If a taxable person has been granted the privilege of VAT only becoming chargeable at the time the payment is received, he should check whether the approval, granted to him by the tax authorities in this regard, contains a term stating that the approval terminates automatically.
The tax authorities have decided on the controversial topic of VAT treatment of supervisory board remuneration by means of various decrees. A supervisory board can only avoid VAT in exceptional cases. Therefore, there is a need to be particularly prudent, taking all steps necessary to meet the requirements of the tax authorities.
The Federal Fiscal Court takes the position that the German statutory rule, pursuant to which only corporations can be controlled companies of a VAT group, is not in line with the VAT Directive. Also, the Federal Fiscal Court calls into question whether the requirement of the subordination of the controlled company under the controlling company is necessary. The ECJ will have to decide whether partnerships have to be included in VAT groups and whether VAT groups are possible between affiliated companies without being a subordinated controlled company. Companies should now already start taking steps in order to prevent detrimental effects or to take advantage of the decisions of the ECJ.
The Federal Fiscal Court has referred questions on the scope of input VAT deduction by holding companies and several questions regarding VAT groups to the European Court of Justice (ECJ). The decision on the input VAT deduction of holding companies is of particular relevance as the Federal Fiscal Court has taken the position that the input VAT deduction is possible only in a restricted extent. Holding companies should prepare for an approving verdict of the ECJ and take steps to secure the input VAT deduction. The questions on VAT groups will be dealt with in our next newsletter.
Many German companies ship products for processing to other EU Member States. After processing and transformation, some finished products are returned to their EU Member State of origin and some are shipped to another EU Member State for further processing. In practice, there is great uncertainty - also due to differing national regulations. The ECJ has now decided that a (non taxable) temporary transfer of goods is only given if the goods will be returned to the country of departure after processing. However, this is only half of the story.
Entrepreneurs are not obliged to pre-finance VAT over a period of years. The Federal Tax Court expressed its position regarding uncollectibility. Correction of VAT may potentially be taken into account whenever agreements regarding retentions are made on the basis of which entrepreneurs are not fully entitled to the payment of remuneration at the time of the supply is carried out (temporary uncollectibility).
According to a decision of the Federal Court of Justice, the right to deduct VAT arises at the time the taxable supply is carried out. As a consequence, the right to deduct VAT does not cease to apply retroactively if the taxable person purchases goods “in good faith“ and only afterwards realizes that these transactions were part of a VAT fraud carousel. There is also no obligation to correct the submitted VAT returns in this case. The Federal Court of Justice’s decision increases legal certainty for taxable persons and consultants (decision of the Federal Court of Justice of 1 October 2013, 1 StR 312/13, see also decision of the Federal Court of Justice of 5 February 2013, 1 StR 422/13).
The tax authorities follow the Federal Fiscal Court’s jurisdiction by means of a circular of the Federal Ministry of Finance. Significant VAT refunds incl. interest, for wrongly paid past VAT, are in store for property developers.
Due to the clear and direct assignment of the input transactions, furthermore, the circular of the Federal Ministry of Finance has far-reaching consequences: Companies may now become liable for VAT when purchasing construction work although they have, to date, not fallen within the scope of sec. 13b of the German VAT Act.
A taxable person is only entitled to an input VAT deduction with regard to goods and services purchased for business purposes. In its notification dated 2 January 2014, the Federal Ministry of Finance stipulates the general allocation principles to the business. In particular, with regard to construction work, the allocation to the business has to be executed by 31 May of the following year. Otherwise, there is a risk that the input VAT cannot be deducted.
As usual, the end of the year sees many countries amending their VAT laws. This newsletter addresses the most relevant changes within the EU. The predominant issue is no longer changes in VAT rates but rather the fight against loss of tax revenue. It is not surprising that the scope of the reverse charge scheme will be further extended. Entrepreneurs doing business in the countries concerned may have to amend their EDP systems for the tax finding processes and the new reporting requirements.