Context
Deco Proteste - Editores, Lda. (Deco) is a company that sells magazines via a subscription system, among other things. To attract enough subscribers, Deco runs promotional campaigns in which new subscribers, in addition to the magazine to which they subscribe, are entitled to a welcome gift in the form of a smartphone or tablet worth less than 50 euros.
Subscribers receive this gift at the start of their subscription and can cancel the subscription at any time without having to return the gift.
Deco believes that in this case there is no 'delivery without consideration' and, if there is a case of a free of charge supply, that the threshold for “low value gifts”, as defined in the local regulations, has not been exceeded. The Portuguese Tax Authorities disagrees with this. Ultimately, the dispute ends up in court.
Given doubts about the interpretation of this promotional activity, the Portuguese judge asks the Court of Justice of the European Union for clarification on whether there is any "free supply" of the welcome gifts at all.
Preliminary questions
In this case, the referring Portuguese judge asks whether the gift given to new subscribers upon subscribing to a magazine should be considered as:
a) A free supply, separate from the subscription.
b) Part of a single transaction for consideration.
c) Part of a commercial package consisting of the main transaction (the magazine subscription) and the ancillary transaction (giving the gift), with the latter being considered as a supply for consideration benefiting the magazine subscription.
Judgement
The Court rules that handing over a gift to new subscribers upon subscribing to a magazine must be regarded as an ancillary service to the main supply, which consists of the delivery of magazines.
The arguments that led to this judgment are as follows.
The Court notes that the handing over of a welcome gift for subscribing to a new subscription is part of the company's commercial strategy. The gift is used as an incentive to attract new subscriptions and increase the number of subscribers. Furthermore, there are significantly more subscriptions when subscribing to a subscription comes with a welcome gift.
The Court also rules that the gift does not have an independent purpose from the perspective of the average consumer. Its purpose is to encourage subscription, and consumers are willing to pay at least one month's subscription fee to receive the gift.
Finally, it is noted that the gift, in this case, a tablet or smartphone, enables new subscribers to make optimal use of the main service (reading the magazines).
Based on these arguments, the Court concludes that the gift is part of a single transaction for consideration, namely the delivery of magazines, and should not be regarded as a separate “free of charges” supply. Therefore, the company involved does not have to make a taxable self-supply and the whole transaction is subject to the reduced VAT rate applicable to publications.
Comments
The Court rules that a gift offered with a newspaper subscription should be considered an "ancillary supply" compared to the "principal supply", which is the subscription to the newspaper itself.
It is noteworthy that the Court, in this ruling, applies the "ancillary supply” doctrine to avoid a taxable self-supply. Even more remarkable is that the Court, in this case, does not primarily reason from the perspective of the consumer, as is usual, but from that of the supplier, whose aim is to boost subscription sales.
The judgment recalls previous European case law, such as the Kuwait Petroleum case (C-48/97), which held that any "free of charge" supply, except for samples or low value gifts, results in a taxable self-supply, even if business purposes are involved.
In a more recent case, GE Aircraft Engine Services (C-607/20), the business motives behind the free of charge supply did lead to a different more favorable outcome. The Court ruled in the GE case that the provision of "free of charge" vouchers was intended to improve the performance of employees and therefore did not fall under the self-supply mechanism (in this case, Article 26(1)(b) of Directive 2006/112/EC).
One consideration of the Court is that the gifts (in this case: smartphones/tablets) facilitate access to the digital publications (see paragraph 27). Unfortunately, it does not indicate whether this is a decisive factor. As usual, the Court limits itself to resolving the dispute, taking into account the facts presented.
The question now arises whether the position from the Kuwait precedent has definitively been abandoned. We are anticipating that this ruling will lead to new discussions and possibly be discussed among EU member states within the VAT Committee. To be continued, no doubt!
