Briefing document & Podcast: ECJ C-505/22 (Deco Proteste) – A gift with a subscription is an “incidental service” rather than a free transfer of goods

Interpretation of Article 2(1)(a) and Article 16 of Council Directive 2006/112/EC (the VAT Directive) concerning the VAT treatment of free goods supplied in exchange for a subscription.

Summary:

This judgment concerns a preliminary ruling requested by the Portuguese Tax Arbitration Tribunal regarding the VAT treatment of tablets and smartphones given as gifts to new subscribers of magazines published by Deco Proteste – Editores Lda. The core question was whether the provision of these gifts should be considered a separate supply of goods free of charge (subject to VAT under certain conditions) or part of a single transaction for consideration (linked to the magazine subscription). The Court ruled that the supply of the subscription gift constitutes an ancillary supply to the principal supply of periodicals, and therefore falls within the concept of a “supply of goods for consideration”. This means the VAT treatment follows that of the principal supply (the magazine subscription).

Key Facts:

Deco Proteste – Editores Lda publishes and markets magazines on a subscription basis.
As part of promotional campaigns, new subscribers receive a free tablet or smartphone with a unit value below EUR 50.
The gift is sent after the first monthly subscription payment, and subscribers can cancel the subscription after this payment while keeping the gift.
Deco Proteste applied a reduced VAT rate (6%) to the magazine subscriptions but did not explicitly mention the gift on the invoices.
The Portuguese tax authority deemed the gifts taxable under Article 3(7) of the Portuguese VAT Code, which treated gifts with a unit value below EUR 50 but exceeding an annual ceiling of 0.5% of turnover as taxable supplies.
The tax authority applied the standard VAT rate (23%) to the value of the gifts, leading to a significant VAT assessment against Deco Proteste.
Deco Proteste argued that the gift was a commercial offer linked to the subscription, not a free disposal, and that the 0.5% turnover ceiling in Portuguese law was incompatible with EU law (specifically Article 16 of the VAT Directive and principles of neutrality, equal treatment, and proportionality).

Main Themes and Ideas:

Single vs. Multiple Supplies for VAT Purposes: The judgment reiterates the fundamental principle in EU VAT law that each transaction should generally be considered distinct. However, where a transaction comprises several elements, the question arises whether it constitutes a single supply or multiple supplies.

“for VAT purposes every transaction must normally be regarded as distinct and independent.”
“Where, however, a transaction comprises several elements, the question arises whether it is to be regarded as consisting of a single supply or of several distinct and independent supplies which must be assessed separately from the point of view of VAT”

Criteria for Identifying a Single Supply: The Court refers to established case-law for determining if multiple elements constitute a single supply:

Indivisible Economic Supply: If elements are so closely linked as to form a single, indivisible economic supply that it would be artificial to split.
Principal and Ancillary Supplies: Where one or more elements are principal, and others are ancillary, sharing the tax treatment of the principal supply. An ancillary supply does not constitute an end in itself for the customer but is a means of better enjoying the principal service.
Absence of Distinct Purpose: From the perspective of the average consumer, the ancillary supply has no distinct purpose.
Respective Value: The relative value of the elements, with one being minimal or marginal compared to the other, can provide evidence.

Application of the Single Supply Concept to Subscription Gifts: The Court found that the provision of the subscription gift in this case was not a separate free disposal but an ancillary supply to the principal supply of the magazine subscription.

The gift was “an integral part of the commercial strategy of the applicant in the main proceedings.”
Its sole purpose was to “increase the number of subscribers” and “increase its profits.”
The gift “has no distinct purpose from the point of view of the average consumer, who agrees to pay at least one month’s subscription in order to obtain the gift.”
The gifts (tablets/smartphones) enabled subscribers to “benefit, under the best possible conditions, from the service provider’s main service, namely the reading of the magazines… in so far as a tablet and a smartphone make it possible… to consult a digital version of those magazines.”
The Court concluded that the subscription and the gift “form a whole, with the subscription constituting the principal supply and the gift an ancillary supply the sole purpose of which is to encourage the purchase of a subscription.”

Implications for VAT Treatment: As the gift is considered an ancillary supply to a supply for consideration (the subscription), it is also treated as a “supply of goods for consideration” under Article 2(1)(a) of the VAT Directive. This is in contrast to being treated as a “disposal of goods free of charge” under the first paragraph of Article 16.

Irrelevance of “Gifts of Small Value” Exception: Because the Court determined that the supply of the gift was part of a single, consideration-based transaction (as an ancillary supply), the question of whether it qualified as a “gift of small value” under the second paragraph of Article 16 of the VAT Directive became irrelevant. The Court therefore did not address the compatibility of the Portuguese law’s 0.5% turnover ceiling with EU law, nor did it rule on the principles of neutrality, equal treatment, and proportionality in this context.

“In view of the answer given to the first question, there is no need to answer the other questions.”

Most Important Ideas/Facts:

The decisive factor in determining the VAT treatment of the subscription gift was whether it was a separate free supply or part of a single transaction for consideration.
The Court found the provision of the gift to be an ancillary supply to the principal supply of the magazine subscription, driven by the commercial objective of increasing subscriptions.
An ancillary supply shares the VAT treatment of the principal supply. Therefore, the gift was treated as a supply for consideration.
This classification meant that the “gifts of small value” exception under Article 16 of the VAT Directive was not applicable in this case.
The judgment clarifies the application of the “single supply” concept in promotional offers involving goods provided alongside a service.