German restaurants fear closures as pandemic tax breaks go off menu

A picture shows the menu of the Giesinger Braeustueberl restaurant in the southern state of Bavaria, raising awareness for a possible VAT increase by having two prices for each dish on its menu – the current 10% VAT and what the dish would cost after the tax break ends in 2024 and guests would have to pay 19% VAT on food in the restaurant in Munich, Germany, Nov 3, 2023. REUTERS/Louisa Off

BERLIN  – Chef Omar Ben Hammou found opening his Berlin seafood restaurant tough enough amid the COVID-19 pandemic. Then Russia invaded Ukraine, basic foodstuffs right down to cooking oil grew more expensive, interest rates began to climb and a labor shortage set in.

And now Ben Hammou faces another blow as the German government moves to end pandemic-era tax breaks for the hospitality industry.

“We have more expensive products, we have less labor force, and now we have to raise prices. But if we raise prices people complain and they leave bad reviews. So what should we do, just close?”

To support the industry during COVID-19 lockdowns, the government slashed value-added tax (VAT) for food at restaurants to 7 percent, but that is due to rise back up to 19 percent by the end of the year.

The fiscally hawkish FDP party, which has control of the finance ministry in the three-way ruling coalition, backs letting the tax break expire, calculating that it would cost 3.3 billion euros ($3.5 billion) to keep it going in 2024.

Finance Minister Christian Lindner made it clear recently that the government would have to find funds from elsewhere in the budget if it were to extend it.

Nevertheless, some 12,000 businesses could close if the VAT goes back up to 19 percent, said Guido Zoellick, president of the German Hotel and Restaurant Association Dehoga.

Many restaurants operate on tight margins, which makes them quite sensitive to tax increases.

According to a Dehoga survey, 93 percent of business owners would have to pass on a tax increase on meals to their customers, but the growing expense of eating out and other strains on budgets risks keeping customers at home.

“I would expect a shift from out-of-home consumption back to at-home consumption because eating at restaurants becomes relatively more expensive,” said ING economist Thijs Geijer, noting that this would benefit supermarkets and supermarket suppliers.

Furthermore, at supermarkets, VAT is due to remain at 7 percent for prepared meals. “It is not fair competition if there is this differentiation,” Ingrid Hartges, managing director of DEHOGA, told Reuters.

One restaurant, the Giesinger Braeustüberl in the southern state of Bavaria, is raising awareness by having two prices for each dish on its menu – the current one and what the dish would cost after the tax break ends.

“It’s clear that if we get this 19 percent VAT increase on food in the restaurant, then of course we have to pass some of it on to the public, to the guests,” founder and managing director Steffen Marx told Reuters.

In Spain, Italy and France, the VAT on restaurants is at 10 percent, considerably lower than the expected 19 percent in Germany from 2024. Fiscal support measures introduced in these countries during the pandemic have already ended.

Italian, Spanish and French restaurant owners complain about the rise in ingredients prices and labor shortages, but employment data shows a recovery in the sector.

The question is whether German restaurants are still struggling or have recovered well enough from the pandemic to withstand having the tax break removed, according to Tomas Dvorak, senior economist at Oxford Economics.

“Providing fiscal support in an environment of still high inflation and high interest rates is tricky,” he said.

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