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Germany Chases Brewers for Taxes Regardless of Size

Aug. 10, 2018, 5:01 AM

A recent court ruling in Germany burdening a rogue hobby brewer with the same tax treatment as the nation’s largest beer houses is a case study on why not to mess with two of the most well-known pillars of German society: beer and bureaucracy.

As the craft-beer movement grips Germany amid falling sales from traditional brewers, it shows that market fads don’t diminish the deep-seated formalities that continue to govern Germany’s beloved beer market, Thomas Busching, a partner with Squire Patton Boggs in Frankfurt, told Bloomberg Tax Aug. 7.

“There’s a huge amount of administrative things that you need to comply with [in Germany] when you start a business,” he said. “It’s the same thing with beer brewers.”

Beer sales in Germany have been sinking year-on-year for decades. In 2017, German brewers sold 935 million liters of beer, a 16.6 percent decrease since 1993, according to Germany’s Federal Statistics Office.

As a result, tax revenue from domestic brews has also nosedived. The Federal Statistics Office estimates that taxable domestic sales have decreased by 26.6 percent since 1993, while tax-exempt beer, such as that produced by hobby brewers, has increased by 135 percent in that same timeframe.

The court’s decision means that plaintiff and brewer Reiner Lebherz’s small operation will bear the brunt of the the full tax rate—the same paid by German beer giants Brau Holding International, Anheuser-Busch InBev SA/NV, and Oettinger Brauerei, who own Paulaner, Beck’s and Oettinger respectively, producing millions of liters of beer every year.

’Joke’ Decision

In a decision published July 2 (11 K 1344/17), the Financial Court of Baden-Württemberg ruled March 20 to dismiss brewer Reiner Lebherz’s claim of undue taxation when he was taxed the highest amount possible for an ancillary business he’d established to sell off the remainder of a homemade batch of beer.

According to Germany’s Beer Tax Act, hobby brewers producing less than 200 liters per year for private consumption are exempt from beer taxation. For-profit brewers in Germany pay tax according to the amount of beer they produce and its alcohol content, with the nation’s smallest breweries—those producing less than 5,000 liters per year—receiving as much as a 56 percent discount off the base rate of 0.787 euros per unit of alcohol for every 100 liters of beer they produce, according to the Act.

Regional financial authorities, however, contested that because Lebherz’s operation wasn’t registered as an authorized brewery—defined according to Germany’s Beer Tax Act as a tax warehouse subject to inspection by tax authorities—he wasn’t eligible for the reduced tax rate reserved for small breweries once he declared his business, according to court documents.

Now that Lebherz’s brewery, which produces some 4,000 liters of beer per year in tiny Bitz, Germany, in the nation’s south, is properly registered, Lebherz receives the same tax advantages as other small breweries, he told Bloomberg Tax August 7.

Still, he considers the decision a “joke,” not least because it goes against what he believes to be the basic principle of Germany’s beer tax: to provide tax incentives to smaller brewers.

“My brewery is the same as before. I don’t brew more beer and I don’t brew less,” he said. “The only difference is that I had to register as a tax warehouse and now that’s why the formalities are bigger.”

Dynamic Market

The decision comes during a particularly dynamic period for one of Germany’s best-known industries: In 2017, 82 new breweries across the nation flipped on their kettles, according to the German Brewers’ Association, the umbrella association representing the interest of the nation’s brewers.

The increase is led by craft-beer makers in urban enclaves like Berlin, where 26 new breweries have opened since 2012—the most of any other German state in that period, according to the association. That includes Bavaria, considered the mecca of traditional German beers. Today, about half of all German breweries are microbreweries, with a yearly production of less than 100,000 liters, according to the Association.

While overall sales of beer in Germany have been steadily declining over the past 25 years, the nation’s smallest breweries experienced a 16.7 percent increase in sales between 2016 and 2017, according to statistics from the German Association of Private Brewers, which represents Germany’s small and medium-sized breweries.

It’s a phenomenon directly related to the surging popularity of craft beer in Germany, the president of the German Brewers’ Association Holger Eichele said in a Feb. 27 press release.

“The beer market in Germany is becoming increasingly diverse despite ongoing consolidation. Newly established and traditional breweries are always bringing new, interesting beers to the market.”

Trend Meets Tradition

It’s a trend that can be attributed to a number of factors, Roland Demleitner, a spokesman for the German Association of Private Brewers, told Bloomberg Tax Aug. 7. Germany’s aging population, for example, is losing its taste for alcohol, he said.

At the same time, however, there’s a growing desire for regionally produced brews of unique tastes and alcohol content, said Demleitner. While such beers are beloved in the U.S. and elsewhere, the trend has been slow to catch on in Germany, thanks to its 500-century-old brewing standards, known as the Reinheitsgebot (Beer purity law).

But just because there’s a burgeoning market for new beers in Germany doesn’t mean hobby brewers trying their hand at the craft shouldn’t have to follow the same age-old rules as everyone else, said Demleitner.

“Everyone who brews beer has to be registered,” he said. “If a hobby brewer produces more than his hobby status allows and starts selling as a business, which was the case with this court decision, then he has to register as a tax warehouse.”

Though Busching said such strict rules could be detrimental to spontaneous brewers looking to cash in on the craft-beer craze in Germany, the extra layer of red-tape is just “part of the game” in which to do so.

“Once this guy starts selling hectoliters, it won’t be any problem for him to register as a tax warehouse and become an official brewery in order to take advantage of the reduced rate,” he said.

To contact the reporter on this story: Jabeen Bhatti in Berlin at correspondents@bloomberglaw.com

To contact the editor on this story: Penny Sukhraj at psukhraj@bloombergtax.com

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