The topic of supplies of construction works is one of the most complex areas of German VAT law. Particularly in light of the associated shift of VAT liability pursuant to Sec. 13b of the German VAT Act, many questions arise for taxable persons, property developers, and tradespeople. This article provides an overview of the VAT treatment of the supply of construction works, including the differences from the income tax withholding procedure for construction services (known as the construction withholding tax).

VAT classification of supplies of construction works in practice

The first step is to identify the type of service provided. Correct classification plays a key role in answering two important questions. First, the place of taxation must be determined. Supplies of construction works are generally either work deliveries or (work) services connected with immovable property. Therefore, the location of the immovable property is also the place of taxation for VAT purposes.

This raises the second question of who owes the VAT. In principle, according to Sec. 13a German VAT Act, the supplier is liable for the VAT. In certain circumstances, such as a supply of construction works provided to construction contractors or cross-border transactions (where the supplier is not established in Germany), however, the VAT liability is shifted to the recipient of the service in accordance with Sec. 13b German VAT Act (known as the reverse charge procedure).

Whether a service is subject to the reverse charge procedure for construction works depends largely on how the transaction is classified. In the case of complex services that include both material and labor components, it must always be determined which component is predominant from the perspective of the recipient of the service (Sec. 13b para. 4 German VAT Circular). If the activity is classified as a supply of construction work, the VAT liability is shifted to the recipient. If, on the other hand, the activity is predominantly for the supply of goods without any change in substance, the taxable person providing the service remains liable for VAT.

The classification is not based on the value of the materials or labor or on the civil law classification as a contract for work or a service, but on a qualitative assessment. The expectation of the recipient of the service is decisive. If they expect a supply of construction work, the entire transaction is also considered as such. This assessment is independent of how the contract is formally structured or how the invoice is itemized.

What is meant by construction works in terms of VAT?

Within the meaning of Sec. 13b para. 2 No. 4 German VAT Act, construction works are considered work deliveries or other (work) services in connection with immovable property that serve to construct, repair, maintain, alter, or remove a building.

The decisive factor is that these services constitute an intervention in the fabric of the immovable property (Sec. 13b.2 para 3 German VAT Circular). This intervention may take the form of construction, extension, improvement, maintenance, or removal. This also includes maintenance expenses and repair services.

Typical supplies of construction works include the installation of building components such as windows, doors, floor coverings, heating systems, elevators, and escalators. Furthermore, the supply of work or the installation of equipment or machinery, provided that these have a direct effect on the substance of the building, also constitute construction works. Earthworks, the erection of roofs and stairwells, and the installation of photovoltaic systems, provided that these are permanently connected to the property, are also considered construction works. Construction works also include artistic work or cleaning work, provided that it alters the substance of the building, and, for example, lighting systems if these are permanently installed (non-exhaustive list in Sec. 13b.2 (5) German VAT Circular).

Transactions that are not considered construction works within the meaning of VAT law include, for example, planning and supervision services provided by architects or engineers. Architectural services, structural calculations, construction supervision, tendering, and pure surveying work are therefore not considered construction works within the meaning of Sec. 13b of the German VAT Act (Sec. 13b.2 para 6 German VAT Circular). However, these services may still be taxable as services connected to immovable property  if they are provided for a specific piece of immovable property. Purely material supplies without assembly, scaffolding, or the temporary installation of containers are also not considered construction works. Cleaning services that do not involve any change to the surface and the rental of construction equipment without operating personnel are also excluded. The same applies to the pure provision of labor, even if the persons provided perform supplies of construction works. The supply of building materials without installation or the erection of office containers without structural work are also not construction services for VAT purposes (non-exhaustive list in section 13b.2 para. 7 German VAT Circular).

What is considered immovable property in terms of VAT?

In order for a transaction to be classified as a supply of construction works within the meaning of VAT law, it must have a sufficient connection to immovable property. In European VAT law, the term immovable property is explained in Art. 47 of the VAT Directive and Art. 13b of EU Regulation 282/20211. The term does not constitute an exception but rather represents a separate rule on the place of taxation. It should therefore be understood broadly rather than narrowly.

For VAT purposes, Art. 13b (a) to (d) EU Regulation 282/20211 defines immovable property as any distinct part of the surface of the earth on which ownership or possession can be established. In addition, buildings and structures permanently attached to the ground also fall under this term. Furthermore, movable property can also become part of immovable property. This is the case if they are connected to the building in such a way that the building could not be used without them. Alternatively, the initially movable objects may be so firmly connected to the immovable property that they cannot be removed without destroying them or the property. This includes, for example, machinery, equipment, or other objects, provided that they are permanently integrated into a building and cannot be removed without loss of substance.

VAT liability for construction works pursuant to Sec. 13b German VAT Act

In VAT, the principle applies that the taxable person providing the service is liable for the VAT on his supply (Sec. 13a German VAT Act). However, the reverse charge procedure is an important exception to this rule. In the case of construction works within the meaning of Sec. 13b German VAT Act, the VAT liability may be shifted from the taxable person providing the service to the recipient of the service. The transfer of the VAT liability from the supplier to the recipient occurs when certain conditions are met. According to Sec. 13b para. 2 No. 1 German VAT Act, the transaction must be a supply of construction works. Furthermore, the recipient must be a taxable person and itself provide supplies of construction works on a permanent basis. An entrepreneurial activity in this area is considered sustainable if more than ten percent of the total worldwide turnover consists of construction works. If these conditions are met, the VAT liability is shifted to the recipient of the service, regardless of whether they use it for a supply of construction works they have provided (Sec. 13b.3 para 1 sentence 1 German VAT Circular).

