No hair, no VAT? – Federal Fiscal Court rules on hair root transplants

The boundary between (VATable) cosmetic surgery and (VAT-exempt) curative surgery is blurred. This is also shown by the current judgement of the Federal Fiscal Court of Germany (BFH) of 25 September 2024 (case reference: XI R 17/21), in which it ruled on a legal dispute between a specialist surgeon and the tax authorities.

As the owner of a practice specializing in the treatment of hair loss (alopecia), this surgeon carried out hair root transplants on patients, among other things. There are numerous causes of hair loss. In medicine, a rough distinction is made between scarring and non-scarring forms. Scarring or scarring alopecia causes the hair follicles (structure surrounding the hair root) to scar due to inflammation. There are various causes for the non-scarring forms. Not every type of hair loss can be treated by transplantation, e.g. if it is caused by an autoimmune disease (so-called circular hair loss).

The specialist in question recorded all transplant services as VAT-exempt medical treatments in accordance with Section 4 no. 14 lit. a) of the German VAT Act (VATA). However, during a tax audit, the tax office denied him this tax exemption for the treatment of androgenetic and hereditary alopecia (both subtypes of non-scarring forms of hair loss). Androgenetic alopecia is the term used to describe age-related hair loss, from which many men, but also some women, suffer. Hereditary alopecia refers to hereditary hair loss. All these forms of hair loss are recognized by the WHO as diseases or diagnoses in ICD 10. The case ultimately ended up at the Düsseldorf tax court and then at the Federal Fiscal Court.

Which medical services are VAT-exempt?

Section 4 no. 14 lit. a) VATA is based on Art. 132 para. 1 lit. c) VAT directive and exempts

• medical treatment
• in the field of human medicine,
• carried out by a medical or similar professional

from VAT.

The reason for the tax exemption is to minimize the cost of health measures. As with most tax exemptions in the VATA, this is a so-called non-genuine tax exemption. With such an exemption, the entrepreneur has no input VAT deduction on the input services of other entrepreneurs that can be allocated to their output transactions either directly or proportionately according to a key.

In the case to be decided by the BFH, it was only disputed whether the criterion of “medical treatment” was fulfilled.

What services are VAT-exempt medical treatments? 

The term “medical treatment” is characterised by EU law. According to the ECJ definition, medical treatment is treatment that serves to diagnose, treat and, as far as possible, cure diseases or health disorders - i.e. a therapeutic purpose (para. 16 of the BFH judgement).

It is true that tax exemptions are interpreted narrowly. In the context of medical treatment, however, the case law is somewhat more generous: On the one hand, prophylactic measures (preventative care) may also be covered. In these cases, there is no illness or health disorder (yet). On the other hand, some reconstructive measures are also regarded as medical treatment (para. 23 of the BFH judgement). This applies, for example, to prostheses for missing body parts. Strictly speaking, the “cure” in the medical sense would be to allow the body part to grow back. Unfortunately, this is not yet medically possible. However, a prosthesis compensates for the deficiency associated with the missing body part.

As the hair also represents body parts, hair transplants are to be regarded as reconstructive measures. However, it depends on whether the hair loss results in a deficiency (in which case it is tax-free) or whether the treatment is only for cosmetic purposes (in which case it is taxable). Because the body and mind form a unit according to current medical understanding, the deficiency can be of both a physical and psychological nature.

The BFH now explains this for the different types of hair loss:

1. In the case of scarring hair loss, a deficiency is presumed due to scarring of the hair follicles. Corresponding transplants are tax-free.
    
2. The same applies to hereditary hair loss. This is because the people suffering from it have less hair from birth, which according to the BFH represents a “clear deviation from the normal state” (as this is unusual in babies or small children).
    
3. In the case of androgenetic hair loss, the BFH assumes that there is no deficiency requiring treatment - on the grounds that it is a classic symptom of old age. It is noteworthy that the BFH applies this to both men and women. The situation is different in social law, for example: in the BSG (Federal Social Court) judgement of 22 April 2015 (B 3 KR 3/14 R), which is well worth reading, the BSG ruled that, unlike women, a man with hair loss at an older age is not entitled to be provided with a wig. Although the judgement referred to circular hair loss, the statements it contained were general: baldness in men stands for “energy” and “sportiness”. In women, on the other hand, baldness is perceived as a “defect”.
   The BFH took a different view and generally assumes these services as VATable. However, it allows an exception to this: as soon as the hair loss has reached a certain severity (“disfiguring effect”) and subsequent illnesses (usually psychological) are possible as a result, tax-exempt medical treatment is deemed to exist in individual cases. However, this must be proven for the respective patient by means of a qualified medical certificate. The BFH did not allow a certificate from the transplanting doctor to be sufficient, as otherwise the tax exemption would be in the hands of the entrepreneur himself.

As the Düsseldorf tax court had previously followed the opinion of the tax office, the BFH overturned the judgement of the court of first instance and referred the case back to it. The tax court must now examine whether it will stick to the assumptions made by the BFH or whether the medical specialist will be able to refute them with further evidence.

What needs to be considered for the VAT exemption of hair transplants in practice?

The new BFH judgement creates both clarity and bureaucracy for the doctors and clinics concerned. The question of tax exemption affects both VAT and input VAT.

It would have been welcome if the BFH had orientated itself on ICD 10 and taken a more generous interpretation here. In practice, androgenetic hair loss will affect the majority of cases. In this respect, the BFH's judgement contradicts social law on the one hand. On the other hand, androgenetic hair loss can also occur at a very young age. To assume that a 20-year-old is not in need of treatment fails to recognize the medical reality. Although the constitutionally required option to invalidate the presumption in individual cases is logical, in practice it leads to additional paperwork that should not be underestimated. It is precisely in these cases that the tension in tax law between fairness in individual cases and practical handling becomes apparent once again.

Doctors and clinics that carry out hair transplants in Germany should therefore bear the following in mind:

1. For each hair transplant performed, the type of hair loss the patient suffers from should be documented in detail.
    
2. In the case of patients with androgenetic hair loss, it is advisable to inform the patient as early as possible that a qualified medical certificate must be obtained.
    
3. Proper Section 15a VATA documentation is also essential. If the relationship between taxable and tax-exempt services changes in a later advance return period, the taxable person may have to make an adjustment to the input VAT deduction.

This article does not constitute legal advice and is for information purposes only.