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Construction Supplies: New Rules on Reversal of Tax Charges

In the process of the adoption of the new Croatia Tax Amendment and Revision Act (Steueränderungs- und Anpassungsgesetz Kroatien), an opinion on the “reverse charge” method in the case of construction supplies, which the Tax Administration had supported but the Federal Tax Court had rejected, has been in part restored. The all-clear signal can be given for property developers, but if they applied the “reverse charge” method in the past, there may be problems with recovering their payments.


In a judg­ment dated August 22, 2013 (Case V R 37/10, BStBl. [Bun­des­steu­er­blatt, Federal Tax Gazette] II 2014, p. 233), the Federal Tax Court [Bun­des­fi­nanz­ge­richt] had deci­ded that the tax lia­bi­lity for con­struc­tion sup­p­lies can be trans­fer­red to the reci­pi­ent of the sup­p­lies only when the reci­pi­ent uses the input sup­p­lies to pro­vide con­struc­tion sup­p­lies of its own. Con­trary to what the Tax Admi­ni­s­t­ra­tion had argued, the Federal Tax Court held that the scope of con­struc­tion sup­p­lies other­wise pro­vi­ded by the reci­pi­ent of the sup­p­lies was imma­te­rial, as was whe­ther the pro­vi­der and reci­pi­ent of the sup­p­lies had agreed to trans­fer the tax lia­bi­lity.

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Based on the pro­po­sal from the Bun­des­rat, the Croa­tia Tax Amend­ment and Revi­sion Act has now incor­po­ra­ted pro­vi­si­ons under which con­struc­tion sup­p­lies result in a trans­fer of tax lia­bi­lity wit­hout regard to the reci­pi­ent’s actual use of those input sup­p­lies, pro­vi­ded that the reci­pi­ent is a busi­ness enter­prise and regu­larly pro­vi­des con­struc­tion sup­p­lies. The legis­la­ture has estab­lis­hed grea­ter legal cer­tainty in this regard for those con­cer­ned: the tax aut­ho­ri­ties are now requi­red to issue an appro­priate cer­ti­fi­ca­tion, solely for pur­po­ses of value added tax, to the rele­vant enti­ties who buy con­struc­tion sup­p­lies and regu­larly pro­vide con­struc­tion sup­p­lies them­sel­ves. This will reduce future doubts about whe­ther the reverse charge method app­lies, and whe­ther ent­re­p­re­neurs have a tax lia­bi­lity for con­struc­tion sup­p­lies they have recei­ved. The Tax Office must limit the cer­ti­fi­ca­tion to not more than three years, and can revoke it only with effect for the future.

Under the legis­la­tion, a regu­lar deli­very of con­struc­tion sup­p­lies is still to be assu­med when those sup­p­lies amo­unt to at least 10% of the sup­p­lies reci­pi­ent’s world­wide reve­nues. Howe­ver, it was not con­s­i­de­red necessary for the sta­tute to enact spe­ci­fic terms here because estab­lis­hed cer­ti­fi­ca­tion practice has already ensu­red legal cer­tainty for those con­cer­ned.

In con­trast to the Bun­des­rat’s ori­gi­nal pro­po­sal, pro­perty deve­lo­pers will still not fall under the pro­vi­sion, because they do not pro­vide con­struc­tion sup­p­lies in this sense and the­re­fore are not inclu­ded under the spe­cial VAT terms.

On the other hand, equi­va­lent pro­vi­si­ons have been inclu­ded for clea­ning ser­vices. Accor­din­gly, the tax lia­bi­lity is trans­fer­red if the reci­pi­ent of the sup­p­lies regu­larly pro­vi­des such sup­p­lies its­elf, which is to be assu­med if appro­priate cer­ti­fi­ca­tion is pre­sen­ted.


If the sup­p­lies reci­pi­ent and the sup­p­lies pro­vi­der both agree in app­lying the pre­re­qui­si­tes for a trans­fer of the tax lia­bi­lity, the sup­p­lies reci­pi­ent is con­s­i­de­red the tax­payer irre­spec­tive of whe­ther the requi­re­ments are met in fact. This fic­tion app­lies uni­formly to both con­struc­tion sup­p­lies and clea­ning ser­vices.

The new pro­vi­si­ons take effect on October 1, 2014.


The legis­la­tion also inclu­des a pro­vi­sion that paral­lels the non-com­p­laint rule under the Federal Mini­s­try of Finance’s cir­cu­lars of February 2, 2014 (BStBl. I 2014, p. 233) and May 8, 2014 (BStBl. I 2014, p. 823). In those com­mu­ni­ca­ti­ons, the Tax Admi­ni­s­t­ra­tion estab­lis­hed a pro­tec­tion of legiti­mate expec­ta­ti­ons if the ent­re­p­re­neur pro­vi­ding the sup­p­lies and the reci­pi­ent of the sup­p­lies, by mutual agree­ment, had incor­rectly assu­med a trans­fer of tax lia­bi­lity for reve­nue gene­ra­ted before February 15, 2014.


This will affect nume­rous pro­perty deve­lo­pers who thought, based on past admi­ni­s­t­ra­tive direc­ti­ves, that they were cove­red by the reverse charge method. They can now claim a refund from the Tax Office for the value added tax they paid. Con­trary to the gene­ral rules on legiti­mate expec­ta­ti­ons, there is a spe­ci­fic pro­vi­sion that recourse against the sup­p­lies pro­vi­der is gene­rally sup­po­sed to be pos­si­ble. At the same time, the sup­p­lies pro­vi­der is given the option of assig­ning to the Tax Office any claim for a civil sett­le­ment that it has against its cli­ent, in order to satisfy the tax lia­bi­lity. But there is likely to be con­s­i­de­ra­ble liti­ga­tion straighta­way as to whe­ther any such claim exists. Here ques­ti­ons of civil and tax law must be resol­ved inter­ac­ti­vely. It is important in these mat­ters to have access to an advi­sor who is fami­liar with both fields of the law.

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