switzerland and abroad. In order to achieve its purpose, the association organised Christian musicals. Approximately 70% of the musicals were financed by donations and no admission fees were charged.

In addition to the income from donations, the association also generated income from services, such as the sale of food in connection with the musicals, the sale of other items (e.g. books; T- shirts), from publicity services (sponsoring) in favour of companies and accommodation services. On the occasion of a VAT inspection, the FTA denied the association an input VAT deduction in connection with the organisation of the musicals. The association appealed against this.

DECISION OF THE FEDERAL SUPREME COURT
The Federal Supreme Court refers to its previous case law, according to which a corporate body can also maintain a non-entrepreneurial sphere in addition to the entrepreneurial sphere. However, account must be taken of the fact that the company is, in principle, an economic unit to which all activities related to the entrepreneurial activity must be allocated.

A possible non-entrepreneurial sphere is therefore characterised by the fact that the business unit in question either does not generate any income from services or at least does not generate such income in a sustainable manner. An independent non-entrepreneurial sphere can therefore only be assumed if the separation can be made sufficiently clear - whether this is due to a separate activity that is clearly recognisable to the outside world or a clear purpose that differs from that of the entrepreneurial activity. If this is not the case, the principle of the "unity of the company" remains with a single, entrepreneurial sphere.

In the present case, the main purpose of the organisation of the Christian musicals is the non-profit or idealistic activity of the association - and not the sale of food, books or T-shirts or the provision of publicity and accommodation services. With the musicals, the association therefore pursues ide- alistic purposes and not the generation of income. In this respect, entrepreneurial activity is there- fore lacking.

This means that the idealistic purpose of the musical performances can be clearly distinguished from that of the association's entrepreneurial activities (sale of food, etc.) and a separation can be made between the rather small entrepreneurial sphere and the significantly larger non-entrepre- neurial sphere. The close factual link between the entrepreneurial and non-entrepreneurial activi- ties is irrelevant: The association does not perform the musicals in order to promote its entrepre- neurial activities, but merely uses the (ideally motivated) performances as an opportunity to carry out a subordinate entrepreneurial activity.

CONCLUSION

As a result, the Federal Supreme Court confirms its previous case law on the distinction between the entrepreneurial and non-entrepreneurial sphere. The argumentation appears to be driven to a significant extent by considerations of achieving "unfair" tax advantages by using a comparatively subordinate business area in order to be able to deduct input tax incurred in the supposedly non- entrepreneurial sphere.

BACKGROUND
From a VAT perspective, subsidies and donations constitute so-called "non-consideration". This means that they are considered to be flows of funds that are not matched by any supply. As non-consideration, subsidies and donations are equally not subject to VAT. In contrast, subsidies and donations differ at the level of input tax deduction. While donations do not lead to a reduction in input tax, subsidies trigger the requirement for a corresponding reduction in input tax. The distinction between donations and subsidies is made on the one hand according to whether the donor is a "subject of public law" (hereinafter "public authority"). Corresponding grants that are not paid by a public authority are generally considered donations. However, if the grant is made by a public authority, it cannot automatically be concluded that it is a subsidy, as public authorities should also be able to "donate" within the meaning of VAT. Recently, the Federal Supreme Court once again had to deal with the question of the distinction between a donation and a subsidy.
BG DECISION 9C_609/2022
Facts of the case
In the present Federal Supreme Court case 9C_609/2022, the taxpayer, which is organised under private law and whose statutory purpose is to provide teaching, research and service infrastructures for conventional medicine, intended to build a campus on a plot of land owned by the Canton of Zurich. For this construction project, the taxpayer received an investment amount of CHF 9,000,000 from the Lottery Fund of the Canton of Zurich.

As part of an inspection, the FTA took the view that the taxpayer had wrongly qualified the investment contribution from the lottery fund as a donation and not as a subsidy and had therefore wrongly not amended its input tax deduction. In particular, the FTA claimed that the contribution was based on a legal basis and was also earmarked for a specific purpose, namely as an investment contribution for the construction of the musculoskeletal research and development centre, the activities of which could be considered to be in the public interest. The taxpayer argued that the funds should be recognised as a donation and not as a subsidy.

Accordingly, it was disputed in this case whether the lottery fund had made an input tax-effective subsidy or an input tax-neutral donation.

Decision of the Federal Supreme Court
In general, the Federal Supreme Court states that a (tax-neutral) donation exists if a voluntary donation is made with the intention of enriching the recipient without the expectation of a supply in the VAT sense in return. The person receiving the donation can largely dispose of the funds as they see fit, which does not rule out the possibility of donations being made linked to a specific project. In principle, the beneficiary is not subject to any legally standardised duty of conduct. This means that, in principle, public authorities can also make donations.

