Clarifications / specific questions on services
Which tax rate applies? What is the general rule?
Time of supply
Note: The forms (VAT pre-registration and VAT return) will not be amended. Turnover subject to the reduced rates is to be reported in the line "taxable turnover at other tax rates" (line 28 of the 2020 form), which actually still relates to turnover from prior years at the VAT rates applicable at that time.
Overview 1 – Amount of tax
Special case 1 – affects almost every business:
Continuing contracts / long-term contracts / annual passes / subscriptions
Continuing obligations, long-term contracts (e.g. lease agreements)
Continuing services in the form of other services may exist, for example, in connection with rentals, leasing, maintenance, monitoring, and ongoing financial and payroll accounting. As a rule, these are deemed performed on the day on which the agreed service period ends, i.e. at the end of a month in the case of rent.
Continuing services performed before 01.07.2020 are therefore subject to 19% or 7% VAT, while those performed later are subject to 16% or 5% VAT (limited until 31.12.2020).
>> Action required for such contracts
Contracts for continuing services that qualify as an invoice (i.e. where the lease agreement states an invoice number, the VAT identification number and all other information required for an invoice) must be adapted to the amended VAT rate.
It should be sufficient to add an addendum to the contract referring to the amended VAT rate and to recalculate the rent accordingly.
For an adjustment effective January 2021, it is advisable to include a contractual provision in contracts now being concluded. Since the increase is already known, there is generally no interest that needs protection under § 29 UStG.
Note: civil-law claim for adjustment of contracts that are more than 4 months old as of 01.07.2020 (when the new legal situation takes effect)
Pursuant to § 29 UStG, in the event of a change in tax rates, one contracting party may demand from the other an appropriate compensation for the additional or reduced VAT burden if it performs a service after 30.06.2020.
However, one of the conditions for such compensation is that the service is based on a contract concluded before 01.03.2020.
Note: The compensation claim only applies if the parties have not agreed otherwise in a contract (which may also be concluded orally).
If, for example, a fixed-price agreement is in place, an appropriate compensation is excluded (§ 29 Abs. 1 Satz 2 UStG)!
Example of compensation for the lower VAT burden
A carpentry business concluded a contract on 12.02.2020 (alternatively: 12.03.2020) for the installation of windows at a price of EUR 100,000 (no fixed-price agreement!). No contractual agreement was made regarding VAT. The installation of the windows was completed on 12.07.2020.
The entire service is therefore subject to the standard rate of 16%, and in the basic scenario (12.02.2020) the recipient may demand compensation for the lower VAT burden, since the contract was concluded more than 4 months before the change took effect. In the alternative (12.03.2020), no compensation can be demanded.
Annual passes (season tickets / subscriptions / gym membership fees)
Annual passes are, according to the prevailing view, advance payments for a single uniform service. Upon payment at the beginning of the service period, VAT arises due to receipt of payment; however, the service is only performed at the end of the term. The applicable VAT is therefore determined on the basis of the legal provisions in force at the end of the respective service period.
Since subscriptions or season tickets cannot be split into monthly partial services, they constitute a single uniform service that is only deemed performed at the end of the term, and the tax rate then in force is decisive.
For the gym membership paid in February 2020, this means: at the end of January 2021 the service is deemed performed, and at that point the higher (or original) VAT rate of 19% applies again.
Special case 2: Difference between advance payments and partial services
Important distinction:
Partial services must not be confused with advance payments!
Advance payments: The applicable rate is the one in force at the end of the performance of the service – for all advance payments! Therefore, in the case of advance payments already made before 01.07.2020 but where the service is only performed in the period from 01.07. to 31.12.2020, the reduced tax rate (16%) is to be applied "retroactively".
Performance of the service = acceptance of the construction work
Practical note / tip: What needs to be done (How do I issue the final invoice)?
The advance invoices already issued do not need to be corrected; rather, the VAT is rectified in the final invoice.
Example 1: Advance payment with a correct final invoice
Construction work performed from 08.06. to 29.06.2020,
total EUR 20,000 net
Acceptance of the construction work on: 03.07.2020
Final invoice issued: 04.08.2020
Applicable VAT rate for the entire invoice:
16% (date of acceptance of construction work is decisive)
Advance invoice issued on: 25.05.2020 in the amount of 50% of the invoice total, EUR 10,000 net
plus 19% VAT = EUR 1,900, i.e. a total of EUR 11,900.
