Sales Tax Consultancy

In accordance with section 1 sub-section 1 UStG [German Sales Tax Act], all services and deliveries which an entrepreneur within the country exports for a fee in the framework of his/her business activities (no. 1), the import of goods into the country (no. 2) and the so-called intra-community purchase for a fee (no. 5) are subject to sales tax.

In principle, the entrepreneur is the tax subject and the tax debtor of sales tax. Whosoever carries out a vocational or commercial activity independently is defined as an entrepreneur. This definition of entrepreneurs does not only include tradespeople or free-lancers but also and, in particular, (non-commercial) landlords and lessors.

According to section 18 sub-sections 1 and 2 German Sales Tax Act, entrepreneurs are required to submit sales tax advance returns to the fiscal administration by the 10th day after the end of the advance reporting period (quarter or month) and to pay the advance payment. In addition to the monthly or quarterly sales tax advance returns, the entrepreneur also has to submit an annual sales tax return to the fiscal office according to section 18 sub-section 3 UStG. The annual return summarises the individual sales tax advance returns in one annual return, with the amounts resulting from the advance returns being considered with regard to the annual tax debt.

Input tax deduction constitutes an essential component of the sales tax system in order to safeguard the neutrality of sales tax in the entrepreneurial sector. Basically, no entrepreneur is to be subjected to a financial burden within an entrepreneurial chain. Input tax deduction grants the entrepreneur the right to deduct sales tax paid on input services to another entrepreneur (supplier or service provider) from his/her sales tax liability for an output service. As a rule, the right to input tax deduction arises immediately at the time at which the service is received (so-called immediate deduction). However, possession of a proper invoice within the meaning of section 14 sub-section 4 UStG comprising, among other information, the particulars regarding the service recipient and the service provider as well as the tax number and sales tax ID number of the service provider forms a decisive formal precondition for the assertion of input tax deduction. The right to input tax deduction can (only) be asserted for the taxation period during which both the material and the formal preconditions are fulfilled. The entrepreneur has the burden of proof and the burden of adducing evidence that the preconditions for input tax deduction have been fulfilled with reference to the tax office.

However, the sales tax law also establishes numerous cases in which the right to deduct input tax is excluded in spite of the fact that the material and formal preconditions are excluded. For example, input tax deduction is excluded, in particular, in cases in which the input service is to be used for tax-free output sales of the entrepreneur. In addition, e.g., certain input tax amounts cannot be deducted which apply to expenses which are subject to a disallowance of the deduction of operating expenses with regard to earnings taxes.

In the field of corporate groups, the sales tax entity is of particular importance. In this process, two legally independent companies are treated as one company for sales tax purposes. As a result, services within the so-called fiscal unit constitute so-called non-taxable internal turnover and, as a result, sales tax is not owed. According to the applicable law, a fiscal unit is created without formalities, i.e. an agreement between the parties involved or an application for approval by the competent tax office are not required.

The existence of such an entity is based on the precondition that, according to the overall impression of the situation, as a subsidiary company, a legal entity (e.g. a German limited liability company (GmbH)) is financially, commercially, and organisationally integrated into the company of the parent company. If these preconditions are fulfilled, the sales tax as well as the input tax claims of the subsidiary are recorded as those of the parent company. The parent company alone is the entrepreneur for the overall company consisting of its part of the company and the company of the subsidiary company. In this context, uniform recording serves the purpose of administrative simplification.

A tax group is interesting, in particular, if the companies within the group carry out services not subject to sales tax - which leads to the exclusion of input tax deduction and receipt services from other companies within the group structure. Otherwise, sales tax can lead to a real cost burden without a sales-tax entity.

The sales-tax entity and fulfilment of the preconditions regularly constitutes a central point of conflict in court proceedings, in particular, because jurisprudence is going in the direction of increasingly stringent requirements.

In this connection, a change in the case law of the Federal Fiscal Court in 2015 has practical relevance. According to this, a partnership (e.g. a GmbH & Co. KG) can be integrated into the parent company’s company even if, in addition to the parent company, the shareholders of the partnership are only entities financially integrated into the parent company’s company in accordance with section 2 sub-section 2 No. 2 German Sales Tax Act (UStG).

In the age of the intra-community movement of goods, it is, in particular, the place at which a service is performed which is of decisive importance for the purpose of sales taxation and the implementation of the principle of the country of destination. Section 3c UStG includes a complex provision on the determination of the location regarding inter-community mail-order transactions with private individuals.

Like any other entrepreneur, in the case of a delivery to another EU member state, the mail order entrepreneur as such is obliged to check whether the recipient is also an entrepreneur or a non-entrepreneur. In this process, deliveries to another entrepreneur are exempt from taxes as intra-community deliveries, while deliveries to a non-entrepreneur (e.g. a private person) might be subject to sales tax in the recipient country. In certain cases listed in more detail in section 3c UStG, the delivery has to be considered as having been executed in the EU member state in which the transport or shipment of the product ends. Another precondition for the application of the mail order rule is that the total amount of the fees which is attributable to the deliveries within the meaning of section 3c UStG exceeds the supplier’s material delivery threshold during the current calendar year or has exceeded the said threshold in the previous calendar year. If the mail order provision applies, the mail order entrepreneur carrying out the delivery has to report and pay sales tax in the recipient country.

