BFH rules on VAT treatment of chain supplies

BFH deviates from position of the tax authorities

Germany’s Federal Tax Court (BFH) issued two decisions dated February 25, 2015 on the VAT treatment of a mobile supply in a cross-border chain supply transaction.

A chain supply is defined as the consecutive supply of goods between more than two entrepreneurs, but with only one actual physical movement of the goods. The particularities of chain transactions are especially important for foreign businesses. A distinctive feature of a chain supply is that only one supply within the chain is treated as a zero-rated supply (e.g. a mobile supply).

The current position of the German tax authorities is that the party that arranges the transport of the goods is determinative as to which of the supplies in a chain is zero-rated.

BFH decisions

In its recent decisions, the BFH sets out different criteria from the determinative criterion considered by the tax authorities. The BFH acknowledges that a mobile supply must be evaluated in relation to the circumstances of each particular case, but the main criterion is the point in time at which the final customer receives authority to dispose of the relevant goods. The following scenarios are possible:

• If the final recipient of the goods receives authority to dispose of the goods in Germany at the beginning of the transport (before the goods leave the country of origin), the final supply should be regarded as a mobile supply and, thus, the VAT-exempt supply.
• If the final recipient of the goods receives authority to dispose of the goods after the goods have been transferred abroad, the first supply should be regarded as a mobile supply, and, thus, the VAT-exempt supply.
• If it is not clearly identifiable when the authority to dispose of the goods is transferred, the presumption, in general, should be that the first supply is the mobile supply that is VAT exempt.

Perhaps the conditions the German tax authorities use to evaluate the VAT treatment of mobile supplies will change in the future. However, the existing regulation is still applicable until the German tax administration’s position changes. Nevertheless, it is recommended that companies include clear agreements in the underlying contracts regarding the point in time at which the authority to dispose of the goods changes.