The Federal Supreme Court examines three key criteria for distinguishing a subsidy from a donation:

    1. Are the funds provided by a public authority?
    2. Is the allocation of funds based on a legal basis?
    3. Are the funds awarded without any expectation of a specific supply in return?
As a result, it denied this, as "the expectations on the part of the Canton of Zurich inevitably [had] to go further, as considerable public funds are at stake, which must be used economically and in a targeted manner". The canton of Zurich could "not be accused of having donated the funds and leaving their use largely to the taxpayer". However, this excludes a donation, as "in the case of a donation [...] it is to be expected that it is made free of a legally enforceable behavioural obligation, apart from the fact that the funds are used appropriately."
CONCLUSION
The judgement of the Federal Supreme Court raises questions. At the crucial points, the court relies more on conjecture than on substantiating its decisive considerations. In particular, the distinction between a "project-related donation" and a subsidy is unclear (although the court expressly recognises that there can be project-related donations). Taxable persons who receive donations that could be considered to be made by a public authority in the broadest sense should review their position from a VAT perspective. If such funds are newly awarded, the corresponding contracts should be checked to see whether they are sufficiently clearly formulated to be able to clearly distinguish between a donation and a subsidy. Subsidies are also to be part of the partial revision of the VAT Act. It remains to be seen whether this will create more clarity.
Entrepreneurs in Switzerland are usually confronted with a pragmatic tax administration in the area of value-added tax, which orients its actions to the meaning and purpose of a regulation rather than to purely formalistic requirements. Three recent examples from German case law show that entrepreneurs can regularly hope for less understanding in the case of formal errors as soon as they move (for VAT purposes) within the EU area. Germany offers itself as a strong trading partner for Swiss companies as an example. The countries to the east and south of the EU in particular are by no means less strict than their immediate neighbour to the north. In view of an average tax rate in the EU of over 20%, the consequences can be serious.
  • VAT "correct" invoices and right to deduct input tax

The first case presented here as an example (Federal Fiscal Court, ruling of 7 July 2022, V R 33/20) dealt with the question of retroactive invoice adjustment. It should be noted that according to European law, the right to deduct input tax arises at the time the service is rendered and in the amount of the tax owed - that the tax has also been paid, is not decisive (unlike in Switzerland). However, the prerequisite for exercising the right to deduct input tax is the possession of a proper invoice.

According to the German tax authorities and case law, an invoice can only be corrected retrospectively if the document to be corrected has five essential characteristics (issuer of the invoice, recipient of the service, description of the service, remuneration and the amount paid). The invoice must contain a separate value-added tax (VAT). If one of these elements is missing, the invoice does not qualify as an invoice for VAT purposes. Until now, it was not detrimental to the qualification as an invoice for VAT purposes if the content of the features was incorrect (the invoice was then not correct, but at least represented an invoice document that could also be corrected retroactively). In the case decided here, the supplying party mistakenly came to the conclusion that the recipient of the service was resident abroad and that the service was therefore not subject to VAT in Germany. Accordingly, it invoiced with "VAT 0%". In the course of a tax audit, it later turned out that the recipient of the service was resident in Germany and should have been invoiced with German VAT.

In the opinion of the court, however, the document was so faulty due to the lack of separately stated tax that it no longer constituted an invoice and the correction had no retroactive effect on the input tax deduction.

  • Proof of the conditions for a taxexempt intra-Community supply I

In an older ruling (Federal Fiscal Court, ruling of 22 July 2015, V R 23/14), the Federal Fiscal Court (Bundesfinanzhof, BFH) deals with the conditions under which it is possible to prove that goods in the context of an exempt intra- Community supply have actually left the territory of one Member State and entered the territory of another Member State. And again, the issue was the question of a correct or sufficient determination of place.

In the underlying case, the customer had confirmed this in writing to the supplier upon collection of the goods: "The vehicle will be transported by me to the destination country Spain on ...". However, this was not sufficiently precise for the German tax authorities because the specific (!) destination was not named and could not be equated with the company address of the buyer without further ado.

Once again, the BFH agrees with the opinion of the administration - and thus denies the tax exemption for the intra-Community supply. And again, the BFH emphasises that the question of good faith protection did not arise in the present case, as formal completeness was lacking (protection could be granted to all goods). If the good faith in the content of the accuracy).

  • Proof of the conditions of a taxexempt intra-Community supply II

In the last example briefly presented here (BFH, ruling of 19 March 2015, V R 14/14), the BFH also deals with the conditions for proving the conditions of intra- Community supplies. And once again, the decision is to the disadvantage of the taxable person.

The issue in dispute was whether the plaintiff had succeeded in proving that all the conditions for an intra- Community supply had been met. In particular, the question was whether a witness statement was suitable as evidence to confirm the existence of the conditions for intra-Community deliveries at the time of delivery. The lower court denied this and considered the evidence not to have been provided.

The BFH shares this view. The legislator has determined t h a t the proof is to be provided by corresponding bookkeeping and documentary evidence. Only in blatantly exceptional cases, in which formal proof cannot be provided or cannot reasonably be provided, does the principle of proportionality allow for a reduction of the tax burden. The BFH confirmed the refusal of tax exemption for the intra- community supply in question. Since such an exceptional case was not recognised in the present case, the BFH confirmed the refusal of tax exemption for the intra- community supply in question.

  • CONCLUSION

The examples make it clear that the German tax authorities (but also tax authorities in other EU member states) place high demands on entrepreneurs in terms of formal requirements. The The "good" news for entrepreneurs is that they can (but also must) take countermeasures, because the formal requirements are regularly clearly specified in the relevant laws. It is therefore advisable for entrepreneurs who trade in the EU and provide or receive services to establish internal processes, controls and/or checklists at an early stage to ensure that, for example, incoming invoices are (also) checked for formal correctness and that all necessary proof is available in the prescribed form for their own, possibly taxexempt, services.