This article is essential for Latvian YouTubers and other content creators, as it examines a recent case heard in the Supreme Court of the Republic of Latvia (Senate) regarding whether donations received by a video game streamer from viewers are subject to personal income tax. This is the first time such a case has been reviewed at the court level in Latvia, so by understanding it, content creators can better prepare for changes and avoid potential legal complications.
This article is republished with permission from its author, Jānis Taukačs. The article was originally published on the Tax Stories blog.
It turns out that they are also subject to personal income tax, even if the income earned from streaming comes from voluntary payments. This was recently decided by the Senate. However, the European Court has ruled completely differently on a similar issue. Let’s compare.
The amounts may seem small—around EUR 6600 in the personal income tax, plus an equal amount in fines and about EUR 400 in interest. But the case still ended up in court. Why? Because the video game streamer invited viewers to voluntarily make payments, believing them to be exempt from the personal income tax.
Voluntary Income?
Both the Latvian District Court and the Senate believe that this income is subject to personal income tax. The Latvian District Court views it as economic activity. In Europe, there is accumulated case law related to the application of VAT on this matter. Moreover, the European Court ruled differently than the Senate.
Street Musician
In one of the classic European Court cases (Tolsma), the question was whether voluntary payments received by a street musician are subject to VAT. The EU VAT Directive states that a taxable transaction occurs if it is received as payment. The European Court ruled that no obligations were formed between the musician and the donors, as the payments were voluntary. They were not dependent on the quality of the music. Passersby also could not demand the musician play something specific, at a specific location, time, or duration. Therefore, the European Court concluded that no mutual obligations were formed, which is a prerequisite for the existence of a transaction. Since this 1994 case, it has been the basis for many other European Court cases.
Missed the Mark
Interestingly, the Senate’s ruling references a European Court case but on a completely different matter—whether VAT should be applied to payments for telecommunications services if the user has terminated a contract that provided for payments over a longer period (the European Court’s answer was yes, it should be applied). This ruling, in turn, aligns with European Court rulings on VAT penalties for early termination of lease agreements. The Senate’s reference to a similar ruling by a German tax court might be worth considering, but when contrasted with the European Court’s opinion, the latter carries more weight.
Economic Activity
An individual’s activity qualifies as economic activity if it meets one of the following criteria:
1. The regularity and systematic nature of transactions (3 or more transactions per year or 5 or more transactions in 3 years);
2. Income from transactions exceeding EUR 14,229 per year;
3. The economic nature of the activity or the volume of items owned by the person indicates systematic activity with the aim of earning a reward.
The Latvian District Court and the Senate believed that all these criteria were met in this case. For example, the Latvian District Court stated that the payments were made to ensure that these viewers could continue watching the YouTuber’s video content and live streams in the future. However, the same could be said for the mentioned street musician, where donations might encourage them to continue playing, possibly on the same street corner.
Donation? Gift?
Interestingly, gifts up to EUR 1425 from unrelated persons are exempt from personal income tax in Latvia, provided the gift is not compensatory in nature. The amount from each individual viewer is unlikely to exceed this amount. Regarding donations, the Latvian law states that in a similar situation, money or other items given by a private individual without compensation to a budgetary institution or NGO is considered a donation if the recipient has no obligation to perform actions considered compensation. In the gamer’s situation, there is no such obligation either!
Compensatory Gift?
The Latvian Civil Law stipulates that compensatory gifts are those given as compensation for services rendered. The comments on this article state that a compensatory gift is when the recipient of the service has no obligation to pay but wishes to express gratitude for the received service. But does the gamer provide a service to the viewer? Does watching “Panorama” on Latvian Television constitute a service? The VAT Law states that the provision of services is a transaction that is not the delivery of goods. In the mentioned European Court cases, the Court considered that there was no transaction because there was no obligation. Latvian VAT Law also provides that compensation is the monetary value of services received or to be received. Finally, the Senate’s ruling states that the payments received by the gamer are not compensatory gifts.
A Scheme?
Could everyone now hide under the guise of voluntary payments? I doubt I would want to help a client with the agreement that whatever they pay will be fine. Unless it’s a charitable project where I don’t expect any payment for the service. YouTube’s live streaming software is specifically designed to openly display which follower has donated how much during the live stream. For example, if I added a function for voluntary payments to this blogging platform, would it be considered compensation for services or a donation? Intuitively, I would say it’s taxable income under personal income tax, but that seems to contradict European Court jurisprudence.
Copyright Fees!
However, the Senate also acknowledged that video game-playing videos and live streams could be recognized as copyright objects. The European Court has clarified that a work is the author’s intellectual creation if it reflects their personality. This is established if the author, in creating the work, can exercise their creative options by making free and creative choices. Therefore, the court concluded that such income may be subject to the expense rates applicable to copyright fees (30% and 50% of the copyright amount), and economic activity registration is not required.
Litigation Isn’t Quick
The final decision of the Latvian State Revenue Service (VID) in this case was made in May 2020. Relatively quickly—in March 2022, there was already a second-instance ruling. However, the YouTuber had to wait more than two years for the Senate.
Is There Anything More That Can Be Done?
Probably not. Personal income tax (IIN) is a Latvian matter. It is not regulated at the EU level. Therefore, the Latvian court’s disagreement with the European Court can only lead to considering new litigation in Latvia for similar situations in other cases. Therefore, it is not certain that this Senate ruling can already be considered as settled case law.
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