ECJ C-565/24: VAT Rules for Loss-Making Travel Trips

Can a business evade standard VAT deductions simply by running systematically loss-making "coffee trips"? Court of Justice of the European Union (ECJ) Case C‑565/24 examines P-GmbH, a German company that offered discounted and free coach excursions financed by selling goods on site. This case explores whether non-traditional travel organizers operating with a negative margin still fall under the EU's special VAT scheme for travel agents, and whether a negative margin can yield a tax refund.

Background of the Case 

Between 1997 and 1999, P organized so-called 'coffee trips', where tourists were taken by coach to popular destinations, received a meal, and could take part in other organized activities. P bought the necessary transport services from other taxable persons and resold those services to participants in its own name. 

Participants normally paid a fee for the excursion, but this fee did not fully cover P’s transport costs. P covered the remaining costs, as well as the costs of other services included in the trips, through the revenue generated from selling goods. P also increasingly offered free excursions, with all costs financed through its sales revenue.

For VAT purposes, P initially treated the transport services and sales of goods separately and applied the normal VAT rules. It therefore deducted all input VAT incurred on the transport services it purchased, which the German Tax Authorities initially accepted.

However, after finishing the tax audit and subsequent administrative and court proceedings, the Tax Authority restricted P’s right to deduct input VAT on transport costs. They accepted the deduction only for transport services provided on trips where participants did not pay a fee. For trips where participants paid a fee that partially covered the transport costs, the Lower Saxony Finance Court held that P was subject to the special VAT scheme for travel agents.

As a result, P could not deduct the VAT it paid to the transport providers in the same way as under the normal VAT rules. Nonetheless, P appealed that decision to the German Federal Fiscal Court, which referred the matter to the ECJ.

Main Questions from Request for Ruling

The Federal Court raised three questions before the ECJ. First, the court asked whether an excursion organized by a trader away from its business premises falls within the concept of transactions relating to a journey carried out by a travel agent under the Sixth VAT Directive. 

If the answer to the first question is affirmative, the Federal Court asked whether the special travel agents’ scheme still applies when the taxable margin is negative. Third, if the special scheme applies even in such circumstances, the Federal Court asked what the VAT consequences of that negative margin should be.

Applicable EU VAT Directive Article

To answer the questions raised, the ECJ interpreted and analyzed Articles 12(1) and 26 of the Sixth VAT Directive. Also, the ECJ identified Article 1(1) of Council Directive 85/577/EEC on protecting consumers in respect of contracts negotiated away from business premises as relevant to this case.

German National VAT Rules

The relevant German rules were set out in Article 25 of the Law on Turnover Tax and largely reflected the EU special scheme for travel agents. The German rules also contain a specific restriction on input VAT deduction. Although the general input VAT deduction rules under Article 15 otherwise continued to apply, the trader could not deduct VAT charged on travel-related inputs.

Importance of the Case for Taxable Persons

This case is significant for taxable persons because it addresses whether non-traditional travel operators, such as businesses organizing subsidized excursions or "coffee trips", must apply the special VAT scheme for travel agents, even when operating at a systematic loss. Furthermore, it touches upon the crucial question of how negative margins are treated for VAT purposes and whether they can generate tax refunds or offset other taxable liabilities.

Analysis of the Court's Findings

The ECJ considered the first two questions together. Firstly, the ECJ recalled that Article 26 is not limited to businesses formally registered or described as travel agents or tour operators. This means it can also apply to traders who organize travel or excursions in their own name and purchase the services needed for those activities from other taxable persons.

The ECJ also explained why the EU created this special VAT scheme. Travel agents and tour operators typically combine several different services, such as transport and accommodation, which may be supplied in different countries. Applying the ordinary VAT rules separately to each service would create significant practical difficulties, particularly in determining where the services are taxable, what amount is subject to VAT, and how input VAT should be deducted. 

Therefore, Article 26 established a simplified special VAT regime adapted to the nature of travel businesses. Notably, the ECJ clarified that the scheme is not limited to cross-border travel services. Although initially introduced to address the practical difficulty of taxing travel services involving several EU countries, the wording is broad enough to cover services supplied entirely within one EU country. 

Furthermore, the ECJ underlined that the scheme depends on the nature of the services provided, rather than the formal description or legal status of the business. The same reasoning applies where a trader is not normally considered a travel agent or tour operator but provides services that are identical or comparable to those provided by such businesses. Due to this interpretation, P cannot be excluded from the special scheme merely because it was not formally a travel agent or tour operator.

The ECJ further noted that P’s coach excursions have the characteristics of travel services. Nonetheless, the key question is whether two particular features of P’s business change that conclusion: the excursions were systematically loss-making, and P covered those losses through a separate activity involving the sale of goods during the excursions.

Concerning the relationship between the transport services and the sale of goods, the ECJ explained that the relevant consideration is primarily the nature of the travel service itself. In P’s case, that service is the provision of transport.

The ECJ then considered whether the transport and goods sales should instead be treated as a single combined supply. The important test is the average consumer's perspective. A supply is generally ancillary when it does not represent an objective in itself for the customer, but merely helps the customer enjoy the main service. When applying this reasoning to P's operations, the ECJ noted that the company clearly organized the excursions partly to encourage participants to buy its goods, but buying the goods was not compulsory.

Additionally, the ECJ considered the financial relationship between the two activities, determining that the transport fee was not merely symbolic or insignificant: on average, it covered around 60% of the actual cost of the transport service. This further supported the conclusion that the excursion was a genuine service supplied to customers in its own right, rather than merely a promotional mechanism for selling goods.

The ECJ also noted that the scheme does not depend on whether the travel activity is profitable or what its purpose is. The rule is not intended to limit the scheme according to the economic results of the transactions. Making profitability a condition would significantly restrict the scope of the provision and would be inconsistent with the purpose of the special scheme.

Accordingly, the decisive criteria remain whether the trader acts in its own name, purchases goods or services from other taxable persons, and provides travel services that are not merely ancillary.

Regarding the third question, the ECJ restated that the taxable amount under the special scheme is the margin. More specifically, it is the amount paid by the traveller, excluding VAT, minus the actual cost of the services purchased from other taxable persons for the traveller's direct benefit. The margin must be calculated for each travel service, rather than by combining all travel services and calculating one overall margin. 

Therefore, a profitable excursion cannot simply be used to offset a loss arising from another excursion when determining the taxable amount. Additionally, the rules clearly provide that VAT charged to the travel agent by other taxable persons on services directly benefiting the traveler cannot be deducted or refunded in any EU country.

Court's Final Decision

Ultimately, the ECJ concluded that the special VAT scheme for travel agents remains applicable even where the fee paid by travelers does not cover the full cost of the services. In other words, the fact that the excursions are partly financed through a separate goods-selling activity does not prevent the scheme from applying, provided the underlying services have the characteristics of travel services.

Additionally, the ECJ ruled that a negative margin on an individual travel service does not create a right to an input VAT refund. 

Conclusion

As a result of the ECJ's conclusion, P’s loss-making excursions remain within the special travel agents’ VAT scheme, but P cannot claim a refund of the input VAT simply because the margin on those excursions is negative. This decision reinforces that businesses cannot circumvent the simplified travel agent scheme by structuring operations with systematic losses or cross-subsidizing travel costs through other commercial activities. Consequently, traders must carefully assess how input VAT is handled under special regimes, as negative margins will not yield tax credits or offset VAT liabilities from separate revenue streams.