Final invoice:
EUR 20,000 net in total plus 16% VAT = EUR 3,200:
EUR 23,200 gross
Less advance payment of 25.05.2020:
EUR 11,900 gross
Remaining payment:
EUR 11,300 gross
Example 2: Advance payment with a correct final invoice
Construction work performed from 01.02.2020 to 30.06.2020,
fixed price EUR 30,000 net
Acceptance of the construction work on: 15.07.2020
Final invoice issued: 28.07.2020
Applicable VAT rate for the entire invoice:
16% (date of acceptance of construction work is decisive)
Advance invoice issued on: 17.01.2020 in the amount of EUR 10,000 net plus 19% VAT = EUR 1,900, i.e. a total of EUR 11,900.
Final invoice:
Fixed price EUR 30,000 net in total plus 16% VAT = EUR 4,800: EUR 30,000
VAT, 16%: EUR 4,800
Amount payable:
Less net advance payment of 17.01.2020: -EUR 10,000
Less VAT on advance payment: -EUR 1,900
Final payment: EUR 22,900
>> Caution with construction services – partial services
Partial services only exist if they are economically meaningful and clearly delineable services, if there is an agreement on performance in the form of partial services, and if the partial services are separately accepted and invoiced.
For such partial services, the VAT rate at the time the partial service is completed always applies, i.e. upon acceptance of the individual service (unlike with advance payments, where the date of acceptance of the entire completed work applies).
>> Note on cash-basis taxation
(= where the business generally accounts for VAT at the time payment is received) – the same principles regarding the time of supply apply to partial consideration and advance payments. In practice, this means: if consideration or partial consideration is received for services or partial services that the business performed before 01.07.2020, the VAT rate applicable up to 30.06.2020 (19% or 7%) is to be applied.
_Overview 2 – (Partial) services / advance payment_s
Practical note / tip – What needs to be done?
Note: For tax reasons, the (private) building owner will likely want acceptance of the construction work to occur by 31.12.2020 – or, for projects where acceptance was scheduled by 30.06.2020, will want to postpone acceptance until after 01.07.2020, since the reduced VAT rate of 16% then applies.
At a seminar, we were informed of the following option (although no one yet knows whether the tax office will actually accept this):
For construction works that will only be carried out after 31.12.2020: issue a voucher (a so-called "single-purpose voucher", where the place and tax rate are fixed) to the customer for a construction work that will be carried out after 31.12.2020.
Special case 3: Vouchers – difference between single-purpose and multi-purpose vouchers
What happens to vouchers issued before 01.07.2020?
Overview 3 – Vouchers
Practical notes / tips – What needs to be done?
For single-purpose vouchers issued before 01.07.2020, restaurants, retailers, etc. – i.e. all affected parties – should "reverse" these vouchers, i.e. have the customer return the voucher and refund the cash amount. This reverses the original supply.
What exactly should this look like in practice?
Example: A customer comes in and wants to dine at the restaurant or buy a piece of clothing at your shop. Payment is to be made with the voucher. You take back the voucher, refund the customer the cash, and the customer then uses that cash to pay for the meal or the clothing. The POS system must of course be reprogrammed accordingly – please contact your POS provider for this.
Selling vouchers in the second half of the year "saves" the lower tax rate
An example: A customer orders a new car in July 2020 in order to secure the favorable promotional price with 16% VAT. The expected delivery date is 17.12.2020.
However, on 30.11.2020 the dealer must inform the customer that delivery is delayed and the car can only be delivered in January 2021. Of course, this would mean that the VAT rate applicable at the time of delivery would apply – which, based on current knowledge, would again be 19% VAT, making it more expensive for the private consumer.
How could this problem be resolved?
By having the dealer issue the customer a voucher (by 31.12.2020) for a configured vehicle (= single-purpose voucher, i.e. place and tax rate are fixed). Based on current knowledge, this would mean that only 16% VAT would be payable.
Special case 4: Annual bonuses
For the sake of simplicity, an annual rebate for the entire calendar year 2020 may be treated as 50% (January to June) at 19% or 7% VAT and 50% (July to December) at 16% or 5% VAT, regardless of when the underlying turnover was actually generated.