The so-called provision regarding small entrepreneurs in section 19 UStG provides for a special provision as a result of which certain companies do not pay sales tax in spite of the taxability and tax liability of turnover generated. This privilege according to ECJ jurisdiction is intended to simplify administration leading to the establishment of more small businesses and an increase in their activities. Moreover, it is intended to strengthen their competitiveness and ensure an adequate proportion between the administrative effort involved in tax administration and the expected tax income (ECJ ruling of 26/10/2010/case number C-97/09). Entrepreneurs whose total sales plus the applicable tax did not exceed an amount of EUR 17,500 in the previous year and whose total sales will probably not exceed an amount of EUR 50,000 in the current year can benefit from this provision. According to the Federal Financial Court’s case law, in the first business year, the focus is on whether the sales threshold of EUR 17,500 is likely to be reached. The scope of application of the provision on small companies is limited to the respective member state, which means that companies based abroad are excluded from this provision with regard to sales generated in the country. On the other hand, companies both in the original country and in another member state can benefit from this provision if they are based there (constant presence, e.g., through offices, staff, and equipment).
As a result of the application of section 19 UStG, the respective entrepreneur may not indicate sales tax separately in his/her invoice and is not entitled to deduct input tax.

In this connection, reference has to be made to a current decision by the Federal Fiscal Court (reference no.: XI R 26/17), according to which the application of section 19 UStG is banned in the event of an abusive division of entrepreneurial activities with a view to the multiple use of the provision on small enterprises. In the case at issue, several companies provided accounting services of the same content towards a recipient of services not entitled to deduct input tax in order to use the provision on small entrepreneurs several times. The Federal Fiscal Court saw this approach as an inappropriate use of the provision which leads to it being disallowed as a result of a teleological reduction on the basis of an interpretation in line with an interpretation of the Directive on the common system of value added tax in line with EU legislation.

Turnover generated from the sale of a company as a whole are not subject to sales tax in accordance with section 1 sub-section 1a UStG. This is intended to simplify and facilitate the transfer of companies or parts of companies. As a result, the sale of a business as a whole applies if a company or an operation managed separately within the structure of a company is transferred as a whole for consideration or gratuitously. In the opinion of ECJ, the sale of a business as a whole comprises the transfer of business operations and independent parts of companies which form a company or a part of a company as a result of the summary of tangible or intangible assets and which can be used to continue independent business operations. In addition, the purchaser must intend to continue the operation of the business operation or part of such transferred rather than immediately unwinding the business operation concerned and selling the stock of goods, if applicable (ECJ dated 27/11/2003; case no. C-497/01).

In many cases, the applicability of the sale of a business as a whole is doubtful and, therefore, it is also an essential element of decisions by the Federal Fiscal Court and the European Court of Justice in numerous cases. If there are any doubts, we recommend specific agreements regarding the possible consequences to be made as early as in the company acquisition agreement.

In the event of the sale of a business as whole, the purchaser might be subject to the obligation to repay the input tax amounts in the context of a correction according to section 15a UStG. An input tax correction has to be carried out if the seller of the business has purchased movable items within the last five years or purchased real estate properties asserting input tax deduction during the last ten years and if this results in a change of use by the buyer having an adverse impact on sales tax. This is because, as a result of the sale, the buyer assumes the legal position of the seller which also involves the assumption of the five- or ten-year monitoring period of the tax office regarding a possible input tax correction.

The reverse charge procedure under section 13b UStG describes a special sales tax provision in which in certain cases (e.g. Construction services) the recipient of the service owes sales tax rather than the entrepreneur performing the service. As a result, in this procedure, the recipient of the service does not pay sales tax to the performing entrepreneur for the turnover generated. Instead, the recipient as such has to pay the tax to the tax office. However, at the same time, he/she can assert such tax as input tax which means that the sales tax liability and the right to deduct input tax coincide in the person of the recipient of the service. This concurrence of sales tax and input tax creates many opportunities in combatting sales tax fraud (e.g. in sales tax carousel transactions). This is why the scope of application of the reverse charge procedure is increasingly being expanded also internationally. 

The reverse charge is based on the precondition that the turnover generated is liable and subject to sales tax in the specific country. For this reason, tax-free services, such as e.g. services by small companies within the meaning of section 18 UStG, are not covered by it.

Since 01/01/2015, the place of performance for telecommunications, radio, and television services or of services rendered electronically for non-entrepreneurs has been the country in which the recipient of the service is based or has his/her permanent residence. Therefore, taxation also takes place there. To ensure that entrepreneurs offering the above-mentioned services in many member states do not register for sales tax in every one of these member states and hence have to comply with the relevant obligations to register and submit tax returns, the so-called mini-one-stop-shop provision was introduced to simplify matters. This enables entrepreneurs to centrally and electronically report services in other member states covered by the mini-one-stop-shop provision to the Federal Central Tax Office in a special tax return and to pay the tax resulting from this as one overall sum. However, the mini-one-stop-shop provision only applies to turnover in other member states in which the respective entrepreneur does not have a fixed establishment for the purposes of sales tax.

Sales tax advisers LHP Attorneys Tax Advisers Cologne