Place of Supply Rules for App Store Sales Under EU VAT: What Developers Should Know

The central point of dispute between Xyrality, a German-based mobile game application developer, and the Hamburg-Altona Tax Office was the determination of who should be considered the supplier of in-app purchases for VAT purposes. Due to the specific ways games were made available to users and how payments for in-app purchases were processed, the key question was whether Xyrality itself or the Irish app store operator should be treated as the supplier of the in-app purchases.

Background of the Case 

Xyrality distributed its mobile games to users through an online app store operated, during the relevant period, by an Irish company, X. While users could download the games for free, progression in the games or access to additional features required paid in-app purchases. After selecting the item, reviewing the price and payment method, and confirming the purchase through a series of pop-up screens, all branded with X’s logo, the entire purchasing process was handled through the app store interface.

What is relevant in this process is that Xyrality was not identified to the end customer as the supplier of the in-app purchase. However, once the transaction was completed, the end customer, that is, the user, received an email from X confirming the order, which included the app store logo, indicated that the purchase was from Xyrality, and showed the gross price with the German VAT included.

Upon the agreement between the two companies, X reported to Xyrality each month the in-app purchases made by customers and issued a commission invoice for 30% of each purchase. Initially, Xyrality considered itself a service provider to end customers and applied German VAT to EU-based customers. Nonetheless, this changed in January 2016, when Xyrality amended its VAT returns, stating that it had a commission agreement with X under which it provided services to X, and that X was the supplier to the end customers.

As a result, the company treated the place of supply of its services to X as Ireland, and reduced its German VAT base by the value of the in-app purchases made by EU customers. However, after conducting the tax inspection, the Tax Authority concluded that X was merely an intermediary. 

The main reason for this was the Tax Authorities' conclusion that, although purchases were made through the app store, customers were reminded of the service terms at each stage, showing that X acted only to collect payments on behalf of a third party. Following this conclusion, the Tax Authority issued VAT assessments for 2012 to 2014 without considering Xyrality’s amended returns and rejected Xyrality’s complaints.

The company's appeal against the VAT assessment before the Finance Court in Hamburg was accepted, with the court determining that Xyrality’s services were not taxable in Germany because X was the recipient and handled in-app purchases in its own name. Moreover, the Finance Court concluded that integration of Xyrality’s products into the app store interface led the average customer to perceive X as the seller, particularly since registration and acceptance of the app store’s terms were required.

After the decision was announced, the Tax Authority appealed to Germany’s Federal Fiscal Court (Fiscal Court), which was uncertain on whether treating X, rather than Xyrality, as the supplier of the in-app purchases aligns with EU law, and, thus, referred a question to the Court of Justice of the European Union (ECJ) for a preliminary ruling. 

Main Questions from Request For Ruling

The Fiscal Court referred three questions to the ECJ, where with the first one it asked whether under Article 28 of the EU VAT Directive, a German developer supplying electronic services to non-taxable EU customers through an Irish app store before January 1, 2015, should be treated as supplying the service to the app store, which then supplies it to the end customers, since the app store did not initially identify the developer or show German VAT until the order confirmations.

In case Article 28 applies, the second question asks whether the place of supply of this fictitious service from the developer to the app store is in Ireland. With the third question, the Fiscal Court asked whether, if the developer provided no services in Germany, it could still be liable for German VAT because the app store, acting under an agreement, named the developer as the supplier and showed German VAT in the email confirmations to end customers, even though those customers cannot reclaim input VAT.

Applicable EU VAT Directive Article

Due to the specificities of the case, the ECJ considered relevant provisions from both the EU VAT Directive and Implementing Regulation (EU) No 282/2011. Regarding the EU VAT Directive, in addition to Article 28, which defines the concept of a taxable person acting in their own name but on behalf of another for VAT purposes, and Article 203, which establishes that VAT is payable by any person who enters the VAT on an invoice, both cited in the referred question, the ECJ highlighted Articles 44 and 45 as the most relevant. 

The most relevant Article from the Implementing Regulation was Article 9(1), which provides detailed rules for applying Article 28 of the VAT Directive to electronically supplied services. One of the most important provisions of this Article is that it applies from January 1, 2015.

German National VAT Rules

The ECJ did not cite or interpret German VAT rules and regulations. More specifically, in this case, it focused solely on interpreting and clarifying applicable EU-wide VAT legislation.

Importance of the Case for Taxable Persons

As the world is becoming more digital, the case between the German Tax Office and Xyrality provides valuable clarification of the complex VAT implications of supplying electronic services through intermediaries or marketplaces, particularly when the end customers are non-taxable persons in other EU countries. 

