VAT on Dancing Courses of a Charitable Organization?

The Bundesfinanzhof decided on April, 27 2006, re V R 53/04 on the question whether dancing courses offered by a charitable organization were subject to value added taxation or not.

Charities may have to pay VAT on offered courses

A charitable association offered a “Seminar for Music and Body Flow Training” within Dancing Workshops during the years 1995 – 1998. The association believed that the courses were within the realm of the by-laws in fostering the association's goals. Therefore, this income came from a “purpose business (Zweckbetrieb)” and was tax exempt pursuant to §4 no. 22 UStG.

There were significant differences to courses of normal dance schools. With a special wholistic approach, the association is not performance or success oriented but aiming to become more acquainted with foreign cultures (e.g. African, Asian, Latin-American culture). The teachers are not dance teachers but certified rhythmic teachers, dance therapists, Gestalt therapists and similarly trained persons.

The tax office considered the fees obtained from this workshop as subject to value added taxation and wanted to have this paid. The recreation character of this workshop predominates and even excepting the association's facts in their program, nothing else but a normal dance course could be recognized.

Furthermore, this turnover cannot be considered as from “cultural events” in terms of §4 no. 22 UStG and is therefore not tax exempt. Cultural and sports events for charitable reasons are exempt from taxation, in as much as the remuneration consists of participation dues. The courses in dispute only aimed to improve the dancing abilities of the individual participant – even there was a future goal to be met. It is of no difference that the undisputed training methods of the association differ from commercial schools. This criterion alone is irrelevant.

However, if the disputed turnover belonged to a “Zweckbetrieb” then this association might not lose its status as charitable. When a charity runs a business that is not a “Zweckbetrieb” they will loose their tax-exempt status for the relevant income (§64 AO). Understand “Zweckbetrieb” as a business aiming to turnover funds for the association, whenever the charity's goals can only be achieved via such corporation, and only competes with other similar business as much as is not avoidable (§65 AO). The association understood the income from the workshops as from such “Zweckbetrieb”. But because the Tax Court was not able to determine actually which goals the association pursued, the association could not prove it had such “Zweckbetrieb”. Therefore, it was considered to have none. The income in dispute was therefore subject to VAT.

The now only reaming question is: Which tax amount will be levied on that income? Following §12 II no. 8a UStG, the tax amount will be the reduced one, i.e. of 7%.

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