Germany Court Rules NFTs Subject to VAT

The German Lower Saxony Finance Court released a landmark decision in a case regarding the taxability rules applicable to the 2021 trade of NFTs of digital image files as part of collections, commonly referred to as NFT collectibles, through a globally used OpenSea platform. The main issue in question was whether transactions relating to the trade of these NFTs were subject to VAT.

Fact of the Case and Court's Decision

The plaintiff in this case was a sole proprietor from Germany who sold NFTs of digital image files as collectibles through the OpenSea marketplace, using the so-called smart contracts. These transactions were recorded on blockchain and linked only to pseudonymized wallet addresses. 

Since the buyer did not provide VAT identification or comparable documents, the plaintiff argued that the transactions could not be taxed in Germany. Moreover, the plaintiff claimed that the service should be considered as provided by the digital marketplace, namely OpenSea, in the US, since the place of supply is the US, not Germany. 

The plaintiff further added that even if some ales were considered direct to domestic buyers, this would involve only a minor share of transactions, which should be exempt from VAT. Additionally, he argued that enforcing VAT on NFT sales would be structurally impossible due to the anonymity of blockchain transactions, and therefore, taxation would be in breach of German law.

However, the German Lower Saxony Finance Court (Court) partially accepted these claims and arguments. The Court acknowledged that the plaintiff acted as an entrepreneur and that NFT sales were not supplies of goods but rather other services under German VAT Law. It also held that the buyers of the NFTs, and not the OpenSea platform, were the actual service recipients.

However, the Court rejected the plaintiff’s argument that pseudonymized wallet addresses made it impossible to identify service recipients, adding that pseudonymization does not prevent the provision of services, and the plaintiff failed to demonstrate that his buyers were entrepreneurs. Due to these circumstances and conclusions, NFT sales to non-entrepreneurs qualify as electronically supplied services under German Law. 

Conclusion

Ultimately, the Court ruled that the plaintiff’s NFT sales were taxable as electronically supplied services to the buyers, not to OpenSea, and therefore subject to VAT in Germany. Because OpenSea operates worldwide and not all transactions could be assumed to have taken place in Germany, the Court estimated that only half of the plaintiff’s NFT sales were taxable in Germany at the standard 19% VAT rate. However, the plaintiff may still appeal against this decision before the Federal Finance Court.

Source: PwC