Resale of in-game gold under the margin scheme?

Advocate General Kokott advises the Court of Justice of the EU to apply the margin scheme to the resale of digital goods such as in-game gold. A surprising opinion, and one that does not convince us.

European VAT distinguishes between supplies of goods and supplies of services. That distinction matters for, among other things, which country has the right to tax, and for rates, exemptions and special schemes. Second-hand goods are covered by a special scheme: the margin scheme. Under it, a reseller owes VAT not on the whole consideration but only on the margin, the difference between the selling price and the purchase price.

Žaidimų valiuta

The case concerns the Lithuanian business of the same name, which trades in virtual gold. It buys and sells gold from the online game RuneScape, referred to here as in-game gold. It achieved turnover of € 99,580 in 2021, € 163,428 in 2022 and € 52,476 in 2023. The Lithuanian tax authorities took the view that VAT should have been accounted for and raised an assessment.

Žaidimų valiuta argues that no VAT is due because trading in virtual currency is exempt, and that in any event only the margin constitutes the consideration. The Lithuanian court referred both points to the Court of Justice of the EU, and Advocate General Kokott has now delivered her opinion.

The exemption for currency trading

The Advocate General deals with the exemption briefly. The exemption for transactions concerning means of payment covers legal tender, such as the euro, and non-legal tender that is accepted between market participants as a means of payment and whose only purpose is to be used as such, for instance bitcoin. In-game gold is not a currency accepted as a means of payment in real life. Trading in it is therefore taxable.

For Dutch practice that is no surprise. Several Dutch courts have ruled the same way and Advocate General Ettema has advised the Supreme Court to follow suit.

The margin scheme

Whether VAT is due on the whole turnover or only on the margin is harder. Advocate General Kokott points out that on the literal wording of the VAT Directive the margin scheme is open only to the resale of second-hand tangible goods.

In our view it is a pity that she does not address the possibility offered by article 15(1) of the VAT Directive. Under that provision, electricity, gas, heat or cooling energy and similar items are treated as tangible property. What counts as similar items is unclear. The common feature of electricity, gas, cooling and heat is, in our view, that these intangible items are traded as goods. On that basis it is not impossible to regard digital goods as similar items. Such an assimilation would, however, create complications for allocating taxing rights: the place of supply rules for goods are not designed for digital goods.

The Advocate General treats the sale of in-game gold as a service, but considers that fiscal neutrality nevertheless requires the margin scheme to be capable of applying. In interpreting the directive, account must be taken of technological developments, and there is no indication that the legislature deliberately and for objective reasons excluded trade in used services. In her view that application by analogy applies only where the in-game gold was bought, not where the seller earned it in the game. She closes by noting that applying the scheme by analogy presupposes that in-game gold is traded in a comparable way to second-hand goods and generally carries residual VAT.

Whether that is the case is doubtful. The District Courts of Noord-Holland and Gelderland rightly emphasised that the margin scheme is intended for second-hand goods already bearing VAT. Take a car on which a consumer paid VAT when buying it: if that consumer sells it to a dealer, the margin scheme prevents VAT being charged again on the full price on resale. Here the in-game gold is earned in the game by private players and apparently sold without VAT to other players or to a trader. There is no digital good that has already been fully brought into charge.

In practice

The opinion is surprising, but it does not convince us. The purpose of the margin scheme provides no justification for taxing only the margin on in-game gold, because that gold has not previously been fully brought into charge.

That said, the current rules do pinch for traders. Charging VAT on the full selling price means the margin is almost entirely taxed away. In our view, however, it is for the legislature rather than the courts to provide a solution.

In Dutch case law and in the practice of the Dutch Tax Administration, sales of in-game gold are taxed under the normal rules at 21%. In our view that is consistent with the VAT Directive. Whether the Court of Justice of the EU endorses that view remains to be seen.

Traders in in-game gold and other digital goods or currencies can protect their position by objecting within six weeks against the VAT paid or the refund decision for the period concerned, or, where an assessment has been raised, against that assessment. The opinion at least shows that the position that only the margin is taxable on the resale of purchased in-game gold is arguable. The inspector may therefore not impose a penalty on a business that has accounted for VAT on the margin alone.