To prove that a taxable person is actually to be regarded as a provider of construction works for VAT purposes, a certificate with the designation USt 1 TG is issued by the tax office. This certificate is issued by the competent tax office upon application or ex officio. It is valid for a maximum of three years. Although the certificate provides important security for the parties involved, it is not mandatory for the shift of VAT liability. The legal requirements are the sole determining factor. If these are objectively met, the VAT liability is shifted to the recipient even if no certificate is presented. For reasons of legal protection, a taxable person is always considered a supplier of construction works if they are in possession of a USt 1 TG certificate. This also applies if they are clearly not a supplier of construction works and if they do not present the certificate to the provider of the construction works (Sec. 13b.3 para 5 sentence 1 German VAT Circular).

If the service provider is established abroad, the VAT liability in case of a work delivery or supply of services in relation to immovable property is shifted to the recipient of the service in accordance with Sec. 13b para 2 No. 1, para 5 sentence 1, para 7 sentence 1 or sentence 2 German VAT Act. According to Sec. 13b para 2 No. 4 sentence 2 German VAT Act, this provision takes precedence. In this case, the VAT liability is shifted even if the recipient of the service does not qualify as a supplier of construction works.

Why are property developers not considered supplier of construction works?

According to the current case law of the Federal Fiscal Court, property developers are not considered suppliers of construction works within the meaning of Sec. 13b German VAT Act (Sec. 13b.3 para 8 German VAT Circular). Property developers purchase land, have buildings constructed on it, and sell them as a supply of immovable property . Since they do not perform any supplies of construction works themselves, but rather supply immovable property, the reverse charge procedure does not apply to them. Subcontractors who provide supplies of construction works for property developers must therefore charge VAT. This is important in practice because there have been numerous cases of incorrect application of Sec. 13b German VAT Act in the past, particularly in cases where supply of construction works were mistakenly invoiced without VAT.

Correct invoicing for supplies of construction works

If construction works are supplied to another supplier of construction works and the requirements of Sec. 13b German VAT Act are met, the supplier providing the construction works may not show VAT on their invoice. Instead, they must indicate that the reverse charge procedure applies (invoice text: “Reverse charge” or “VAT liability shifted to the recipient of the service”). The recipient of the service becomes liable for the VAT and must pay the VAT to the tax office themselves.

A recipient of a service who purchases construction works under the reverse charge procedure is entitled to deduct input VAT if the service purchased is used for taxable output transactions. If, on the other hand, the supply of construction works is used for VAT-exempt transactions, such as the supply of immovable property  without the option of VAT, the input VAT deduction does not apply. The same applies if the service is used for private or non-business purposes.

In addition, the input VAT deduction is limited in the case of partial business use. If a piece of immovable property is used for both business and private purposes, the input VAT may only be claimed on a pro rata basis.

If, on the other hand, an invoice with VAT is issued incorrectly even though the reverse charge procedure applies, this results in what is known as an incorrect VAT statement in accordance with Section 14c  of the German VAT Act. In this case, the supplier owes the VAT shown on the invoice. The recipient of the service may not claim this as input VAT. This can lead to considerable financial disadvantages.

Simplification rules only apply if no VAT loss arises and taxation is correct. If, for example, the supplier and the recipient of a service have applied a shift of VAT liability for a transaction carried out for the recipient in accordance with Sec. 13b para. 2 No. 4 German VAT Act, even though this was not applicable according to the type of transaction and objective criteria, the recipient is still considered the person liable for VAT (Sec. 13b para. 5 sentence 8 German VAT Act). The prerequisite is that this treatment does not result in any VAT losses. This is deemed to be fulfilled if the recipient of the construction works pays VAT on the correct amount of the transaction. There is no simplification rule in the event that the supplier charges VAT even though this is not correct. The supplier must correct their invoice. The recipient of the service is not entitled to deduct VAT from this invoice.

Construction withholding tax in accordance with Section 48 German Income Tax Act

In addition to VAT classification, a supply of construction works may also be subject to construction withholding tax in accordance with Section 48ff. German Income Tax Act. This is the case if a supply of construction works is provided domestically to a taxable person or a legal entity under public law. 

In such cases, the recipient of the construction works must withhold 15 percent of the agreed gross consideration and pay it to the tax office. This tax deduction can be avoided if the service provider presents a valid exemption certificate or certain turnover limits are not exceeded.

In VAT law, the immovable property status   is a prerequisite for the existence of a supply of construction works. In income tax law, on the other hand, a connection to the ground, for example through its own weight, is sufficient for the item to be considered immovable property. While the VAT regulations are harmonized under EU law, the construction withholding tax is a purely German national provision. This means that a supply of construction works can be considered from income tax perspective as given even if it is not from VAT perspective.

Conclusion: Construction services subject to VAT require clear structures

The VAT treatment of supplies of construction works under Sec. 13b of the German VAT Act is a highly complex issue with far-reaching consequences. Correct handling of VAT liability requires in-depth knowledge of the definition of supply of construction works, the connection to immovable property, the distinction from other supplies of services, and the status of the recipient of the service. Errors in the application of the reverse charge procedure can lead to VAT claims, interest charges, and denial of input VAT deduction.

Particularly in complex subcontractor structures, a careful examination of each individual transaction is necessary. Close coordination in the assessment of individual transactions is recommended for all parties involved, whether clients, contractors, or tax advisors. The only way to ensure legal certainty when dealing with supplies of construction works under VAT law is through careful examination, correct documentation and, where necessary, obtaining the USt 1 TG certificate.