By dissecting the structure of transactions, the contractual relationships between service providers and intermediaries, and the way suppliers are presented to customers, ECJ explains the significance of agency, commission arrangements, and the legal fiction. Finally, with its interpretations, the ECJ provides critical guidance for determining the place of supply for VAT when services are deemed to be received and re-supplied.

Analysis of the Court Findings

The ECJ noted that Article 28 of the EU VAT Directive defines that when a taxable person acts in their own name but on behalf of another in a service supply, they are deemed to have received and supplied the services themselves. As a result of the wording, the article establishes a legal fiction of two consecutive, identical supplies. The first one is where a commission agent first receives the service from the principal on whose behalf they act, and then supplies it to the client themselves. 

As established and confirmed by the ECJs' 2023 Fenix International judgment, also known as the OnlyFans case, Article 28 establishes that a taxable person acting as an intermediary in their own name but on behalf of another is presumed to be the supplier of the services. ECJ added that it is up to the national court to examine all circumstances of the case, particularly the commission agent’s contractual obligations to customers, to determine whether the conditions for applying Article 28 are met.

Nonetheless, the ECJ noted that the Finance Court found that X acted in its own name for in-app purchases because the integration of Xyrality’s products into the app store interface led the average customer to view X as the contractual party and seller. Such a perception was further reinforced by the requirement for customers to register with the app store and accept its terms of use before purchasing. At the same time, X’s role as acting on behalf of another was not sufficiently clear during the transaction.

Notably, for Article 28 to apply, there must be an agency under which the agent acts on behalf of the principal in supplying services. Even if the end customer can sometimes learn the agency's and the principal’s identities, this alone does not prevent the intermediary from being treated as acting in their own name on behalf of another. The key determining factor is the powers held by the intermediary in the context of the service supply. 

Regarding the relevance of Article 9a(1) of Implementing Regulation No 282/2011, the ECJ stated that, since it entered into force on January 1, 2015, it does not apply to this case, which concerns services supplied between 2012 and 2014. However, given the fact that it clarifies a concept already present in the EU VAT Directive, it can be taken into account when interpreting the Directive. 

As for the second question, the ECJ emphasized that the locus of supply for services must be determined in accordance with Chapter 3 of Title V of the VAT Directive, which sets out general rules for the taxation of services and specific rules for particular types of services. 

Under the general rules, the place of supply of services to a taxable person is the location where that person has established their business. For a supply to a non-taxable person, the location is where the supplier has established their business. From the perspective of this case, the Advocate General noted that neither Article 28 nor any other provision allows the place of supply to be determined differently than defined under the general rules.

On account of applying Article 203 to this case, the ECJ recalled that under the established case-law, this provision aims to prevent loss of tax revenue that could arise from the right of deduction under the Directive, applying where VAT has been invoiced incorrectly, and the invoice recipient has a right to deduct the VAT. 

The Advocate General also observed that Article 203 is tied to the right to deduct VAT and aims to prevent revenue loss from overstated deductions. Notably, in this case, the services were supplied to non-taxable persons, who cannot deduct VAT.

Courts Final Decision

The ECJ ruled that the application of Article 28, when a taxable person in one EU country supplies electronic services to non-taxable EU customers through an app marketplace in another country before  January 1, 2015, cannot be excluded just because the marketplace’s order confirmations show that person as the supplier and display their local VAT rate.

Furthermore, the place of supply of the fictitious service must be determined in accordance with the general rules set out in Articles 44 and 45. In this case, the place of supply of the fictitious service from the developer to the app store is in Ireland, where the app store is established.

Lastly, Article 203 does not make the first taxable person liable for VAT in their EU country merely because they were designated, with their consent, as the supplier in the order confirmations, and the VAT rate of their EU country was shown. Nonetheless, since the services were supplied to non-taxable persons who cannot deduct VAT, Article 203 did not apply, as there was no associated risk of revenue loss.

Conclusion

Taxable persons supplying digital services through marketplaces or intermediaries in the EU should carefully examine the ECJ ruling, which provides several critical clarifications on applicable VAT rules and further reaffirms the findings from the Fenix International (OnlyFans) case, as one of the most impactful ECJ cases. Essentially, taxable persons must understand that clear contracts, careful structuring of marketplace arrangements, and accurate reporting are crucial for staying VAT-compliant across borders.

Source: Case C‑101/24 - Tax Office, Hamburg-Altona, Germany v Xyrality GmbH, EU VAT Directive, Implementing Regulation (EU) No 282/2011, VATabout - CJEU Clarifies VAT Liability of Digital Platforms