Effects of the planned reduction of VAT rates on the real estate industry
On 3 June 2020, the coalition committee of the German government adopted the economic stimulus package "Combating corona effects, securing prosperity, strengthening sustainability". On 12 June the German government adopted the government draft of the "Second Corona Tax Assistance Act". The law is expected to be passed by the Federal Parliament (Bundestag) and the Federal Council (Bundesrat) on 29 June.
Among other things, this draft law provides for the reduction of the value added tax rates (VAT) from 19 percent to 16 percent and from 7 percent to 5 percent for the period as of 1 July to 31 December 2020.
As a result of the short-term nature of the planned amendment to the law, businessmen are now forced to quickly prepare for this reduction in VAT. The Federal Ministry of Finance published the first draft of an application letter on 15 June and a second draft on 23 June in this respect. Following, we would like to update our previous information letters of 10 and 19 June 2020 and provide some basic information, especially for the real estate industry. We assume that the simplification rules set out in the second draft of the BMF letter will not be revoked upon its official publication.
Section 27 (1) German Value Added Tax Act (UStG) stipulates that, in the event of changes in tax rates, the VAT rate applicable at the time the service is performed shall be applied. Hence, if a service is performed by 30 June 2020, the tax rate of 19 percent (7 percent, respectively) shall be applied. For services performed as of 1 July 2020, value added tax is charged at 16 percent or 5 percent respectively. As of 1 January 2021 this is expected to be reversed again. This regulation also applies to the performance of partial services.
The invoice must state the time of performance of the service (section 14 (4) no. 6 UStG). If a service is provided for a period of time, the service is deemed to have been performed at the end of this period. If, for instance, performance of a service is started in June 2020 and is completed in July 2020, it is deemed to have been completed for VAT purposes in July. In this case, the tax rate of 16 percent (5 percent, respectively) would thus apply.
In the case of down payments, partial payments, anticipated payments or advances, the tax pursuant to section 13 (1) no. 1a sent. 4 UStG is incurred when the payment is received. According to section 27 (1) sent. 2 UStG, however, the tax rate to be applied is that which applies when the (partial) performance is actually carried out.
Thus, if an advance invoice is issued in June and the invoice amount is received in June, basically 19 percent and 7 percent respectively are still to be charged for the time being. However, there are no objections to calculating and paying 16 percent or 5 percent VAT provided that the (partial) service is not performed until July. Should partial invoices of 19 percent or 7 percent have already been issued and received, section 27 (1) sent. 3 UStG provides for a correction with the final invoice for the (partial) service in July.
In the second draft of the BMF letter, it is now clarified that the input tax deduction of 19 percent and 7 percent respectively on partial invoices issued and paid before July remains correspondingly possible if all other necessary conditions for the input tax deduction are fulfilled and the correction is made in the final invoice for this (partial) service, which will be carried out between July and December 2020.
The extent to which price changes in contracts result from the reduction and, subsequently, the increase in VAT rates depends on the individual contractual arrangement. This is not a question of value added tax law but of civil law. Section 29 UStG, unless otherwise agreed, provides in principle for a claim to compensation of the VAT increase/decrease in the amount of the VAT at least for long-term contracts, if the parties to the contract have concluded a contract no later than 4 months before a change in the VAT rate comes into force, i.e. in this case before 31 March 2020, taking into account a different VAT rate.
In addition to the legal implementation of the temporary changes in tax rates, the technical conversion of accounting, ERP and electronic cash register systems, for example, is of great importance. Changing these systems at such short notice and then resetting them again represents a particular challenge for companies.
3. General simplification rule in the 2nd draft of the BMF letter
Within the framework of the settlement of accounts between VAT-registered businesses, the second draft of the BMF letter provides for a simplification rule. According to this, for services which are rendered in July 2020 and which are still incorrectly invoiced at 19 percent and 7 percent respectively, no objections will be raised if no adjustment of VAT is made. In this case, the recipient of the service will also continue to be granted the input tax deduction - if otherwise correctly treated in the business chain. This, however, only represents a relief for all parties involved if the service recipient is entitled to full input tax deduction. But this is often not the case for real estate companies.
4. Questions of reporting in the advance VAT returns and annual VAT returns
Sales at 16 percent and 5 percent respectively are reported together in the respective lines for taxable turnover at other tax rates. Adjustments to the originally declared 19 percent and 7 percent sales are reported negatively in the respective lines for taxable sales at the tax rate of 19 percent and 7 percent. Adjustments to the input tax deduction must also be taken into account negatively in the respective lines of the tax returns.
5. Relevance for the real estate industry
In some areas, the changes in VAT rates have a particular impact on the real estate industry.
5.1 Real property lease agreements
Lease agreements relate to services that extend over a longer period of time. Hence they belong to the so-called permanent services which are considered to be performed when the agreed service period ends. Lease agreements usually provide for monthly installments which are considered to be paid at the end of each month.
In the case of leases that have opted for VAT pursuant to section 9 (2) UStG, the June rent shall be invoiced at 19% VAT. For the months July to December 2020, 16% VAT will be payable on the rent, and as of January 2020 19 percent VAT will be payable again.
