ECJ Cases C‑409/24 to C‑411/24: Reduced VAT and Ancillary Services Explained

What seemed to be three separate cases turned out to be one important case, in which the Court of Justice of the European Union (ECJ) interpreted critical EU and German VAT rules and regulations. Cases C‑409/24 to C‑411/24 raise an important question of compatibility between national and EU VAT law: whether EU countries may exclude certain ancillary services from the reduced VAT rate applicable to short-term accommodation while ensuring compliance with the principle of fiscal neutrality. 

Background of the Cases 

In the first case, C‑409/24, J. operated a hotel and restaurant and offered its guests accommodation that included an optional breakfast and access to a car park. Guests would not pay for parking separately, and breakfast could be excluded from the booking, in which case its cost was deducted. J. argued that all these elements, overnight stay, breakfast, and parking, formed a single composite supply and should therefore be subject to the 7% reduced VAT rate applicable to accommodation.

However, after it conducted the tax audit, the German Tax Authority concluded that breakfast and parking must be treated as separate supplies and taxed at the standard VAT rate of 19%, in accordance with national VAT law. J. opposed this conclusion. 

Nonetheless, both the Tax Authority and the Finance Court in Saxony rejected the claim, stating that these services were not merely ancillary to the accommodation but constituted independent services. The Finance Court added that even if they were considered ancillary, national law still required their separation for VAT purposes. Consequently, J. further appealed before the Federal Fiscal Court, seeking a legal review of whether these elements should be treated as a single supply or taxed separately under VAT rules.

While the Federal Fiscal Court agreed with the earlier judgment that breakfast services, being optional and priced separately, constituted an independent supply subject to the standard VAT rate, it had a different view regarding parking services. From its point of view, providing parking spaces was, in principle, ancillary to the main service of short-term accommodation, since the price customers paid did not depend on whether they used the parking facility. 

Regardless, German law required that such services be separated from the main supply if they were not directly used for accommodation. The Federal Fiscal Court had doubts whether this rule is fully compatible with EU law.

The second case, C‑410/24, dates back to 2013, when D operated a guesthouse offering overnight stays with breakfast included at a single flat rate, regardless of whether guests actually consumed the breakfast. In the VAT returns, D applied both the 7% reduced VAT rate and the 19% standard rate%, but later sought to have those transactions taxed at the reduced rate. The main argument was that D treated the accommodation and breakfast together as a single supply that should be taxed uniformly.

By contrast, the Tax Authority held that a separate VAT rate applies to each of these services and rejected D's request to amend the VAT assessment. A decision that the Hessian Finance Court later confirmed in the appeal process. The Finance Court held that breakfast could not benefit from the reduced VAT rate because German law limits that rate strictly to short-term accommodation and requires any services not directly linked to that accommodation, such as breakfast, to be taxed separately at the standard rate.

Just like J. in the first case, D appealed to the Federal Fiscal Court, arguing that breakfast should be considered ancillary to the accommodation. The D noted that, since the price always included breakfast regardless of whether it was consumed, it formed an integral part of a single composite supply. It should therefore be treated with the same reduced VAT as the accommodation itself.

The Federal Fiscal Court noted that the main difference between this case and C‑409/24 was that here breakfast should, in principle, be regarded as ancillary to the main service of short-term accommodation, since the total price paid by guests generally did not change depending on whether they actually consumed it. Nonetheless, the question of whether German law, which requires breakfast to be separated from the accommodation for VAT purposes and taxed at the standard rate, is compatible with E-wide rules.

The third case, C‑411/24, resembles the previous two. In 2011, D GmbH & Co. KG operated two hotels offering short-term accommodation along with ancillary services such as parking, wi‑fi, and, at one hotel, gym and wellness facilities, all included in the overall price without separate invoicing. D GmbH treated ancillary services as part of the accommodation and applied the 7% reduced VAT rate in its 2011 return. 

The Tax Authority and later the Finance Court disagreed with this treatment, stating that the use of Wi-Fi, parking, and wellness amenities constituted taxable supplies subject to the standard VAT rate of 19%. This led to an appeal before the Federal Fiscal Court, which agreed that, even though no separate payment was charged, the services were provided for consideration and were ancillary to the main supply of accommodation, forming a single overall supply. 

And again, the same doubt whether the German requirement to separate ancillary services not directly used for accommodation is fully compatible with EU VAT law remained. In all three cases, guided by this doubt, the Federal Fiscal Court asked for a preliminary ruling from the ECJ.

Main Questions from Request For Ruling

In all three cases, the Federal Fiscal Court asked the same question: whether Articles 24(1) and 98(1) and (2) of the EU VAT Directive, read together with Category 12 of Annex III, prevent an EU country from enforcing a national rule that requires certain supplies to be separated for VAT purposes. 

Essentially, the questions focus on one critical issue of whether such a national provision can lawfully exclude from the reduced VAT rate supplies that are ancillary, such as breakfast, parking spaces, gym and wellness facilities, and hotel wi‑fi, to short-term accommodation, even though they are remunerated as part of the total price.

