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German Ministry of Finance changes rules for supplies of goods including installation

The German Federal Ministry of Finance amends the rules for supplies of goods including installation. In the future, foreign businesses that carry out assembly work, installation work or project work in Germany will in many cases no longer be able to use the reverse charge procedure. These businesses must now charge German VAT to their customers and register for VAT in Germany.

1. Back­ground

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).

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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.

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