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

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.