Periodical VAT returns vs VAT refund scheme

[EN] In its Circular of 21 May 2014 the German Federal Ministry of Finance (Bundesfinanzministerium) has now reacted to a decision of the German Federal Tax Court (Bundesfinanzhof, BFH) of 28 August 2013 (XI R 5/11).

In this decision the BFH has ruled that a foreign company is entitled to recover its entire input VAT for the year through a periodical VAT return even though the VAT refund scheme (Vorsteuervergütungsverfahren) would have been the correct procedure as the company has performed only transactions for which the recipient was liable to pay the VAT in Germany (reverse charge). Its obligation to file VAT returns, however, derived from a single invoice issued by this company where the VAT was incorrectly charged pursuant to sec. 14c(1) of the German VAT Act (Umsatzsteuergesetz).

In order to reduce the scope of this decision and thus the right of companies to claim input VAT through the backdoor, the Federal Ministry of Finance has now set out clear rules in its Circular to react to the above mentioned BFH judgment. According to the German tax administration this judgement can only be applied to cases with comparable facts. In particular, the following conditions need to be met:

  1. the foreign company has filed an application for VAT refund on time to the Federal Central Tax Office (Bundeszentralamt für Steuern, BZSt),
  2. all other conditions pursuant to the refund scheme have been met for the refund period,
  3. the VAT has not been reimbursed under the VAT refund scheme due to an erroneous assessment and
  4. the reimbursement of the input VAT through the VAT refund scheme is no longer possible because the application of VAT recovery was withdrawn based on a notice by the Federal Central Tax Office, the application deadline has passed or the decision of the Federal Central Tax Office to reject the remuneration is formally final.

The case of the German Federal Tax Court and the specifications set out in the Circular are interesting as it confirms again the tendency of the German tax administration to keep the two procedures strictly separated. Taking the additional requirements of the Circular into account, the tax administration significantly limits the application of the BFH decision and consequently reduces the benefits of this decision for foreign companies to recover VAT in Germany.

FVO, 26 May 2014

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