It is recommended that the agreements be reviewed to see how the exercise of the option has been set out. The following wording, for instance, is frequently used:
a) Net rent plus statutory VAT, with the addition "currently 19 percent", if applicable
b) Net rent plus 19 percent VAT
c) Gross rent incl. VAT
With regard to the forthcoming change in VAT rates, the wording as set forth in a) should be no problem. The wording of b) and c) should be reviewed and adapted. With regard to possible claims for compensation in accordance with section 29 UStG, reference is made to the details provided in Part 2.
Insofar as lease agreements serve as invoices or permanent invoices - in each case with all necessary invoice components in accordance with section 14 (4) UStG - have been issued, these are to be reviewed from the performance period July 2020 and again from the performance period January 2021, and adjusted if necessary.
5.2 Statement of ancillary costs
The ancillary costs of the lease allocable to the lessee follow the main service of the lease as an ancillary service. If the option for value-added tax on sales/purchases for the lease-out is exercised, the ancillary costs are also invoiced subject to VAT. Usually, monthly advance payments for ancillary costs are agreed upon, followed by a statement of ancillary costs for the calendar year.
This statement of ancillary costs is not a final invoice for the calendar year, which as a whole is subject to VAT at 1 percent. Since a monthly rent payment is usually made for a partial service determined on a monthly basis and the ancillary costs as an ancillary service follow the respective partial service for VAT purposes, the annual ancillary cost statement results in 12 monthly partial statements, each of which is taxable at the VAT rate applicable for that month. For the year 2020, there will thus - presumably - be 6 partial invoices for January to June 2020 which are subject to a VAT rate of 19 percent and another 6 partial invoices for July to December 2020 which are subject to a VAT rate of 16 percent. To make a clear separation, a precise interim invoice would theoretically have to be drawn up for 30 June 2020, e.g. with corresponding determination of meter readings for electricity and water. It can only be hoped that the Federal Ministry of Finance will permit a pragmatic simplification here (e.g. a 50/50 split). The second draft of the BMF letter does not yet contain any regulations in this regard. For a lessee who is entitled to full input tax deduction from a lessor's invoice, there is neither an advantage nor a disadvantage if such a simplification rule is permitted.
5.3 Input tax deduction for partial invoices from suppliers
As a rule, suppliers invoice at the end of the calendar year and charge monthly discounts. These discounts were previously invoiced at 19 percent and 7 percent respectively. However, as the service is then deemed to have been performed by 31 December 2020, the tax rate of 16 percent and 5 percent applies. The adjustment of the total VAT can be made in the final account. The input tax deduction on the deductions of 19 percent and 7 percent remains possible.
The second draft of the letter of the Federal Ministry of Finance allows for shortened accounting periods in the period July 2020 - December 2020 so that service recipients (who are not entitled to full input tax deduction) can benefit from the lower VAT rate if the regular accounting period ends after 31 December 2020. It is not absolutely necessary to provide a meter reading here. To simplify matters, a breakdown by days can be made. Should, however, the meter reading be determined later than 3 months after the interim billing, weighting should be carried out to take account of differences in consumption. If there are definitely no such differences in consumption, weighting can then be dispensed with again. It is advisable that service recipients who are not or not fully entitled to deduct input tax exert an influence on the suppliers in this respect. Lessees who are not or not fully entitled to deduct input tax should clarify this with their lessor.
5.4 Construction work
Construction work is the delivery or performance of works or services that typically extends over a long period of time. For this reason, the billing of partial services and/or down payments, partial payments, anticipated payments or advances is often agreed and invoiced.
5.4.1 Partial performance of construction work
Partial performance is an economically distinct and separable part of a uniform performance for which the remuneration is agreed and invoiced separately. In the case of work deliveries that were accepted as partial performance before 1 July 2020 or work services that were completed as partial performance before 1 July 2020, the invoicing is then still 19 percent and 7 percent respectively.
It is recommended that existing contracts be reviewed with regard to agreed partial performances and the respective applicable VAT rate. Any adjustments must be made before the change in the VAT rate comes into force, i.e. in June 2020, or again in December 2020.
5.4.2 Down payments and advances
As already explained in Parts 2 and 5.4, the tax rate to be applied to down payments, partial payments, anticipated payments and advances is that which applies when the (partial) service is performed. The date of issue of the invoice is not relevant. For discounts on (partial) services which are carried out in July to December and which are invoiced and paid for by June, the invoicing remains possible at 19 percent or 7 percent respectively, if the adjustment is made when the service is performed. The input tax deduction also remains possible. However, discounts of 16 percent or 5 percent are already permitted in these cases too.
5.4.3 Review of pricing due to the change in VAT rates
Contractual regulations on VAT should also be reviewed in the case of long-term construction work (for possible compensation claims, see Part 2 above).
It is urgently recommended that all necessary preparations for the temporary reduction of VAT rates be made immediately within the company. Despite existing uncertainties, the expected remaining time until the scheduled change in the law comes into force is extremely short so that the implementation of all necessary changes in contracts and operational processes cannot be postponed. The second draft of the BMF letter now contains some simplification rules that can facilitate the conversion. Due to the complexity of the subject matter, there is nonetheless still a need for clarification on various practical issues.
BEITEN BURKHARDT will be pleased to assist you with all tax and civil law questions and will also support you in questions of technical implementation e.g. in accounting systems.