Applicable EU VAT Directive Article

Regarding the EU VAT Directive, the ECJ noted that the most relevant articles are Articles 2(1)(c), 24(1), 96, and 98(1), and Annex III to the VAT Directive, which contains the list of supplies of goods and services to which the reduced VAT rates stated in Article 98 may be applied.

Germany National VAT Rules

When it comes to German VAT rules, Articles 1(1) and, more notably, 12 of the Law on Turnover Tax, which includes VAT rules, were identified as key for settling these cases. Also, Articles 4 and 5 of Section 12.16 of the Ruling on the application of turnover tax were considered.

Importance of the Case for Taxable Persons

The importance of these cases lies in a simple fact: they address a vital question about how national VAT rules interact with EU law regarding composite or bundled supplies. The ECJ provides unequivocal guidance on distinguishing between principal and ancillary services and on which components qualify for reduced VAT rates. The ruling is particularly useful for hoteliers and short-term accommodation providers, which include breakfast, parking, or other amenities. 

Analysis of the Court Findings

Since all three cases raise the same question, the ECJ decided to join them together, and as a preliminary note, stated that questions assume these ancillary supplies fall within the scope of point 12 of Annex III, which allows EU countries to apply a reduced VAT rate to accommodation services in hotels and similar establishments. The ECJ also underlined that, under established case law, supplies of an ancillary to a principal supply that qualify for a reduced rate may themselves benefit from that reduced rate.

Furthermore, the ECJ added that a single supply exists when multiple components provided to a typical consumer are so closely linked that they form an indivisible economic supply, which would be artificial to split. In such a supply, it is common that some elements may constitute the principal supply, while others are ancillary. Thus, for ECJ, the key question is whether an EU country can apply a reduced VAT rate only to the principal element of a transaction that includes ancillary supplies.

While the EU VAT Directive does allow EU countries to apply one or two reduced rates to a category in Annex II, exercising this right is subject to two key conditions: the reduced VAT rate must be applied only to clearly identified, specific elements of the supply category, and the application must comply with fiscal neutrality. A rule that was confirmed in the Valentina Heights case. 

To meet the first condition, the supply must be clearly identifiable within the broader category, based on objective, precise criteria set out in national law. Something which German law apparently did manage to do by stating that the 7% reduced VAT rate applies specifically to the short-term rental of living quarters, bedrooms, and camping pitches, while excluding supplies that are not directly used for accommodation, even if the payment for those ancillary services is included in the overall price.

Regarding the second condition for applying a reduced VAT rate selectively, the ECJ reminds that the principle of fiscal neutrality prohibits treating similar goods or services differently when they compete with each other. For determining similarity, the consumer perspective is the key. 

Notably, goods and services are similar if they have comparable characteristics, meet the same needs, and the differences between them do not significantly influence consumer choice. Thus, if the services are interchangeable from the average consumer’s point of view, applying different VAT rates could distort choices and thus violate fiscal neutrality.

The ECJ added that the principle of fiscal neutrality cannot, in itself, expand the scope of a reduced VAT rate in the absence of clear legal provisions. Moreover, it is up to the Federal Fiscal Court to determine whether services such as breakfast, parking, gyms, wellness facilities, and wi‑fi, when offered by a hotel as part of short-term accommodation, are, from the perspective of an average consumer, similar and interchangeable with those services provided independently by other operators.

However, the ECJ provided guidance to the Federal Court. If it finds that these services are interchangeable, applying the standard VAT rate to them as ancillary supplies does not violate fiscal neutrality, provided that independent operators offering the same services are also subject to the standard VAT rate.

Courts Final Decision

The ECJ concluded that EU-wide rules do not prevent national legislation from excluding certain supplies, such as parking, gyms, wellness facilities, wi‑fi access, and breakfast services, even when they are ancillary, and their cost is included in the overall flat-rate price for accommodation, from the reduced VAT rate for short-term accommodation. However, two key conditions must be met: the reduced VAT rate must apply to clearly defined and specific elements of accommodation services, and the principle of fiscal neutrality must be respected.

Conclusion

The ECJ made it unmistakably clear that EU countries may draw a line between principal accommodation and ancillary services when applying reduced VAT rates, even if those ancillary services are bundled into a single flat-rate price. 

Nonetheless, the ruling clarifies that the reduced VAT rate is not a free-for-all and applies only when the strict conditions are met. For hoteliers and short-term accommodation providers, the joined cases are a stark reminder that VAT law is as much about precision and compliance as it is about economics, and that 'ancillary' does not automatically mean reduced.

Source: Joined Cases C‑409/24 to C‑411/24 - J-GmbH v Tax Office K, D v Tax Office F, D GmbH & Co. KG v Tax Office A, EU VAT Directive, VATabout - ECJ case - The Hotel's Eligibility for a Reduced VAT Rate: Valentina Heights Case (C-733/22)