Background: Exemption to the value-added tax

Since coalition negotiations began, Deutsche Post has been among those companies that media reports indicate could be put at a disadvantage by decisions made by the new German government. This assumption is primarily based on statements made by the new German government about changing regulations on the value-added tax that apply to postal services. The truth of the matter is that the previous government also prepared legislation to amend the regulations applying to the value-added tax that would have taken effect on Jan. 1, 2010. In this connection, people also speculated about the possible impact on Deutsche Post. But what is really under discussion here?

Currently, the so-called universal services provided by Deutsche Post are exempt from the sales tax. This exemption is defined in European regulations covering the value-added tax and has been added to German sales tax law. The underlying idea of the exemption is that services provided for the common good should be priced as reasonably as possible, that is, without a tax being levied on them. Deutsche Post is currently the only company in Germany that provides universal postal services on a national basis.

In its coalition agreement, the new government stated that "... in light of the latest ruling by the European Court of Justice, the application of the sales tax to postal services is to be promptly changed in such a way to ensure that no further unequal tax treatment exists. ..."  In reference to a ruling by the European Court of Justice issued in April 2009 that applies to all EU member states, the agreement also says, "... Under the ruling by the European Court of Justice, the provision of basic postal services to citizens remains exempt from the sales tax. ..." As a result of these findings, the coalition government stressed that postal services must be exempt from the value-added tax in the future. Under a proposed change to the German sales-tax law offered by the previous government, every postal provider offering the complete range of universal services in Germany would have had the right to be exempt from the value-added tax for these services.

Under the European Court of Justice ruling, the exemption from the value-added tax applies to all companies that pledge to provide the entire range of universal services or a portion of them in a member state. In EU case law, there is only one exemption to this principle: Services to which the value-added tax applies are those services whose conditions are negotiated on an individual basis. As a result, all universal services of Deutsche Post that are provided under the company's general terms and conditions must remain tax-free because the same conditions apply to all customers.

At the moment, it remains unclear what form the new legislation proposed by the German government will take. In this regard, the government still must clarify a number of questions related to the ruling by the European Court of Justice. For this reason, it is difficult to predict the possible financial impact on Deutsche Post. Even if the extent of the exemption to the value-added tax for Deutsche Post were reduced, other factors would have to be considered in such an analysis. These include the option of deducting the input tax for areas that would then be subject to the value-added tax, future market developments and price setting. An expanded application of the tax could indeed have a negative impact on revenue and earnings. But Deutsche Post will be able to make initial statements about the possible amount only when an exact tax classification of all products and services has been made.