Businesses that have provided construction services to property developers cannot, for the time being, be retroactively held liable for payment of the VAT incurred on their services. The Berlin-Brandenburg Tax Court ruled accordingly in interim relief proceedings by order of 03.06.2015 (Az. 5 V 5026/15). The applicant in the proceedings had rendered construction services to several property developers in 2009 and, in accordance with the BMF guidelines applicable at the time, had not subjected these services to VAT. Instead, the VAT liability was to be borne by the property developers as recipients of the services (so-called reverse charge procedure). After the BFH ruled in August 2013 that § 13b Abs. 2 Satz 2 of the German VAT Act (Umsatzsteuergesetz – UStG), which governs the reversal of tax liability, generally does not apply to property developers — contrary to the view of the tax administration — and the property developers thereupon reclaimed the VAT they had paid, the tax office assessed VAT against the applicant. In doing so, it relied on the provision of § 27 Abs. 19 Satz 2 UStG newly created by the legislature in July 2014 — in response to the BFH decision — which retroactively excludes the protection of legitimate expectations for the cases in question. The court stated in its decision that there are considerable constitutional doubts about this provision, since under § 176 Abs. 2 AO, the protection of legitimate expectations applies when a tax assessment is amended in favour of the taxpayer if a supreme federal court rules that a general administrative directive of the Federal Government is not in conformity with applicable law. The exclusion of the protection of legitimate expectations may violate the prohibition on the retroactivity of laws enshrined in the Grundgesetz. With § 27 Abs. 19 UStG, the legislature had retroactively intervened in the tax liability for 2009 that had already arisen at the time of its promulgation, so that an inadmissible so-called genuine retroactivity does not appear to be ruled out. The applicant also faces significant financial damage, as he can no longer subsequently invoice the tax to his contractual partner due to civil law limitation periods. Since the constitutional doubts concern only a single provision, the granting of interim legal protection was also not excluded on the grounds decisive in the proceedings concerning the overnight accommodation tax (cf. Press Release No. 6/2015 of 04.06.2015). A final clarification of the question is reserved for main proceedings. However, no such proceedings are currently pending. Finanzgericht Berlin-Brandenburg, 5-V-5026/15, press release of 05.06.2015
Frequently asked questions
Frequently asked questions
Can construction contractors be retroactively subjected to VAT for construction services rendered to property developers?
According to a ruling of the Finanzgericht Berlin-Brandenburg dated 03.06.2015 (Az. 5 V 5026/15), retroactive assessment is ruled out for the time being. In the preliminary legal protection proceedings, the court granted suspension of enforcement, citing substantial constitutional concerns regarding § 27 Abs. 19 UStG. A definitive clarification remains subject to the main proceedings.
What did the BFH rule in 2013 regarding tax liability for construction services provided to property developers?
In August 2013, the Bundesfinanzhof ruled that, contrary to the previous view of the tax authorities, § 13b Abs. 2 Satz 2 UStG generally does not apply to property developers. As a result, the reverse-charge mechanism does not apply to construction services provided to pure property developers. Consequently, many property developers reclaimed the VAT they had previously paid.
What does Section 27 (19) of the German VAT Act (UStG) regulate, and why is the provision constitutionally controversial?
Section 27 (19) UStG was introduced in July 2014 in response to BFH case law and retroactively excludes the protection of legitimate expectations for legacy cases, so that supplying entrepreneurs can be subsequently assessed for VAT. The Berlin-Brandenburg Tax Court considers this to be a potentially impermissible genuine retroactive effect, since it intervenes in tax liabilities that have already arisen. In addition, the protection of legitimate expectations under Section 176 (2) AO is undermined.
What economic damage threatens the performing contractor in such legacy cases?
Due to the civil-law limitation period for its claims, the performing construction contractor can typically no longer pass the subsequently assessed VAT on to its contractual partner (the property developer). As a result, the tax burden remains economically with the contractor, constituting a substantial financial loss. This aspect was a key argument for the tax court in granting interim legal protection.
What role does § 176 Abs. 2 AO play in protecting legitimate expectations in these cases?
§ 176 Abs. 2 AO protects taxpayers when tax assessments are amended after a supreme federal court rules that a general administrative directive is incompatible with applicable law. Since the construction service providers relied on the BMF guidelines and the BFH rejected them, protection of legitimate expectations would normally apply. However, § 27 Abs. 19 UStG expressly overrides this protection – and this is the core of the constitutional dispute.