Construction Withholding Tax and Exemption Certificates for Construction Services

The Act to Combat Illegal Activities in the Construction Industry (e.g. undeclared work) introduced a tax withholding mechanism to secure tax claims on construction services. The key principles of this tax and the points to observe are set out below.

Who is obliged to withhold the tax?

Construction withholding tax must be remitted both by legal entities under public law and by businesses within the meaning of § 2 UStG where a construction service has been rendered to them within Germany. However, the withholding only applies if the service is received within the scope of the business. A business within the meaning of the UStG comprises all enterprises of a taxpayer that are operated commercially or in a freelance capacity — including those that do not remit VAT (small businesses under § 19 UStG) or that generate only tax-exempt turnover (§ 4 UStG).

Which services are subject to the withholding?

Under § 48 Abs. 1 EStG, all services relating to the construction, repair, maintenance, alteration and removal of structures are subject to this withholding. It is also important to note that ancillary services which do not themselves constitute construction services but which can be subordinated to such services are likewise subject to the withholding. The guiding principle applies: ancillary services always share the fate of the principal service. The term "structure" is to be interpreted broadly, so that all installations connected to the ground (e.g. tunnels) are covered. Construction services within the meaning of § 48 Abs. 1 EStG do not include pure planning services (structural engineers, architects, etc.), maintenance work on structures or parts of structures, or cleaning work, provided these cannot be subordinated to a construction service.

Thresholds — withholding and exemption certificate

The recipient (principal) may refrain from withholding tax if the consideration payable to the provider (contractor) does not exceed EUR 5,000 in the current calendar year. If the recipient renders exclusively VAT-exempt services in connection with the letting and leasing of property (§ 4 Nr. 12 UStG), the threshold rises to EUR 15,000 per calendar year. If these thresholds are exceeded, withholding may nonetheless be omitted if the provider can present a valid exemption certificate. If no such certificate is available, remittance of the construction withholding tax can often also be avoided by deferring the recipient's payment to the following calendar year. This may allow the thresholds to be maintained.

Amount of the withholding

The recipient must withhold 15% of the consideration and remit it to the tax office. The consideration comprises both the fee for the service rendered and the VAT attributable to it.

Crediting of the withheld amount

The construction withholding tax remitted by the recipient is credited against the tax payable by the provider. The following order of priority applies:

1. The construction withholding tax is first credited against the wage tax payable.
2. Crediting against prepayments of income tax and corporate income tax then follows.
3. Finally, crediting against any final assessment of income tax or corporate income tax may occur.

If a residual amount remains that cannot be credited in accordance with § 226 AO, this amount is refunded to the provider.

Exemption certificate has expired

As a rule, an exemption certificate issued by the tax office expires three years after the date of issue. To avoid difficulties in this respect, the entrepreneur should take action several months before expiry and apply for a follow-up certificate at the competent tax office. If an entrepreneur fails to do so and the exemption certificate has already expired, a follow-up certificate should nonetheless be applied for at the tax office without delay. In addition, payments (consideration) falling due in the interim should be deferred until the new certificate is available, since only once a valid exemption certificate exists may the withholding be omitted.

Practical tip: Verify the validity of the exemption certificate

To verify the validity of the exemption certificate, the recipient can do so electronically via the Federal Central Tax Office (Bundeszentralamt für Steuern) or contact the provider's tax office by phone to have the existence of a valid exemption certificate confirmed.

No withholding by the recipient If the recipient fails to withhold and remit the tax due, a late-filing surcharge may be imposed. This amounts to 0.25% of the tax to be remitted for each month of delay, but at least EUR 10. In the event of further delay, the competent tax office may also levy late-payment surcharges. As a general rule, the construction withholding tax must be remitted by the 10th day of the month following the payment of consideration.