More guidance on VAT reverse charge for land-related construction services

New rules respond to a BFH decision on the scope of the VAT reverse charge for land-related construction and industrial cleaning services and provides a legal basis for simplified administrative rules.

The government has issued new legislation and administrative guidance that revise the VAT reverse charge rules that apply for land-related construction services and industrial cleaning services.

In a decision issued on 22 August 2013 the Federal Tax Court (BFH) limited the scope of the reverse charge for land-related construction services. The BFH rejected several administrative guidelines that applied at the time (in particular, regarding the qualification of businesses for the scheme) on the basis that they violated the principle of legal certainty, and it held that the reverse charge applies only for a recipient of land-related construction services that is using the services received to carry out its own land-related construction services.

The BFH decision, and its implementation in the German VAT application guidelines, led to confusion in the construction industry.

As a result, the German parliament amended the relevant section of the VAT Act in July 2014 to state that the reverse charge applies to land-related construction services provided to recipients that also carry out land-related construction services, irrespective of whether the services received actually are used by the recipient to carry out land-related construction services. The VAT Act now states that a service recipient will be considered to carry out land-related construction services if it has a valid certificate issued by the German tax authorities. A similar provision was implemented in respect of industrial cleaning services. The new provisions came into force with effect from 1 October 2014.

In a circular dated 26 September 2014, the Federal Ministry of Finance (BMF) implemented the new legislation in the German VAT application guidance. It specified several conditions for the required certificate and the supplies concerned, and clarified the rules that applied during the interim period before the new legislation became effective. In particular, the guidance provides the following information:

• Supplies of construction materials and supplies falling within the scope of the land transfer tax will not be considered land-related construction services. In the latter case, the guidance specifically excludes the development of property that will be the subject of a land transfer from the application of the rules. Consequently, property developers may apply the reverse charge mechanism only if they also carry out other construction services.
• Similar to the guidance in place prior to the BFH decision, a company will be considered to carry out land-related construction services if at least 10% of its worldwide turnover relates to land-related construction services. A similar 10% threshold applies for a company to be considered to carry out industrial cleaning services.
• In respect of a VAT group, the 10% threshold will be calculated only in respect of the part of the group that requires the application of the reverse charge.
• To apply the reverse charge, a company must hold a certificate issued by the competent tax office that confirms that the company carries out land-related construction services or industrial cleaning services. The certificate is valid for three years.

Consequently, companies that apply the reverse charge should make sure to be in possession of the required certificate before applying the reverse charge.