BFH: Confiscated bribes reduce the VAT assessment basis

On September 25, 2024, the BFH ruled on the VAT treatment of bribes confiscated as part of criminal proceedings (decision XI R 6/23). The ruling clarifies a key issue in VAT practice and strengthens the constitutional principle of equal treatment in tax law.

Facts

The plaintiff, a graduate engineer in supply engineering, held management positions at various companies in the real estate industry. The plaintiff was paid for awarding contracts to related business partners in the form of contributions to his private assets. Without the knowledge of his respective superiors, he received free services for the construction of his private house from the commissioned companies. The regional court therefore sentenced the plaintiff to a prison sentence for bribery in business dealings and tax evasion. In addition, the court confiscated the bribes in accordance with Art. 73 et seq. StGB (German Criminal Code). The competent tax office treated the bribes as remuneration for taxable services. In the tax office’s opinion, the plaintiff should have paid VAT on these sales. According to the tax office, the amounts paid by the plaintiff during the ongoing appeal proceedings to the treasury of the state’s legal authorities (Landesjustizkasse) with regard to the confiscated bribes did not reduce the VAT assessment basis. The Berlin-Brandenburg tax court confirmed the tax office’s legal opinion in the lower instance (see Berlin-Brandenburg tax court, decision of March 7, 2023 - 2 K 2150).

The BFH ruled in favor of the plaintiff without referring the case to the ECJ

The BFH did not agree with the opinion of the tax court and the tax authorities and ruled in favor of the plaintiff without referring the case to the ECJ, despite the existing implications under EU law. According to the BFH, bribes, even if they are illegal, are generally relevant to VAT and are considered to be remuneration for services rendered. However, the confiscated amounts reduce the VAT assessment basis. This approach is necessary in order to avoid an impermissible double taxation of the offender.

The court refers to the case law of the Federal Constitutional Court and the Court of Justice of the European Union, which require a reduction in such cases in order to uphold the principle of equal treatment under Article 3 (1) of the German Basic Law and Article 20 of the Charter of Fundamental Rights of the European Union. Failure to do so would result in the economic advantage gained by the offender through his criminal act being skimmed off through confiscation on the one hand and, on the other hand, subjected to sales taxation to the same extent – an inadmissible double burden.
According to the BFH, it is also irrelevant that the confiscated bribes are not paid back to the plaintiff but remain in the state coffers. Furthermore, the BFH pointed out that there is no need to refer to the equity procedure, as its admissibility in VAT law is doubtful under EU law.

Consequences for tax practice

The Federal Fiscal Court’s decision provides clarity with regard to the VAT treatment of bribe payments confiscated under criminal law. The BFH clarifies that even in cases of illegal payments that are collected in the context of criminal proceedings, the tax assessment base must be reduced. This decision protects against an impermissible double tax burden for the taxable offender, as the economic benefit from the criminal offense is already skimmed off by the confiscation on the one hand and, on the other hand, no new VAT is levied on the same amount. In practice, this represents an important clarification of the VAT regulations and strengthens the principle of equal treatment in tax law.