Germany: In a menu more expensive than solo? Why the Federal Finance Court takes a close look at savings menus

(Discussion of the German Federal Fiscal Court (BFH) rulings of 22 January 2025, XI R 19/23 ; as well as the parallel ruling of 22 January 2025, XI R 22/22 )

A certain (economy) menu always costs the same for a consumer at the common, well-known fast-food chains. The amount of profit that the fast-food restaurant makes from the sale of (economy) menus of the same value can differ significantly for tax reasons.

The difference results from the amount of Value Added Tax (Umsatzsteuer, “VAT”) that the fast-food restaurant has to pay to the tax office after the sale. This can vary and leads to a final charge for the fast-food restaurant due to the fixed final consumption price.

The first question to be asked is whether the sale of the (economy) menu is a supply that may be taxed at a reduced rate or a restaurant and catering service that is not taxed at a reduced rate. If the guest is provided with a room with tables and chairs as well as a toilet when eating on site, this will regularly be a restaurant and catering service, so that the standard tax rate of currently 19% applies.

Note: The coalition agreement provides for a reduction in VAT to 7% for food in the catering sector from 1 January 2026; this is intended to permanently establish the special regulation temporarily introduced with the Corona Tax Assistance Act of 19 June 2020.

In contrast to on-site consumption, a take-away order constitutes a supply under VAT law, as there are generally no relevant service elements. According to case law, however, such a supply is not a single supply, but at least two independent supplies under VAT law, namely that of the beverage and the food(s). This distinction raises problems, as the result is that both reduced-taxed food and non-reduced-taxed drinks (or even other goods, such as toys for children) are supplied.

The question that has occupied practitioners for some time is: How should the standardised charge for (economy) menus be allocated to the different VAT supplies?

I. View of the German tax authorities

The German tax authorities comment on this question in A 10.1 para. 11 VAT application decree (Umsatzsteuer-Anwendungserlass). It states, among other things:

“If the trader also offers the services provided as part of the total sales price individually, the total sales price must generally be divided according to the ratio of the individual sales prices [i.e. plus VAT]. In addition, other allocation methods such as the ratio of the cost of goods sold are also permissible, provided they are equally simple and lead to appropriate results. Allocation according to operating costs is not an equally simple allocation method and is therefore not permitted.”

In contrast to the cost of goods sold, operating costs also include those for the in-house preparation of food and beverages. There is no clear allocation standard here, which is why there are already different approaches to allocation in theory. This is probably the main reason why the German tax authorities rejected it.

II. Decisions of the German Federal Fiscal Court (XI R 19/23 and XI R 22/22)

In the proceedings with the case number XI R 19/23, the German Federal Fiscal Court (Bundesfinanzhof, hereinafter referred to as the "BFH") had to decide whether the food and paper method ("F&P method") used by the plaintiff could be used to allocate the total sales price for an economy menu. 

In the F&P method, the goods required for the products plus the packaging material directly associated with the goods are added together and set in relation to each other. This ratio is used to allocate the total sales price. Consequently, it is an allocation method based on the ratio of the cost of goods sold.

Interestingly, according to an unpublished letter from the Federal Ministry of Finance (Bundesministerium der Finanzen; “BMF”), dated 1 December 2017, which was available to the Senate (of the BFH), the heads of the VAT department still assumed that the F&P method was a recognisable allocation method based on the ratio of the cost of goods. The reason given for this was that the cost of goods could be specifically allocated to individual products using precisely defined recipes. It was only during the tax audit of the plaintiff in 2018 that an internal instruction was issued stating that, from the point of view of the German tax authorities, the allocation for the sale of off-premises economy menus should be made in proportion to the individual sales prices.

The BFH disagreed with this and stated in the reasons for the decision that the required allocation does not always have to be based on (possibly fictitious) retail prices. Exceptions to this were possible. However, this requires the method used to be at least as appropriate as apportionment according to unit selling prices, which should always take precedence.

However, the F&P method is not equally appropriate because it sometimes leads to the price of a food with a high cost of goods (e.g. a burger) in a menu being significantly higher than the retail price of this food.

Example:

The fact that changes in purchase prices for the purchase of goods are immediately taken into account in the F&P method, although the new goods are usually not sold in the shops until a week later, also suggests that the result is not accurate.

In the proceedings with the case number XI R 22/22 , the plaintiff attempted to counter at least the first approach of the BFH by applying a cap to the individual sales price in some cases, whereby the individual sales prices for all meals and all drinks were added together. The BFH also rejected this modified F&P method as inappropriate. The necessity of a capping itself would already speak against an appropriate allocation standard.

This means that taxable persons who have decided in favour of allocating the total sales price according to the cost of goods sold should review their choice.

III. What does this mean in practice?

The two rulings of the BFH show that caution is still required when allocating prices for menu offerings in system catering if a deviation from the allocation based on retail prices is or should be made. The alternative method must be based on economically comprehensible standards. Methods that lead to inappropriate results cannot be corrected by capping limits. Following the new BFH rulings of 22 January 2025, deviating allocation standards are likely to become the focus of German tax auditors once again.

The new jurisdiction is not only to be observed by system caterers, but may also affect snack bars, bakeries, caterers and many more.

Regardless of this, it means that businesses should carefully document how they arrived at their pricing and why it is considered appropriate when splitting menu offers. This documentation is crucial to be able to successfully conclude a tax audit. 

Do you have any questions about the division of menu offerings in your company? Please feel free to contact us, we will be glad to help you!

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The above information is for information purposes only and does not replace legal or tax advice.