German gaming liberalization – a watershed

It comes as no surprise that the trend towards online and browser games caused a paradigm shift in the German gaming industry, which is developing into one of the world’s most important production sites for online and browser games.

This, without any doubt, has a positive effect on the labour market for artistic and computer literate workers in Germany, and it resulted in a high demand for such qualified employees. Yet challenges are everywhere and the increasing piracy of software and products imposes big problems for the gaming industry.

Initial evaluations of the BIU (German Federal Association of Interactive Entertainment Software) estimated a usage of illegal software and products of between five and ten percent per user. The computer, mobile gaming and consoles are most affected.

This brings us to the topic of this article, legal regulations. As already explained, iGaming faces a surge of popularity due to a number of factors such as level of quality and quantity by the new media comprising television, phone and internet.

The gambling market in Germany, especially sports betting, is booming like no other industry. The annual growth rates are enormous: the total annual turnover in Germany is around 27 billion euro. For those who are not aware of past legal hurdles which faced online gaming in Europe it is well to narrate some salient episodes.

The gambling monopoly of the German state was severally challenged in the European Court of Law and this started forming itself with the landmark decision of the famous Gambelli judgment of the ECJ. (EUGH 06.11.2003 – C – 243/01).

But let us briefly remind readers of this ground breaking case, ie ‘Gambelli-Jurisdiction’? Under Italian law, sports and online betting are strictly controlled by the State in Italy. This monopoly of the past was not allowing foreigners to access Italian players.

The Italian “Gambelli” operator case had a licence from England, where sports and online betting is allowed. It raised the question whether Italian law breached the EU law, under which every EU citizen has the right of establishment and freedom to provide services. Such a breach could be justified only for an important reason.

But the ECJ said a member state, in this case Italy, must not protect its monopoly by simply relying on protection of public order to justify restrictive measures. Equally important after the liberalization of IGaming in Italy it took a number of years for the German federal government to change its view on strict protection of its own monopoly.

This article follows recent developments in legislation which have opened the floodgates for licences in Germany after many years under total prohibition.

On 1 January, 2012, an act for reorganization of gambling was established in Schleswig-Holstein. With effect from 8 February of the same year, the law for gambling was overturned and consequently Schleswig-Holstein joined the First-Changing-Gambling-Contract which gives the federal state the right to grant licences for the operation of gambling.

Ever since the treaty came into action, unlike in the other 15 non-conforming federal states of Germany, it is possible to get online gaming licences for individuals. The Holstein treaty raised great confusion and it is questionable whether such a single state in Germany can challenge other 15 non-conforming states as this was considered as a breach of the principle of equal treatment and free choice of the domicile resulting from the German Constitution.

However, the European Court of Justice for Human Rights in its adjudication on 27 November, 2012 (21252/09) concluded that no human rights were violated because of the gambling treaty. More excitement follows as an important verdict with potentially horrendous consequences was recently published by the Finance Court in Muenster, Germany.

Thus, a professional gambler like a poker player can be obliged to pay VAT for his winnings. The specific case is about a German poker player who did not state his profits during several years in his income tax return. The local tax office estimated the turnover and applied the usual VAT rate in Germany (of about 19 %).

Surprisingly the Tax Court in Munich conceded the tax office in the first instance law and related primarily to the fact that the defendant is playing poker professionally and therefore obligated to pay tax (AZ 15 K 798 / 11U). Explicitly the financial court summarized live tournaments and online games together in the judgment, but also noted it is still unclear under which conditions a participant of poker games and cash games as well as internet games has to be classified as a business company according to the Value Added Tax Act. Thus according to several judgments, the gambler mostly has to pay tax for all the amount won when gambling.

But one cannot solely focus on the tax on profits from online gaming, there is the tax on sales coming from the gaming companies which cannot be ignored. As Germany is still a state monopoly for online gaming, tax revenues are only achieved in Schleswig-Holstein until the other non-conforming 15 states start effectively following suit and issue their own licences (which they did recently).

At this point one should take a look at the position in the Netherlands. They had nearly the same situation as Germany, whereby only the State was empowered to offer online gambling. But in 2012 there was a hint that the Dutch authorities would dissolve the monopoly and they would privatize the live casinos. Finally it was decided by the Dutch government to sell all 14 casinos operated by Holland Casino, and authorize and regulate online gaming through issuing new licences. The sale of ten properties in bundle is also planned for later this year, with the remaining four being sold individually next year.

As stated by the Junior Justice Minister Fred Teeven, applicants interested in obtaining online poker, casino games and sports betting licences will have to meet ‘very strict conditions’. Casinos would pay 20% gaming revenue tax plus two per cent for problem gambling programmes and to regulators.

Prior to this set of new regulations, Casino and arcade owners had to pay 29%. The lower tax scheme is set to level the playing field for new entrants into the market. The draft law is undergoing a consultation process which is set to last for a couple of months, before moving on to the Dutch Parliament. Altogether there were 14 state casinos in Holland, which achieved an annual turnover of about 500 million euro. If these casinos get privatized, the state would benefit substantially from tax revenue. This type of regulation could be a very good solution for Germany.

If the tax rate in the Netherlands is not significantly lower than in other EU countries, only a few private providers of online gambling would use this opportunity and Germany would continue to attract gambling providers and obviously benefit from the tax revenues anyway.

The German system of the State monopoly for online gambling is slowly moving towards a liberalization as the temporary confusion arising from the Holstein licences will be finally integrated with the new licences expected to be issued by the other 15 German States.

The latest news about the liberalization of the non-conforming States is that by this month 20 applicants were informed they will receive licences. But It is not a surprise that the popularity of such liberalization has created a huge demand and almost twice had applied for such licences.

Some of the unsuccessful applicants sued for their exclusion. These included an express lawsuit of an applicant from an operator based in Malta which was not one of the successful 20. In their protest they questioned the arbitrary decision of the number of licences awarded and the questionable evaluation of the application criteria.

So far, 14 operators have lodged appeals in the courts whereby this month the administrative court in Wiesbaden stopped the proceedings. As a result of this, Hessen has to stop the procurement process and could not award the 20 licences. The representatives of the state of Hessen have already announced they they will appeal.

As far as is known, the court will initially examine the records before deciding and it is pretty unforeseeable when the licences can be formally approved. This tale of confusion does not make for a secure business environment in Germany, even though it is the most promising market in the whole of Europe.

One hopes for more clarity and stability in the German gambling arena and that the operators in Malta which have potential clientele in that country can be successful in applying for licences to enable them to provide betting services within the remit of international law.

The writer is a researcher in gaming laws at PKF, an audit and business advisory firm