On 12 June 2020, the German Government agreed on major measures of an economic stimulus package to overcome the corona pandemic. One key item is the temporary reduction of the VAT rates in the second half of 2020.
Both the German House of Representatives (Bundestag) and the German Federal Council (Bundesrat) approved the 2nd Corona tax aid package on 29 June 2020. The law was announced in the German Federal Gazette (Bundesgesetzblatt) on 30 June 2020. It comes into force on 1 July 2020.
The standard VAT rate will be reduced from 19 % to 16 % and the reduced VAT rate from 7 % to 5 % between 1 July 2020 to 31 December 2020.
On June 30, the German Federal Ministry of Finance published the final accompanying circular.
In the following we have highlighted some of the key issues based on the final circular.
The new VAT rates of 16 % and 5 % will be applicable for supplies of goods, services and intra-community acquisitions carried out between 1 July 2020 and 31 December 2020. It is therefore necessary to determine when the respective supply was carried out to apply the correct VAT rate.
Under the German VAT Act the following general rules apply:
Supplies of goods are carried out when the recipient of the goods receives the power of disposal. If the goods are transported or dispatched the supply is deemed to be carried out at the start of the transportation or dispatch.
Supplies of services are carried out when they are completed. In the case of time-limited permanent services, the services are carried out when a service period is completed (e.g. monthly rent), provided that there are no partial services.
An intra-community acquisition is carried out when an invoice is issued, at the latest at the end of the month following the acquisition.
As mentioned above, a supply of services can also be considered as having been carried out when a partial service was completed. For the treatment as a partial service the following conditions must be met:
On the one hand, it needs to be an economically reasonable separable service. On the other hand, the rendering of the individual partial service needs to be agreed upon and the partial service must be accepted and invoiced separately.
The change of the VAT rates will also have an impact on supplies rendered within the scope of long-term commitments.
Such permanent supplies may be supplies of goods (e.g. of building materials in several loads) or supplies of services (rental, maintenance, leasing). In both cases the relevant date of taxation depends on the date when the supply is performed.
From a VAT perspective, a supply of service is carried out on the day on which the service period ends (please see section 13.1 para. 3 of the German VAT guidelines). In the case of recurring supplies of goods, the date of each single supply is relevant.
In the case of permanent supplies of services, the "old VAT rate" is generally applicable for services that are carried out until the end of June 2020. The reduced VAT rate (16 % and 5 %) is applicable for services carried out from July 2020 onwards. It should be noted that this applies even if several individual services provided over a certain period, are included in one combined invoice.
Several months of rent for an office space are invoiced together. The invoice for the months of June, July and August 2020 needs to be as follows: The month of June needs to be charged with the old VAT rate (19 %), the months of July and August with the new VAT rate (16 %). Otherwise it can be regarded as an incorrect invoice (Sec, 14c German VAT Act) for which the relating VAT is legally owed by the issuer of the invoice (please see non-objection rule under point 6. below).
According to the final accompanying circular in the case of contracts for long-term commitments (which can be considered as invoices), it is sufficient to adjust the required information on remuneration and VAT rate for the period from 1 July 2020 to 31 December 2020 with supplementary documents.
In many industries, especially the construction industry, advance payments for supplies to be provided in the future are common. Depending on the time of supply, there may be the need to adjust the invoicing process and to consider some specifics when submitting the preliminary VAT returns.
If advance payments for supplies carried out after 30 June 2020 are received before 1 July 2020, the reduced VAT rate of 16 % or 5 % is applicable. Consequently, the reduced VAT rate must be included on the invoice. According to the final circular of the German Ministry of Finance, a correction for invoices issued with the old VAT rates is not necessary if a final invoice for all supplies includes the reduced VAT rates of 16 % or 5 % (simplification rule).
If advance payments for supplies carried out after 30 June 2020 have already been taxed at 19 % or 7 %, a correction must made in the preliminary VAT returns for the period of the execution of these supplies in box 81 or 86 by declaring a negative tax base.
Vice versa, the "old" VAT rates of 19% or 7% is applicable for payments received after 30 June 2020 for supplies provided before 1 July 2020.
More details can be found in the respective final circular of the German Ministry of Finance.
Work and material supplies (using the German term “Werklieferungen” und “Werkleistungen”) are generally subject to the reduced VAT rates of 16 % and 5 % for contracts concluded or executed between 1 July 2020 and 31 December 2020. An exception only applies if the work and material supplies are economically separable and carried out as partial supplies. A partial supply carried out before 1 July 2020 exists if:
If a partial supply meets the above criteria, the old VAT rate is applicable.
In the case of vouchers, it is necessary to distinguish between a single-purpose and a multi-purpose voucher to determine the respective VAT rate.
For a single-purpose voucher the place of supply of the goods or services to which the voucher relates, and the relating VAT liability must be determined at the time the voucher is issued (sec. 3 para. 14, first sentence of the German VAT Act).
For single-purpose vouchers the circumstances at the time of issuance are decisive for taxation. Consequently, the new VAT rates will be applicable to single-purpose vouchers issued from 1 July 2020. If an additional payment is required when redeeming single-purpose vouchers the VAT rate applicable at the time of payment is to be applied to the additional payment (in the second half of 2020 this means 16% and 5% respectively).
In the case of a multi-purpose voucher not all necessary details for the determination of the respective VAT treatment are available at the time of the issuance of the voucher. In contrast to the single-purpose voucher a multi-purpose voucher is subject to VAT at the time when the voucher is redeemed and not when it is issued.
Therefore, in the case of multi-purpose vouchers, the new rates will be applicable if they are redeemed between 1 July 2020 and 31 December 2020.
If a supplier issued an invoice showing the old VAT rate of 19 % or 7 % for supplies or services carried out after 30 June 2020 and before 1 August 2020 and has paid the respective VAT amount to the tax office, for reasons of simplification no objections will be raised if the entrepreneur does not correct the respective invoice. In principle this would be an incorrect VAT reporting according to Sec. 14c German VAT Act.
Correspondingly, the Input-VAT is completely deductible by the recipient of the supply without correcting the invoice.
The final the circular issued by the German Ministry of Finance contains a detailed description of additional cases. This includes the change of tax base amounts, the refund of deposits, the granting of annual incentives, annual refunds, and many more.
Due to the tight change of VAT rates in Germany we urgently advise to review the following measures:
For further information please do not hesitate to contact your usual RSM contact partner or Mr. Tim Zumbach.