German Federal Ministry of Finance responds to court decision on how reverse-charge mechanism applies to construction

The German tax authorities have now, once again, commented on the decision of the Federal Fiscal Court of August 22 2013 (V R 37/10) that the reverse-charge-scheme is no longer applicable to supplies to property developers and have released another Federal Ministry of Finance’s circular dated May 8 2014.

New legitimate expectation
The reverse-charge-scheme is only applicable to supplies to property developers where the property developer uses the received construction work directly for such a supply itself. If the recipient confirms to the property developer that it intends to directly use the received supply for construction work itself, the recipient is obliged to pay VAT though he might not ultimately directly use it for such a supply itself. This shall not apply if the property developer knew about the inaccuracy of the confirmation.

Non-entrepreneurial purpose
Due to the direct use now required by the Federal Fiscal Court, the reverse-charge-scheme is no longer applicable to the recipient as regards services for non-entrepreneurial purposes.

VAT group
If one part of the VAT group obtains construction work, the reverse-charge-scheme is only applicable if the supply is directly used for construction work. In this context direct use means that one part of the VAT group (controlling company or controlled company) uses the received supply to carry out such a supply to a third person.

Expansion of the non-objection scheme
The non-objection scheme has been extended by two cases. If construction work is commenced before February 15 2014, it will not be subject to objection if the parties invoice this construction work carried out after February 14 2014 by mutual agreement using the reverse-charge-scheme. It also will not be objected to if a service is invoiced with VAT before February 15 2014 by mutual agreement and in consideration of the then administrative interpretation, though the recipient would have already been liable for VAT according to the new case law.

Advance and final invoices
The property developer will owe VAT for construction work if he has issued advance invoices before February 15 2014 without VAT for building projects which will be completed after February 14 2014, as the supply is to be assessed in accordance with the new legal position.

In the interest of simplification, however, it is sufficient for the property developer to charge VAT for the total amount in the final invoice. The advance payments made are to be charged in their net amount (without VAT) in the final invoice. Value-added tax for the total payment is to be declared in the VAT return for the period in which the service was carried out. The recipient will need to correct the VAT paid for the advance payments in the same period.

Robert Hammerl (robert.hammerl@kmlz.de) is a managing associate of Küffner Maunz Langer Zugmaier – KMLZ, the principal Germany correspondent of the indirect tax channel of www.internationaltaxreview.com.

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