EUROPE’S HIGHEST court has cast its austere eye over the risqué world of erotic commerce, ruling that the owner of a Belgian sex shop is not entitled to classify his peep show cubicles as cinemas for tax purposes.
In a ruling in which the European Court of Justice applied arcane tax rules to coin-operated film booths, the shopkeeper lost his claim to apply a reduced rate of value added tax (VAT) on his income from the cubicles.
The three-judge court cast no judgment on the content of the films shown. Rather, they said paying to view a film in a private booth was different, from a tax perspective, to viewing a film with other members of the public in a cinema.
The Erotic Center business in Bruges wanted to avail of a 6 per cent VAT rate by having the cubicles assigned as establishments “for culture, sports or entertainment”.
Tax inspectors thought otherwise, arguing that the cubicles should be classified as “automated recreation devices” with a VAT rate of 21 per cent.
Officials from the local tax authority carried out an audit on the premises in September 2004, leading to a €48,454 charge for unpaid VAT over six months and a €4,850 fine for evasion.
A court in Bruges dismissed the shopkeeper’s claim to have the tax bill set aside. An appeal court in Ghent referred the case to the Luxembourg-based Court of Justice for a ruling on whether such activities came within the ambit of a “cultural exception” enshrined in an EU VAT directive.
The Belgian authorities said the higher tax category was justified because clients started the films by inserting coins into a device, with the possibility of switching from one film to another.
They said the cubicles could not be classified as a “cinema” since they were not spaces in which a group of people could together watch the same film, started without any intervention by the audience, which had paid for admission in advance.
By contrast, Erotic Center argued that the number of seats, the type of film shown or the method of projection used were irrelevant for VAT classification.
In its ruling, however, the European court said the lower VAT rate did not apply to the private cubicles. The common feature of the cinema services to which the lower VAT rate applied was that they were available “on prior payment of an admission fee giving all those who pay it the right collectively to enjoy the cultural and entertainment services characteristic of those events and facilities”.
The rule applying the lower rate could not be “interpreted as meaning that it covers the payment made by a customer so as to be able to watch on his own one or more films, or extracts from films, in private cubicles”.