German Real Estate & VAT amendments | January 2018

[EN] On 5 December 2017, the German Tax Administration published an amendment to the application judgment on turnover tax (Umsatzsteuer-Anwendungserlass). Full details of the amendments can be found here on the website of the German Ministry of Finance.

As an extension to this, the German tax authorities expanded the scope regarding the application of VAT and legal advice in connection with real estate. In general, the VAT treatment of cross-border supply of services between businesses within the European Union follows the concept of reverse charge; this means that in the case of the supplier invoices, liability to declare and pay taxes is shifted to the receiving customer, regarding real estate some exemptions apply. With its recent publication, the German tax authorities have now re-clarified the treatment of lawyer fees in connection with real estate…

1. LAWYER FEES FOR REAL ESTATE ADVICE – SUBJECT TO GERMAN VAT
The German tax authorities decided that the transfer of real estate, as well as legal advice related as such (even if the underlying transaction, leading to the legal change of the real estate, does not ultimately take place), is subject to VAT in Germany – this also includes rent and tenancy law branches. The supply of legal services is not limited to certain professional groups, however it is necessary that the service is linked to an intentional change in the legal status of the land plot.

As a clarification, the tax authorities mention some examples subject to VAT in Germany:

– drawing up a contract for the sale or purchase of real estate and negotiating the terms of the contract, as well as related advisory services (e.g. financing advice, preparation of a due diligence etc.) as these are regarded as dependent ancillary services;

– other services provided in the notarization of property purchase contracts and other contracts aimed at changing rights to a property, irrespective of whether they require mandatory notification;

– advice on a tax clause in a land transfer agreement;

– drawing up and negotiating the terms and conditions of a sale-and-leaseback agreement for a property or part of a property, as well as related advisory services (e. g. financing advice) as these are to be regarded as dependent ancillary services;

– drawing up and negotiating rental and lease agreements for a particular piece of land or a specific part of the land;

– legal examination of existing rental or lease agreements with regards to the change of ownership in the context of a transfer of land.

2. LAWYER FEES – WITHOUT GERMAN VAT (REVERSE CHARGE)
The German tax office also clarifies that the sale of shares and the brokerage of the turnover of shares in real estate companies, as well as consultancy services with regard to the conclusion of a purchase contract for shares in a real estate company (share deal), is excluded from German VAT and still follows the general reverse charge rule for cross-border business.

Furthermore, it has been rectified so that the general reverse charge provisions for taxation apply if the benefit is not related to the transfer of rights to real estate, i.e.

– general legal and tax advice surrounding real estate matters;

– drawing up sample tenancy or lease agreements without reference to a specific plot of land;

– advice on the acquisition structure of a transaction (asset deal or share deal);

– the examination of legal conditions of a property (due diligence);

– the assertion of claims arising from an already completed transfer of rights to real estate.

3. RECOMMENDATIONS
Since there has been a lot of growth in real estate investment in Germany in recent times, it is expected that a number of foreign companies could receive a larger number of lawyer’s invoices now with German VAT. Due to the complexity of directive legislation and rules, it is recommended to check invoices thoroughly – while foreign companies do have a right to recover input VAT charged on layer fees, it is only in the case that the VAT has been charged correctly when invoiced.

Should this be relevant to you, please do not hesitate to contact us – our team of experts will be happy to assist you with any questions you may have, we can also help you to recover VAT in Germany where applicable.

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