Educational services enjoy tax advantages under both German trade tax and value-added tax (VAT) law, provided certain requirements are met. In two recent decisions, the German Federal Fiscal Court (BFH) clarified the conditions that must be satisfied and whether self-employed instructors and subcontractors can also benefit from these tax exemptions.
No trade tax exemption for subcontractors providing educational services
In the first case, the claimant was a limited liability company (GmbH) whose sole shareholder and managing director taught courses as an instructor for a nationwide professional training institute. The institute prepared students for examinations administered by the German Chambers of Industry and Commerce and engaged numerous instructors on a freelance basis. The contractual relationship existed exclusively between the GmbH and the training institute; there was no contractual relationship with the course participants. The tax office denied the trade tax exemption under Section 3 No. 13 of the German Trade Tax Act (Gewerbesteuergesetz, GewStG), arguing that the claimant was not a “vocational education institution” but merely acted as a subcontractor. The Düsseldorf Fiscal Court ruled in favor of the claimant. (BFH judgment of May 15, 2025, V R 33/23).
The BFH overturned the Fiscal Court’s decision and dismissed the claim. It held that the GmbH did not qualify as a “general or vocational education institution” within the meaning of Section 3 No. 13 GewStG. The decisive factor was that the claimant provided its services exclusively to the training institute and was not itself the provider or organizer of the educational program. According to the Court, the term “institution” refers to the organizational role of the educational provider rather than the mere provision of teaching services by a third party. The tax office’s appeal was therefore well founded.
VAT exemption for educational services provided by self-employed driving instructors
In the second case, the claimant was a self-employed driving instructor who, between 2010 and 2012, provided practical driving lessons for Class B driver’s licenses at a continuing education institution (G) recognized under Section 4 No. 21(a)(bb) of the German VAT Act (Umsatzsteuergesetz, UStG). The driving students were participants in publicly funded vocational training programs leading to class C and class D commercial driver’s licenses. The claimant’s contractual relationship existed solely with institution G. The costs of the training were covered by the German Federal Employment Agency. The tax office treated the claimant’s services as subject to VAT, and the Thuringia Fiscal Court dismissed the action. (BFH judgment of May 15, 2025 – V R 23/24).
The BFH upheld the claimant’s appeal. It ruled that the driving instructor provided teaching services directly serving an educational purpose and therefore qualified for the VAT exemption under Section 4 No. 21(b)(bb) UStG. The requirement that the services be provided “directly” relates to the manner in which the services are performed – namely, through the instructor’s personal teaching of the students – and not to the existence of a direct contractual relationship with those students. The Court further held that the services constituted a “closely related service” to institution G’s VAT-exempt principal educational services within the meaning of Article 132(1)(i) of the EU VAT Directive.
Trade tax vs. VAT
The two decisions highlight a deliberate distinction in both the legislation and its legal interpretation. In case V R 33/23, the BFH explained that, since its 2019 amendment (Article 13 No. 2(b) of the Tax Amendment Act, later codified in Section 36(2), second sentence, GewStG), Section 3 No. 13 GewStG no longer contains a dynamic cross-reference to Section 4 No. 21 UStG. Instead, it adopts verbatim the substantive requirements of Section 4 No. 21(a) UStG relating to substitute schools and examination preparation courses. When revising the legislation in 2019, the legislature deliberately chose not to extend the trade tax exemption to self-employed teachers, even though this benefit had already been introduced for VAT purposes in Section 4 No. 21(b) UStG in 1999. The legislative history demonstrates that the scope of the trade tax exemption was intended to remain “fully preserved” and therefore was not meant to be expanded to include freelance instructors or other independent contractors.
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By contrast, in case V R 23/24, the Senate made clear that Section 4 No. 21(b) UStG is based on Article 132(1)(i) of the EU VAT Directive rather than Article 132(1)(j), which applies to private tuition. According to the BFH, self-employed teachers qualify as “other organizations with similar recognized objectives” within the meaning of Article 132(1)(i) of the Directive. The requirement that the services be provided directly relates to the educational services themselves – that is, whether they fulfill the educational purpose – and not to the contractual relationship between the instructor and the students. The Court also clarified that its earlier case law (V R 73/97 and V R 25/20) concerned only Section 4 No. 21(a) UStG, which applies to educational institutions themselves, and not the special rule for self-employed teachers introduced in Section 4 No. 21(b) UStG in 1999.
Trade tax and VAT: what instructors need to consider now
The judgments provide greater legal certainty but also highlight important structural considerations regarding the choice of legal entity and the requirement that the business or taxpayer act as the educational institution itself. In practice, the VAT exemption is contingent on self-employed instructors acting as the educational institution, providing the teaching services personally, and holding the required certificate issued by the competent state authority. However, a separate contract with the students participating in the courses is not required.
Where an instructor operates their own recognized educational institution in addition to providing teaching services for third parties, the income generated through the instructor’s own institution is exempt from both trade tax and VAT. By contrast, revenue earned from services provided to third-party educational institutions remains subject to trade tax but continues to qualify for the VAT exemption. A clear operational and accounting separation between these activities is therefore essential.
Comprehensive tax advice for nonprofit organizations in Germany
With respect to the tax assessment periods at issue, the BFH confirmed that the German legislature deliberately created an asymmetrical framework. Under VAT law, self-employed teachers working for recognized educational institutions benefit from a tax exemption based on the principle of VAT neutrality and Article 132 of the EU VAT Directive. Under trade tax law, however, the exemption is available only to the educational institutions themselves.
Depending on the circumstances, restructuring the business as a sole proprietorship or a partnership may be advantageous where trade tax is a relevant consideration, provided the activity qualifies as a freelance profession under Section 18 of the German Income Tax Act (Einkommensteuergesetz, EStG). Ultimately, the BFH’s decisions also confirm the approach taken in the 2025 VAT reform, which aligned German VAT law with EU law while leaving the divergence between trade tax and VAT law unchanged.
We would be happy to assist you in determining the correct tax treatment of your educational services and in evaluating the structuring options available for your specific situation.
