According to German VAT law, when a taxable person has taken over the processing or treatment of goods using materials procured by the taxable person itself, this constitutes a “work supply” (Werklieferung). The materials may not be merely ingredients or other incidental items (sec. 3 (4) of the German VAT Act).
The German Federal Tax Court (BFH) clarified this rule in 2013, holding that such a work supply only exists if the taxable person treats or processes goods that are foreign to that taxable person (BFH, judgment of 22.8.2013 - V R 37/10). This ruling was published in the Federal Tax Gazette (BStBl. II 2014, p. 128) and should therefore have applied to similar cases in the future. But the tax authorities did not change the provision of the German VAT Regulations, and thus left open the issue of whether the goods to be processed or treated must be foreign to the taxable person in question.
2. The Previous Rule
Neither the wording of the law nor the language of the German VAT Regulations clearly indicates whether a work supply requires the treatment or processing of goods that are foreign to the provider of the work. In VAT practice, therefore, assembly supplies (Montagelieferungen) were often treated as work supplies (Werklieferungen).
Assembly supplies are deemed to exist if the taxable person processed goods belonging to the taxable person. For example, there is an assembly supply if the taxable person deliveres a machine and assembles it on the customer's premises, and the customer provides no goods for this purpose.
If the taxable person was based abroad, the rules for work supplies and thus the reverse charge procedure were applied here (sec. 13b (2) (1) in conjunction with sec. (5) sentence 1 of the German VAT Act). The business did not have to charge VAT or register for VAT in Germany.
3. New Finance Ministry letter
In a letter dated 1.10.2020, the Federal Ministry of Finance added language to sec. 3.8 (1) sentence 1 of the German VAT Regulations. The letter refers to the Federal Tax Court ruling described above, and clarifies that a work supply is only deemed to exist if the provider of the work processes goods that do not belong to the provider.
This applies to all outstanding cases. However, the letter contains a non-objection clause. Under that clause, the tax authorities will not raise any objection if, for VAT incurred before 1.1.2021, supplies are treated in accordance with the previous regulations. This also applies for purposes of input VAT deduction and to the cases described in sec. 13b of the German VAT Regulations (reverse charge).
4. Implications for practice
The Federal Finance Ministry letter is of particular importance for foreign companies that provide assembly supplies in Germany. The distinction between work supplies and assembly supplies is irrelevant for purposes of determining the place of performance; in both cases the place of supply is Germany. However, the VAT liability is transferred to the recipient of the supply (reverse charge) only in the case of work supplies. Therefore, in the future, foreign businesses that carry out assembly supplies in Germany must register for VAT in Germany and charge German VAT on their services. This applies to sales as of 1.1.2021. Given the non-objection rule, no correction for the past is necessary.
The distinction between work supplies and assembly supplies is irrelevant for deemed intra-Community supplies. Under the VAT Directive, the cross-border transport of goods does not constitute a deemed intra-Community supply in the case of work supplies or assembly supplies. Article 17(2)(b) of the VAT Directive covers both work supplies and assembly supplies, and an intra-Community acquisition need not be declared in either case.
Under certain circumstances, the Finance Ministry letter may result in windfall profits for business customers (without full input VAT deduction right). If the assessment of the customer’s VAT is not yet statute-barred, but the assessment of the customer’s supplier is, the customer could reverse its VAT liability on the basis of the letter and Federal Tax Court ruling described above. Because of the limitation period for assessment of VAT, it would not be possible to change the assessment of the supplier’s VAT. In this respect, affected businesses should keep corresponding cases open and examine the extent to which they can benefit from the new administrative opinion.