It is also not objectionable if the business refrains from splitting the turnover and applies the standard rate of 19% to all of it without exception.
Special case 5: Relief regarding price labelling
In order to avoid bureaucratic effort (which in our view already arises to an unsustainable extent), the legislative explanatory memorandum states that prices do not necessarily have to be relabelled. In its letter dated 10.06.2020, the BMWi states that it will not be objectionable if the reduction in the tax rate is treated as a so-called "flat-rate discount".
>> Note for businesses and the change in the amount of VAT
For businesses, VAT is generally a pass-through item, since they pass it on, and the changes from business to business therefore do not result in a lower price. However, you should make absolutely sure that you issue your own invoices with the correct VAT, and that any invoice you receive shows the correct VAT rate.
Special case 6: increased risk in the event of an incorrect VAT statement on invoices
If the wrong VAT amount is stated on invoices, this constitutes an unjustifiably stated amount. This amount must still be paid to the tax office – however, the recipient of the service is not allowed to deduct this amount in full as input VAT. This fundamentally does not change as a result of the temporary reduction of the VAT rates.
It is therefore essential to verify the reduction of the tax rate when invoicing supplies and other services. If this is not done and only the payments are adjusted to the planned legal situation, an incorrect – because excessive – tax statement may result. The supplier must remit even an incorrectly stated tax, but the recipient is to that extent not entitled to deduct input VAT. Please note that a subsequent correction is at the very least cumbersome and may also lead to tensions.
Practical notes / tips – What needs to be done?
On 23.06.2020, a revised draft of the corresponding BMF letter was published. Of particular importance is the newly included non-objection rule for B2B transactions (= transactions between two businesses) in July 2020: if a tax amount that is too high is stated on the invoice – i.e. the supplying business has stated the tax rate applicable before 01.07.2020 (19% instead of 16% or 7% instead of 5%) on the invoice for a service rendered to another business after 30.06.2020 and before 01.08.2020, and has remitted this tax amount – the tax administration takes the view, for reasons of simplification, that it will not be objectionable if the business does not correct the VAT shown on the invoices.
This means that, as a business, you are granted the input VAT deduction for this period for practical reasons even if the tax statement is incorrect, i.e. too high. However: only for one month!
And what else? Further options arising from the coronavirus crisis and more at a glance…
- For the tax years 2020 and 2021, businesses receive temporarily improved depreciation options for movable assets such as machinery. A maximum of 25% declining-balance depreciation is permitted for movable fixed assets acquired or produced after 31.12.2019 and before 01.01.2022.
- The option to offset losses for tax purposes against profits of the previous year is being expanded. The tax loss carryback is being increased to a maximum of EUR 5 million (or EUR 10 million in the case of joint assessment) for 2020 and 2021. In addition, businesses affected by the coronavirus crisis are given the option to use the loss carryback already in their 2019 tax return.
- The due date for import VAT is being postponed to the 26th of the following month. This provides businesses with additional liquidity.
- Corporate income tax law is being modernized and, among other things, now allows partnerships to opt for taxation as a corporation. This improves the competitive conditions for businesses.
- Tax exemption for the corona bonus to employees up to EUR 1,500 free of tax and social security contributions: in the period from 01.03. to 31.12.2020, employers may pay each employee up to EUR 1,500 free of tax and social security contributions. The condition is that this is paid in addition to the wages already owed. This option applies to all employees; there is no requirement that the employer be system-relevant.
- Extension of the investment deadlines by one year: for § 6b reserves with a deadline ending between 01.03.2020 and 31.12.2020 (in each case an extension by one year), and for § 7g reserves (so-called "investment deduction amounts") between 01.01.2017 and 31.12.2017 (extended from the previous 3 years to 4 years).
- Increase of the single-parent relief amount for 2020 and 2021 to a total of EUR 4,008.
- Extension of the 0.25% rule for electric vehicles (concerns the 1% rule)
- Changes to vehicle tax as of 01.01.2021: the assessment basis for vehicle tax for newly registered cars is to be more strongly aligned with CO2 emissions per km as of 01.01.2021.
- Research allowances – promotion of research and development: an allowance of 25% of personnel expenses in research, applicable from 01.01.2020. The research allowance amounts to a maximum of EUR 2 million per year and EUR 15 million per project.
