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Late success for property developers in Germany

18 December 2013

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The German Federal Tax Court has put the Federal Ministry of Finance in its place, writes Thomas Küffner of KÜFFNER MAUNZ LANGER ZUGMAIER

The German Federal Tax Court referred the question to the European Court of Justice (ECJ), as to whether section 13b of the German VAT Act was compatible with EU law. The ECJ affirmed this (see ECJ, judgment of December 12 2012, C-395/11, BVL), however, also pointed out that the national courts are required to consider the principle of legal certainty when applying section 13b of the German VAT Act.

The Federal Tax Court was pleased to "take on board" this order and has declared the following administrative rules to be incompatible with the principle of legal certainty in its decision of August 22 2013:

  • The 10% hurdle for the determination of sustainable construction work in section 13b.3 paragraph 1 and 2 of the German Administrative Circular is not suitable as the contractor is not able to reliably assess whether he or his customer is liable to pay the VAT.
  • The Federal Tax Court also considers the determination in section 13b.3 Abs. 10 of the German Administrative Circular to be too general, after which the conduct of construction work is sufficient without there being the need of a direct link between the received and carried out construction work.
  • Furthermore, the Federal Tax Court dismisses the simplification rule in section 13b.8 of the German Administrative Circular. According to this rule, there would be no objections if both parties were to amicably assume the application of the reverse-charge-scheme despite the conditions not being fulfilled. The Federal Tax Court points out that such an agreement between the contracting parties contradicts the legal provisions as this provision does not put the applicability of the reverse-charge-scheme at the participants’ disposal.

In the circumstances, the following now applies:

  • When selling on residential buildings that have already been fully completed or renovated at the time of the purchase, one has to assume a supply of goods. The property developer did not carry out a supply including installation and therefore is not considered to have carried out construction work. In these cases, the property developer is not liable to pay the VAT regarding the construction work rendered by his subcontractors.
  • However, if the contractor sells land during the construction phase and the customer is still able to influence the construction, the Federal Ministry of Finance will take a supply including installation for granted. If supplies including installations take place, the reverse-charge-scheme according to section 13b paragraph 2 no. 4 of the German VAT Act will apply.

Because of the Federal Tax Court’s judgment, old cases can now be re-opened unless the statute of limitation prevents this. For the future, the following applies: property developers are no longer liable to pay the VAT if they do not carry out construction work. This only changes if they have acted as a general contractor. If so, whether they are liable to pay the VAT will depend on the use of the construction work obtained by them.

The Federal Tax Court’s decision also affects all of the administrative practice in cases of section 13b of the German VAT Act, as the agreements made by both parties regarding the application of section 13b of the German VAT Act according to the simplification rules no longer provide any certainty. The same applies for the 10% hurdle. In the future, it will no longer be applicable. Hence, the qualification as reseller for gas and power supplies that the Ministry of Finance also wants to make dependent on the 10% hurdle (section 3g.1 paragraph 2 and 3 of the German Administrative Circular) may be invalid.

Thomas Küffner
Tel: +49 (0)89 / 217 50 12 – 30

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