In effect from 1 July 2020 until the end of 2020, the German legislator has decided to reduce the value added tax ("VAT") rate from 19% to 16% and from 7% to 5%; respectively.

Such reduction came at very short notice and is likely to cause some difficulties of implementation as well as raise questions of doubt. In a circular issued by the Federal Ministry of Finance, dated 30 June 2020 (GZ III C 2 - S 7030/20/10009), the fiscal authorities addressed various related topics. The following issues will be relevant for the real estate sector:

Long-term Services

In case of services that extend over a longer period of time (e.g., construction services or lease agreements), the service is generally deemed to have been rendered at the end of the performance period and the tax rate relevant at the end of this period shall be applied accordingly Thus, if a construction work was started in April 2020 and completed in August 2020, the tax rate applicable will be that in force at the time the service is completed (i.e., 16%). Where appropriate, it may make sense (if and to the extent practicable) to agree on partial services whose completion falls within the period in which the lower tax rate applies.

Existing lease agreements, which are regarded as services which extend over a longer period of time in the aforementioned sense, are to be checked to see whether a net rent (should regularly be the case) or a gross rent (e.g., in the case of short-term residential lease agreements) has been agreed. If the lease agreement contains a gross rent provision, the reduction of the VAT rate leads to an increase in the net rent. In case of an agreed net rent plus VAT, only the amount to be paid by the tenant is adjusted. Permanent lease invoices have to be adjusted accordingly.

Down Payments, Partial Payments or Advance Payments

In the case of down payments, partial payments or advance payments, in the first instance, the tax rate is relevant which is valid at the time of the receipt of the respective invoice. The final invoice issued after the end of the performance period will then credit the amounts received in advance and the respective VAT will have to be corrected, if applicable. Thus, in total, the VAT rate applicable at the time of performance (end of the performance period) is applied.

Incoming Invoices

With regard to incoming invoices for deliveries or services received, it must be checked whether the correct VAT amount was applied in accordance with the actual date of performance. If, for example, 19% VAT is charged in an invoice for services rendered in September 2020, the right to input VAT deduction is limited to 16%. However, the liable taxpayer resulting from the invoice is also liable for any VAT shown in excess until the invoice is corrected.

Effects on Service Contracts

If and to what extent the change in VAT rates also results in price changes in the various (service) contracts concluded by the companies depends on the individual contractual arrangements.

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.