- Extension of the retroactive effect for transformation transactions with contract conclusion or registration in 2020 of up to 12 months is permitted.
- Extension of the reporting deadline for cross-border tax arrangements
Corona emergency aid 2.0
(= further corona emergency aid, available in addition to amounts already paid out – not yet )
Businesses affected by the coronavirus crisis are granted a further bridging aid. Application deadline = no later than 31.08.2020, payment deadline = no later than 30.11.2020.
The maximum funding is EUR 150,000, for businesses with up to five employees EUR 9,000, and for businesses with up to ten employees EUR 15,000, in each case for three months.
There are very strict requirements and reviews in this regard; applications may no longer be filed by you yourself but only by certain professionals, such as Steuerberater (German Certified Tax Advisors).
As with the first corona grant, the business must not have been in financial difficulties.
In addition, the specific conditions to which payment is tied have already been defined in more detail, and documentation obligations must be observed.
For example, a complete or substantial cessation of business activities as a result of the coronavirus crisis is a prerequisite. This means that combined turnover in April and May 2020 must have dropped by at least 60% compared to April and May 2019. For businesses founded after April 2019, the months of November and December 2019 are used for comparison instead of April and May 2019.
Attached you will find the original text from the following source: https://www.bundesfinanzministerium.de/Content/DE/Downloads/eckpunkte-fuer-das-konjunkturpaket.pdf?__blob=publicationFile&v=2
All information provided to the best of our knowledge, but without any guarantee.
Frequently asked questions
Frequently asked questions
Which VAT rate applies to continuous services such as rental agreements during the transition period?
Continuous services are generally deemed performed at the end of the agreed service period, i.e. at month-end for monthly rents. If the service is rendered before 01.07.2020, the rates of 19% or 7% apply; for later performance (until 31.12.2020), 16% or 5% apply. Contracts that serve as invoices (containing all mandatory details) must be amended by an addendum reflecting the changed tax rate.
When does a compensation claim arise under § 29 UStG in the event of VAT rate changes?
A compensation claim exists if the service is rendered after 30 June 2020 and the underlying contract was concluded before 1 March 2020 (i.e., more than four months prior to the rate change taking effect). However, a fixed-price agreement or other contractual provision excludes the claim. Both contracting parties may demand compensation for the resulting VAT surcharge or relief.
Which VAT rate applies to advance payments when the service is performed at a later date?
The decisive VAT rate is always the one applicable at the time the service is rendered, not when the advance payment is made. If advance payments were invoiced at 19% before 01.07.2020 but the service was performed between 01.07. and 31.12.2020, the reduced rate of 16% applies retroactively. The advance invoices do not need to be corrected; the adjustment is made in the final invoice.
How do partial services and advance payments differ for VAT purposes?
Partial services only exist for economically separable services with a corresponding agreement, separate acceptance, and separate invoicing. In this case, the VAT rate applicable at the time of acceptance of the individual partial service applies. For advance payments, by contrast, the VAT rate at the time of acceptance of the entire completed work is decisive.
Which VAT rate applies to annual passes, subscriptions and membership fees (e.g. gym)?
Annual passes and subscriptions are treated as a single supply that is only deemed performed at the end of the term; they are not split into monthly partial supplies. The decisive VAT rate is the one in force at the end of the supply period. A gym subscription paid in February 2020 is therefore subject to the 19% rate again at the end of January 2021.
How can single-purpose vouchers be used to lock in the reduced VAT rate?
With a single-purpose voucher, the place of supply and the applicable VAT rate are already determined at the time of issue, so VAT becomes chargeable upon issuance. If such a voucher is issued by 31 December 2020, 16% VAT applies—even if the underlying service is rendered in 2021. For single-purpose vouchers issued before 1 July 2020 at 19%, a reversal with cash refund is recommended.
How can annual bonuses for 2020 be settled in a simplified manner under the VAT rate reduction?
For simplification, an annual rebate for 2020 may be allocated on a flat-rate basis: 50% at 19% or 7% (January to June) and 50% at 16% or 5% (July to December), irrespective of the actual time of turnover. Alternatively, the entrepreneur may apply 19% to the entire annual bonus without exception.