bwin.party has been forced to abandon its plan to pay gaming taxes on all of its German business to the breakaway federal state of Schleswig-Holstein, it admitted this morning.
The PartyPoker and bwin owner had previously stated its intention to either offer sports betting, poker and casino across Germany off its Schleswig-Holstein (SH) licence and pay 20% on gross profit, “or continue operating in Germany as is”, in the words of co-CEO Norbert Teufelberger (pictured above left) at its Q1 earnings call in May.
However, the London-listed operator admitted in a trading update this morning that following the federal government’s introduction of the Rennwettlotteriegesetz (RWLG), a 5% turnover tax on all sports bets in Germany, it would be paying this higher tax rate and not the 20% to SH on its German sports betting business, resulting in an earnings hit of “approximately €5-10m in the current year.” Germany accounted for 22% of bwin.party’s net gaming revenue in 2011.
bwin.party’s plans to pay taxes in SH were apparently stymied by a clause in the federal state’s own Gambling Act that stipulated “gaming duty shall not be levied on … lotteries and betting that are subject to taxation under the [federal] Betting and Lotteries Act.”
SH was the only German federal state of 16 not to ratify a new four-year Interstate Gambling Treaty which also came into force on 1 July, under which the pre-existing ban on online poker and casino remains in place and the other 15 German states or Lander (G15) plan to issue up to 20 online sports betting licences to private operators, based on the aforementioned 5% turnover tax.
While SH passed its own gambling law providing for the issue of unlimited licences for all products, including casino and poker, and has so far issued seven licences to private operators including Betfair, bet365 and bwin, all of these have been for sports betting, bringing these companies under the legal remit of the new federal sports betting tax.
Betfair however, which generates a far smaller proportion of its business from the territory than bwin.party – around 4% of revenues and £5m of EBITDA contribution – stated its intention during its recent FY analyst earnings call to not pay the Rennwettlotteriegesetz, despite a failure to do being a criminal offence and exposing the company’s employees to the risk of arrest.
The company’s CFO Stephen Morana, speaking in his capacity as acting CEO ahead of Breon Corcoran’s arrival from Paddy Power in August, said: “In the last couple of days, you have seen a 5% turnover tax on sportsbooks is to be introduced at the federal level. A 5% turnover tax would of course make the market unviable for the exchange.
“However, expert legal advice suggests there are serious fundamental questions of applicability, interpretation and constitutional law. Hence we intend to continue operations with the exchange, and as previously outlined, we intend to pay a 20% gross profits tax to Schleswig-Holstein on our exchange revenues.”
Betfair did not however provide any explanation of how it will actually pay this tax to the SH authorities if the latter is not legally able to actually levy and collect it.
SH minister of the interior Andreas Breitner, despite his new coalition government favouring repeal of the SH law and opting the Land back into the G15 Treaty, admitted recently that SH was powerless to prevent the issue of four to six more licences before its parliament reconvenes in August. But while Breitner did not specify what products these would be for, it seems likely SH will avoid the issue of any online casino/poker licences in order to avoid additional potential conflicts with the G15 Treaty, under which the offer of these products remains prohibited.
Betfair and other pan-European operators have however been said by legal experts to have several strong arguments upon which to found a challenge to the new federal German sports betting tax. The provision for 96% of revenues collected to go to supporting horse breeders in Germany will have to be notified to the EU Commission, with this likely to be flagged up as a form of State Aid that is incompatible with EU law. The different taxation of lotteries and sports betting is also “doubtful regarding the principle of equality but also in the context of EU law”. Olswang’s Christoph Enaux told Casino Choice recently.
German authorities have also been two years to prove to the EC that the new Treaty’s restrictions on freedom to provide gambling services justified its aims of better protection for players from crime, fraud and addiction, “in particular in view of the current development of the on-line poker market in Germany”.
bwin.party also announced this morning that six potential purchasers had expressed an interest in acquiring the Ongame poker network, after US gaming supplier Shuffle Master backed out of a deal for Ongame last month.