• Quentin Warscotte, Partner |

Part 2

The META-VAT conundrum

As revealed in Part 1, both the digital economy and the metaverse are fast-developing environments creating new challenges for tax administrations. So, what does that mean for VAT?

We’ve highlighted three specific examples to illustrate the sheer complexity of applying VAT to the metaverse.

1. Virtual events

Imagine you’re selling tickets for a virtual exhibition at a virtual museum, or you decide to stream a play performed online. In the physical world, this supply would qualify as admission to an event and be taxed wherever the event is held.

In a real but digitalized world where you can attend online events, this already posed a problem in terms of its place of supply (as multiple locations are sometimes involved). It has recently been solved by the adoption of a new Council directive [1]. In a B2C context, the place of taxation of events “which are streamed or otherwise made virtually available” is the place where the (physical) customer is located. This modification to the VAT Directive was entered into force on 6 April 2022 and should be implemented by Member States by 1 January 2025.

Let’s now assume that your newly created avatar decides to visit a virtual exhibition, or see a play in a virtual location in the metaverse. Would the same VAT treatment apply? Would you (or your avatar) even have to pay VAT in this particular situation? This is the million-dollar question.

2. Non-Fungible Tokens (NFTs)

“I know [NFTs] have a great opportunity to be big in music, because sooner or later the labels are going to have to come on in (…) and understand that catalogs and things they hold onto are better served on the blockchain than sitting in the catalog collecting cobwebs,” Snoop Dogg told CNBC in an interview at the NFT.NYC conference in New York City last June [2].

Digitalization of the economy brings new products to the table. Like digital assets linked to physical or digital goods, NFTs are stored on blockchain. NFTs may be associated with a photograph, video, physical or virtual painting, a GIF or a tweet. NFTs may be transferred, traded or sold by the owner. In a nutshell, an NFT is a certificate of authenticity or proof of ownership but it does not restrict the sharing or copying of its associated goods/files.

As a result of the 2020 / 2021market boom , NFTs were used as highly speculative investments and started to show signs of slowing down in 2022. Despite the hype around speculation, NFTs may be a way for artists to benefit from IP rights on the sale price of every transaction.

From a VAT perspective, however, this raises significant concerns as to the very nature of the supply. The same transaction may indeed be regarded as supply of service (e.g. electronic supply of services or transfer of IP rights) or the sale of a virtual good. As there is no official guidance in the EU on the VAT treatment of NFTs, an in-depth analysis of the transaction must be undertaken to determine its qualification, place of taxation and the person liable for the VAT.

3. The (virtual) leasing of (virtual) immovable property

If you enter the metaverse and decide to rent a building there, would VAT apply? German courts recently debated this very question: the application of VAT to the virtual renting of virtual land.

Here’s the story so far. A taxpayer’s avatar was generating revenue by renting out a virtual plot of land. He received virtual currency which was later exchanged against fiduciary currencies.

A German court decided that VAT was applicable, without qualifying the nature of the transaction. The court’s ruling was taken to the Bundesfinanzhof [3] which in turn decided that virtual worlds could not be compared to the real world where VAT is applicable. The taxpayer is simply a “mere participant in a game.” According to the judges at the BFH, the virtual transaction of renting out the building does not constitute a service against consideration for VAT purposes. The fact that the taxpayer exchanged virtual currencies earned in the virtual world against currencies which are legal tender, however, does.

Indeed, part of the transaction happened in the real world [4]. This is the view of the German supreme fiscal court and we can’t help but wonder whether other EU Member States and/or the European Commission would take the same stance.

These are just some of the issues giving rise to legal uncertainty. They underline the fact that these fast-paced environments create new challenges and evolve rapidly. Time is of the essence and these concerns need to be addressed sooner rather than later. Guidance by the competent authorities would allow to qualify these new supplies, prevent potential double taxation, and hopefully close the floodgates to fraud risk.

Want to know more about the metaverse and its VAT-related complexities? Get in touch with KPMG Luxembourg’s “MetExperts”!


[1] Council Directive (EU) 2022/542 modifying Directive 2006/112/EC (VAT Directive) as regards rates of value added tax
[2] Snoop Dogg on crypto winter and the future of NFTs (cnbc.com)
[3] BFH, 18 November 2021, V R 28/19
[4] As the place of transaction here was the US (game operator was in the USA), German VAT was not applicable (out of scope)