German tax court rules "renting" virtual land is subject to VAT


The Cologne tax court (Finanzgericht Köln) ruled that sales generated from the rent of virtual land and buildings in the online computer game "Second Life" constitutes other services rendered for fees, but not services rendered by electronic means.

A "second" virtual life in a computer game

In "Second Life" players appear as avatars that buy or design virtual land, buildings, and objects, which can then be traded, sold or rented out.

Fees are paid in the virtual currency "Linden dollars", which players can obtain by exchanging USD at a central trading place provided by the operator. The exchange rate is based on current demand and available supply.

Rental income in virtual space

The Claimant operated a business and generated revenue by renting out land that it had purchased and designed (e.g. landscaping or furnishing the buildings). The Claimant's avatar made "rental agreements" with the avatars of tenants regarding matters, such as the amount and duration of rent in exchange for payment in Linden dollars, which the Claimant then exchanged for USD.

For the tax office and Cologne tax court, this revenue is subject to VAT in Germany. The leasing of the virtual properties and the associated rental revenue should be deemed other services, which are subject to VAT.

"In-game currencies" as a means of payment

Contrary to the view taken by the German Federal Ministry of Finance (Bundesministerium für Finanzen), which has not treated "in-game currencies" the same as other virtual currencies (e.g. BTC), the Cologne tax court acknowledged that the Linden dollar is a means of payment within the meaning of VAT law.

In a comparison carried out by the European Central Bank of various types of virtual currencies, the Linden dollar emerged as a "bidirectional" virtual currency system that ensured the exchange of USDs to Linden dollars and vice versa. However, the situation would remain the same if "Linden dollars" were not a means of payment similar to money since it would constitute a service in return for monetary consideration in the form of a barter-like transaction.

The tax office estimated on the basis of German taxation that approximately 70% of the Claimant's services have been provided to private domestic users, basing this on the Claimant's presence in the German-language internet.

No services rendered by electronic means

Contrary to the tax office, the tax court found that it is not a question of services being provided electronically with respect to German VAT law. Because the Claimant had designed the virtual land, "human involvement" existed.

German Federal tax court will take over

An appeal is pending before the German Federal tax court. A welcome step would be if the German Federal tax court were to comment on the standards of assessment used, the existence of remuneration and the place of performance.

Increasingly, case law from the tax office and the tax courts is discovering taxation in virtual, digital space. It remains to be seen to what extent other revenues generated in a similar manner or other online games might also be affected.

Other questions remain unresolved

Different from other possible cases such as digital buskers, the earnings paid by the game, unlike in real life, do not depend mainly on chance. Hence, a service exists, such as planting trees in digital public parks. However, as the service is provided through the game operator – a VAT-registered entity – the place of performance should be considered the seat of the game operator (which might not be in Germany).

Growing market of "play-to-earn" games

More and more games are offering the opportunity to earn "in-game currencies" and then exchange these for Fiat currencies or cryptocurrencies (e.g. ETH). The avatars can be embodied by what is referred to as non-fungible tokens (NFT).

From an income tax perspective, the determination should be made on a case-by-case basis whether the income is accrued by individuals subject to income tax or corporations subject to income tax (e.g. a German limited liability company (GmbH)); and the income is accrued from trade or business activities in virtual space.

In addition to taxation on the basis of the personal income tax rate (plus the solidarity surcharge and church tax, if applicable), the business may also bear a trade tax burden.

If there is no income from trade or business, depending on the individual case, the underlying taxation regime must be sought out. It is now known from cases involving crypto assets that the tax authorities make extensive use of the regime of other income at a the personal income tax rate (plus the solidarity surcharge and church tax, if applicable).

For more information on this ruling and tax laws concerning crypto and other online assets, contact your CMS client partner or local CMS expert.