BFH on the deductibility of insolvency administrator costs

Background and decision XI R 8/22

The insolvency administrator for the assets of a building contractor invoiced the insolvency debtor for his insolvency administration services and claimed the corresponding input VAT deduction for the insolvency debtor. The tax office was of the opinion that the input VAT should be divided into a deductible and a non-deductible part, as both VAT taxable and VAT-exempt transactions had been carried out during the insolvency proceedings. The tax office and the insolvency administrator reached a factual agreement to the effect that 45% of the claims registered in the schedule were directly and immediately linked to VAT taxable transactions carried out by the insolvency debtor during the insolvency proceedings.

The transactions during the insolvency proceedings were decisive for the input VAT deduction, as the business had been continued. Although the insolvency administrator had not continued the business in order to preserve it, the construction projects had still been completed. The fact that this only served to strengthen the insolvency estate was irrelevant. Even if there is no continuation of the business, the input VAT amounts must be allocated in proportion to the total turnover for the tax period in accordance with § 15 (4) of the German VAT Code, said the tax office.

The BFH, however, ruled that the business had not been continued because, in accordance with the provisions of the Insolvency Act, the actions of the insolvency administrator should have been aimed at maintaining the business and not, as in this case, at winding it up. If the insolvency debtor had already discontinued the business before the opening of insolvency proceedings, the decision on the deduction of input VAT from the insolvency administrator's invoices should have been made on the basis of the previous business activity. The claims registered in the schedule are decisive. The wind-up activities are not taken into account. This means that 45% of the input VAT from the insolvency administrator's invoice is deductible.

Background and decision XI R 20/22

This case differed from the case described above in that the business was actually continued and the insolvency administrator undertook almost no wind-up activities. The insolvency debtor was an IT administrator and the insolvency administrator continued this specialised activity.

Thus, the services provided by the insolvency administrator did not serve to satisfy the insolvency creditors as the main objective, but were primarily aimed at maintaining the business, even without an insolvency plan. This is a special case that justifies basing the input VAT deduction from the insolvency administrator's invoice on the transactions carried out during the insolvency. A minimal utilisation activity is then, by way of exception, irrelevant.

Classification

VAT in insolvency is always a difficult topic. The judgement provides clarity insofar as the services provided in insolvency must be differentiated according to whether they constitute actions taken to strengthen the insolvency estate, or the continuation of the business. If both coincide, the utilisation activities may be only minimal, in order to base the input VAT deduction on the continued activity. In the case decided, the utilisation activities contributed less than 0.07% to the total income during the insolvency. This can serve as a guideline, but does not automatically rule out higher values.