Tax exemption for educational services - New rules as of 2025 have resulted in legal uncertainties

Under Section 4 no. 21 UStG (as amended), educational services in the non-school/non-university and private sectors have been exempted from tax from 1.1.2025, “if the competent federal state authorities certify that the general educational or vocational training institution provides school teaching, university teaching, vocational training, advanced training or vocational retraining”. According to the new wording of the legislation, there is no longer the requirement for such  institutions to provide proper preparation for a profession or an examination to be taken before a public body (see explicitly previous Section 4 no. 21 UStG [old version]). 

This has accordingly resulted in changes, in particular, for the non-school/non-university sector. Uncertainties have arisen because, only shortly before the end of the legislative procedure, the certification procedures by the federal state authorities were (again) incorporated into the legal provision as a prerequisite.

Consequences for those providing educational services are unclear

At present, it is still unclear what consequences will arise for those affected by the new rules because the certificates that are still required under the new rules did not yet exist as at 1.1.2025; in other words:

• Are the certificates that were issued on the basis of the old legislation still valid?
• Would the right to deduct input tax exist for the period where there is possibly no certificate?
• Can any potential refunds from the past be realised via input tax adjustments?
• Will the prices for educational services increase by the amount of VAT, or will margins fade away when these services are provided to end users?

Despite the relief provided by the circular from the Federal Ministry of Finance …

The Federal Ministry of Finance (Bundesministerium der Finanzen, BMF) did admittedly respond with a circular of 5.12.2024 and, for the time being, took the pressure out of the debates. The circular reflects the opinion of the Federal Government, from the perspective of the fiscal administration, that the certificates based on the old version of the legislation are still valid. Furthermore, the prospect was held out that another BMF circular on the new exemption provision will be published soon. 

The continuing validity of the certificates under the old legislation is generally to be welcomed. The drawback is that both the current as well as the other circular, which has existed in draft form since 17.1.2025, are only binding for the fiscal administration. Therefore, it is not impossible that, in the time of the new legislation, judges who rule on fiscal matters might take a different view of the effectiveness of certificates issued under the old legislation. Judges who rule on fiscal matters would obviously have to address this issue, for example, if an appeal against a claim made by a local tax office that is not beneficial for the affected company is proceeding through the courts. 

… the challenging task of validation remains …

Even if, in the meanwhile, the relief from the aforementioned circular of 5.12.2024 is being applied, a certificate would have to be re-issued, at the very latest, if the underlying old certificate was for a fixed term and has expired; it is open to question whether or not the new legal rules would have implications for the issuing of new certificates. This seems to be not unreasonable because the fact that VAT consequences would necessarily have to be drawn on the basis of a decision by the federal state authorities (a so-called notice of assessment basis) means that the competent civil servants could find themselves in a predicament. This is because their decisions on tax exemption could indirectly lead to VAT not being fully paid if a decision is ultimately not consistent with the EU Directive on the VAT system; 

• if the federal state authorities do not issue a certificate but the activity is however exempted from tax then businesses will continue to owe VAT due to input tax that was incorrectly deducted,
• alternatively, businesses will owe output VAT if contrary to the certification by the federal state authorities there is however actually no tax exemption. 

… for the federal state authorities

On the basis of the wording of the new legislation, within the scope of validation by the  federal state authorities, it is up to - solely(!) - the civil servants to decide whether educational institutions under private law are providers of “general educational or vocational training”. In doing so, for one thing, in accordance with the ECJ judgement the civil servants have to determine whether these institutions provide school or university education. The civil servants thus have to assess whether the offering is an “integrated system for the transfer of knowledge and skills covering a broad and varied range of subjects ... to pupils and students”. Or else check if the elements “vocational training, advanced training or vocational retraining” are present, thus “instruction relating directly to a trade or profession” or “any instruction aimed at acquiring or updating knowledge for vocational purposes”. The complexity of the decision-making problem will be increased by new rulings from the Federal Fiscal Court (Bundesfinanzhof, BFH) that will provide further impetus for decisions by the federal state authorities - such as, with the most recent so-called ‘flying lessons’ decision (BFH of 13.11.2024, case reference: XI R 31/22). According to the ruling, a correct decision requires the federal state authorities to be able to assess, for example, whether or not obtaining a private pilot licence is a prerequisite for a commercial pilot licence.

Finally, it should be noted that the draft circular of 17.1.2025 seems hardly appropriate to support the decision-making by civil servants. The draft reflects the insights from the rulings of recent years - its anecdotal reasoning is thus not readily accessible and, therefore, of limited practicability as an assessment criterion. There is then still a requirement to be able, for example, to decide

• that courses on emergency procedures at the scene of an accident are exempt from tax (because deemed to be general education), however, swimming lessons by swimming schools are not, or
• that music lessons for a three-year old are generally exempt from tax (because deemed to be preparation for an entrance exam for a (vocational) higher education institute), however, driving lessons at driving schools are not (even though the B category licence is a prerequisite for a CE category licence, and the CE category licence is part of the training for professional drivers);

in the case of comparable applications, the draft circular will not make it easier for civil servants to make those decisions.

In view of the direct link between the responsibilities of the federal state authorities and the VAT consequences, it is not improbable that there will be non-decisions, lengthy decision-making processes or something similar because the authorities and civil servants concerned notoriously (and here also understandably) tend to act cautiously. This will be the case irrespective of whether the business or the local tax office applies for a certificate to be issued.