ECJ C-505/22 (Deco Proteste – Editores, Lda) – Judgment – A gift for a subscription is not a free transfer of goods and is ”incidental service” to the main supply

On October 5, 2023, the ECJ issued its judgment in the case C-505/22 (Deco Proteste – Editores, Lda).

Context: Reference for a preliminary ruling – Taxation – Value added tax (VAT) – Directive 2006/112/EC – Taxable transactions – Article 2(1)(a) – Delivery of goods for consideration – Free delivery of a tablet or computer a smartphone in return for subscribing to a new subscription to a magazine – Concept of “single service” – Criteria – Article 16, second paragraph – Deductions made for the needs of the company with the aim of giving gifts of low value

Summary

The case C-505/22 dealt with whether a small gift offered as an incentive for a subscription is considered a separate supply for VAT purposes.

The Court ruled that providing a low-value gift along with a subscription is considered an ancillary supply to the main supply of the subscription. This means the VAT is only charged on the subscription fee, not on the value of the gift.

In essence, the ECJ considered the gift as a promotional tool to increase subscriptions, and not a separate product itself.

Article in the EU VAT Directive

Article 16 of the EU VAT Directive 2006/112/EC

Article 16 (Taxable transaction – Supply of goods)
The application by a taxable person of goods forming part of his business assets for his private use or for that of his staff, or their disposal free of charge or, more generally, their application for purposes other than those of his business, shall be treated as a supply of goods for consideration, where the VAT on those goods or the component parts thereof was wholly or partly deductible.
However, the application of goods for business use as samples or as gifts of small value shall not be treated as a supply of goods for consideration.

Facts

Deco Proteste – Editores, Lda. (‘the applicant’) is a commercial company, the corporate purpose of which is the publication of magazines and other consumer information documents, and which, through its publishing department, produces periodicals intended to inform and protect consumers, which it sells on subscription.
The applicant forms part of the international group EUROCONSUMERS which brings together various organisations promoting and protecting consumer interests. It is linked to the Portuguese consumer protection body DECO – Associação Portuguesa de Defesa do Consumidor.
In order to ensure that its business is economically viable, the applicant needs a large number of subscribers to its magazines. To promote its sales and attract new subscribers, the applicant uses various marketing techniques including direct marketing such as paper mailing, in the form of sending physical letters to potential subscribers; e-marketing, using emails sent to those potential customers; and telemarketing.
In that context, the applicant runs promotional campaigns, in which it gives customers who sign up to a subscription plan, in addition to the magazines subscribed to, entitlement to a gift in the form of an electronic device, a ‘gadget’, (specifically, a tablet) the unitary value of which is always below EUR 50, and makes intra-community acquisitions in order to supply that gift, to which it applies the reverse charge and on which it assesses and deducts VAT. The customer receives the item as an introductory gift and may cancel the subscription at any time.
The applicant does not impose a loyalty period and customers may therefore keep the gift without incurring any penalty.
In 2014, 2015, 2016 and 2017, the overall value of the gifts made to new subscribers exceeded 0.5% of the applicant’s turnover, and adjustments were subsequently made for the years 2015 to 2018.
The invoices issued by the applicant in respect of the monthly payments for the magazine subscriptions which gave entitlement to gifts refer to the subscription to the magazines, applying the 6% reduced rate (under Article 18(1)(a) of the CIVA) to the corresponding amount, but make no reference to the supply of gifts.
In 2019, the applicant underwent an inspection in relation to the Imposto sobre o Rendimento das Pessoas Coletivas (Portuguese corporation tax) and VAT for 2015, 2016, 2017 and 2018.
As a result of that inspection, it was proposed that the applicant make VAT adjustments, since it had exceeded the ceiling of 0.5% of turnover which the Portuguese legislation has established to define ‘gifts of small value’.
The applicant voluntarily submitted replacement declarations for the December of each year from 2015 to 2018 and then self-assessed the corresponding amounts of VAT payable, including default and compensatory interest.
The applicant disagreed with those VAT self-assessments calculated in accordance with the defendant’s interpretation contained in the tax inspection report, and lodged an administrative appeal seeking annulment of those selfassessments and of the assessments of default and compensatory interest for which it was liable.
By decision of 11 May 2021, the deputy director of the Direção de Finanças de Lisboa (Lisbon Department of Finance, Portugal) dismissed the administrative appeal. That decision held that a supply of goods separate from those invoiced to the customer constitutes a gift, on which tax will or will not be payable depending on its unitary value. Since the applicant exercised its right to deduct VAT on the acquisition of those gifts, the annual value of the gifts is subject to the system governing supplies of goods made free of charge, on which VAT must be assessed (pursuant to Article 3 of the CIVA).
On 6 August 2021, since it disagreed with the dismissal of the administrative appeal, the applicant applied to the referring court, the Tribunal Arbitral Tributário (Tax Arbitration Court) for leave to bring the arbitration proceedings now being heard by it. The defendant is the Autoridade Tributária e Aduaneira (Tax and Customs Authority; ‘the defendant’).
The applicant has applied for a finding of unlawfulness and the consequent annulment of the decision dismissing the administrative appeal, of the contested VAT self-assessments for 2015, 2016, 2017 and 2018, totalling EUR 2 562 500.65, and of the assessments of default and compensatory interest, in the amount of EUR 270 936.70, arising from the voluntary adjustments made as a result of the inspection relating to those years.
The applicant has also applied for the defendant to be ordered to repay the tax and interest that it considers to have been unduly paid, plus compensatory interest on that amount until the date on which it is repaid in full.

Questions

1) Where new subscribers are given a gift (a ‘gadget’) when they subscribe to periodicals, must the making of that gift be considered, for the purposes of Article 16 of the VAT Directive, to be:
(a) a supply of goods made free of charge, separate from the transaction consisting of subscribing to the periodicals, or
(b) part of a single transaction for consideration, or
(c) part of a commercial package, comprising a principal transaction (the subscription to the magazine) and an ancillary transaction (making the gift), in which the ancillary transaction is considered to be a supply for consideration instrumental to the subscription to the magazine?
2) If the answer to the first question is that the making of the gift is a supply of goods made free of charge, is the setting of an annual ceiling on the overall value of gifts of 0.5% of the turnover of the taxable person in the preceding year (in addition to the limit on the unitary value) compatible with the concept of ‘the application of goods … as gifts of small value’ referred to in the second paragraph of Article 16 of the VAT Directive?
3) If the preceding question is answered in the affirmative, must that proportion of 0.5% of the turnover of the taxable person in the preceding year be considered to be so low that it renders the second paragraph of Article 16 of the VAT Directive ineffective?
4) Having regard also to the purposes for which it was established, does that ceiling of 0.5% of the turnover of the taxable person in the preceding year infringe the principles of neutrality, of equal treatment or non-discrimination and of proportionality?

AG Opinion

None

Decision

Article 2(1)(a) and the first paragraph of Article 16 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax,

must be interpreted in the sense that:

the delivery of a subscription gift in return for subscribing to a subscription to periodicals constitutes an incidental service to the main service consisting of the delivery of periodicals, which falls under the notion of “delivery of goods carried out for consideration” , within the meaning of these provisions, and must not be considered as a transfer of goods free of charge, within the meaning of said Article 16, first paragraph.

Summary

Delivering a subscription gift as part of subscribing to periodicals is an incidental service to the main service of delivering periodicals. This falls under the category of “delivery of goods for consideration” and is not a free transfer of goods.

Source