The Cologne Finance Court has ruled that sales from the rental of virtual land and buildings in the online computer game “Second Life” represent other chargeable, but not electronically rendered services.
A “second” virtual life in a computer game
In “Second Life” players appear as avatars who buy or design virtual properties, buildings and objects that can then be traded, sold or rented out.
The fees are paid in the virtual currency “Linden Dollars”, which players can receive 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 ran a business and earned income from renting out land that she had purchased and designed (for example, landscaping or furnishing buildings). The Claimant’s Avatar entered into “rental agreements” with the tenants’ avatars for matters such as the amount and duration of the rental for payment in Linden Dollars, which the Claimant exchanged for USD.
For the tax office and the tax court in Cologne, this income is subject to sales tax in Germany. Other services subject to VAT are the rental of the virtual properties and the associated rental income.
“In-Game Currencies” as a means of payment
Contrary to the opinion of the Federal Ministry of Finance, the “in-game currencies” cannot be used with other virtual currencies (e.g. means of payment within the meaning of the sales tax law.
In a comparison of different types of virtual currencies carried out by the European Central Bank, the Linden dollar turned out to be a “bidirectional” virtual currency system that ensured the exchange of USD for Linden dollars and vice versa. The situation would remain unchanged, however, if “linden dollar” were not a means of payment similar to money, since it would be a consideration in the form of an exchange-like transaction.
On the basis of German taxation, the tax office estimated that approximately 70% of the Claimant’s services were provided to private domestic users, based on the Claimant’s presence on the German-speaking Internet.
No electronic services
In contrast to the tax office, the tax court found that it was not a question of electronic service provision within the meaning of German sales tax law. Because the Claimant designed the virtual land, there was “human engagement”.
Federal Fiscal Court takes over
An appeal is pending at the Federal Fiscal Court. A welcome step would be if the Federal Finance Court would comment on the assessment bases used, the existence of the remuneration and the place of performance.
The jurisprudence of the tax office and tax courts is increasingly discovering taxation in the virtual, digital space. It remains to be seen to what extent other similarly generated sales or other online games could also be affected.
Other questions remain unanswered
Unlike in other possible cases such as digital street musicians, unlike in real life, the game’s earnings do not depend mainly on chance. Hence a service like planting trees in digital public parks exists. However, since the service is provided via the game provider – a person subject to VAT – the seat of the game provider (which may not be in Germany) is to be regarded as the place of performance.
Growing market for play-to-earn games
More and more games offer the possibility of earning “in-game currencies” and then exchanging them for fiat currencies or crypto currencies (e.g. ETH). The avatars can be embodied by so-called non-fungible tokens (NFT).
From the point of view of income tax law, it must be decided in individual cases whether the income comes from natural persons subject to income tax or from corporations subject to income tax (e.g. GmbH); and the income comes from trading or doing business in virtual space.
In addition to taxation according to the income tax rate (plus solidarity surcharge and, if applicable, church tax), the entrepreneur can also bear a trade tax burden.
If there is no income from commercial or commercial activity, the underlying taxation regime must be determined depending on the individual case. It is now known from cases of crypto assets that the tax authorities largely make use of the regime of other income at the income tax rate (plus solidarity surcharge and, if applicable, church tax).