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.

© Thinkstock


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.

back to top