Direct claims in case of wrongly paid VAT - BMF circular letter dated 12 April 2022

Reason: Neutrality must be maintained

VAT must always be neutral for the entrepreneur - this is one of the cornerstones of the EU VAT system. If the recipient of the supply pays VAT to the supplier, the recipient receives the tax paid back from the tax office as input VAT. However, there is no right to an input VAT deduction if the VAT was not actually due. If VAT was paid although it was not owed, the recipient of the supply will usually turn to the supplier, reclaim the VAT from them and thus restore neutrality. If the VAT cannot be recovered from the supplier, neutrality would be permanently disrupted unless the tax authorities take special measures. This cannot be allowed to happen - according to the ECJ case law in the "Reemtsma Cigarettenfebriken" case (C-36/05 of 15 March 2007), which the BFH (Federal Fiscal Court) has adopted and further developed.

Responsibility and methodology

A decision on a direct claim must be made within the framework of equity proceedings in accordance with §§ 163, 227 of the General Fiscal Code.  The tax office usually responsible for the recipient is responsible here as well. Systematically, the VAT incorrectly shown on the invoice is taken into account as input VAT.

The main criteria and reasoning used for denying a direct claim

• Equitable measures according to §§ 163, 227 AO are discretionary decisions. The BMF states that the recipient's contributory negligence in the creation of the incorrect invoice must be taken into account.
• The direct claim is subordinate, meaning that the recipient must first try to get the supplier to reimburse the VAT. Situations involving insolvency are dealt with using a multi-pronged approach.  
• The tax authorities will only refund the VAT to the recipient of the supply if and when the service provider (who has incorrectly paid VAT to the tax office) can no longer legally assert their claim against the tax office.
• If the recipient´s claim for reimbursement under civil law against the supplier is time-barred, the tax authorities will no longer grant a direct reimbursement.
• In the case of a gross price agreement, the recipient already has no claim against the supplier for reimbursement of the incorrectly reported VAT. This also rules out a direct claim.
• A direct claim can only be considered if the issuer of the invoice has actually provided a supply; merely indicating the VAT on an invoice is not sufficient in itself.
• Since the direct claim is systematically realised via an input VAT deduction, the invoice must contain all necessary invoice details. The fact that the recipient of the supply may not be entitled to an input VAT deduction pursuant to Section 15 (2) to (4) of the German VAT Act (UStG), on the other hand, is irrelevant because even if the invoice had been issued correctly without VAT, the recipient would not have been charged with non-deductible input VAT.
• A direct claim is also ruled out in the following cases:
  • The tax office has already refunded the VAT to the supplier.
  • The supplier has not paid the VAT.
  • The supplier declared the VAT, but at the same time claimed input VAT from invoices that were not based on supplies.
  • The service provider knew or should have known that it was participating in VAT evasion by receiving the supply.

Practical implications

The BMF requires that the invoice in question contains all the necessary invoice details. This is surprising, as solving the problem by granting an input VAT deduction that does not actually exist is merely an artifice, and the invoice itself would not matter if it were processed properly.

As far as the responsible authority is concerned, the question arises as to how to handle cases involving foreign entrepreneurs who are not required to register in Germany. From the BMF letter’s wording, it appears that in this case the tax office responsible – if there were an obligation to register – is the one that must handle the direct claim. Thus, direct claims could not be asserted using the input tax refund procedure at the Federal Central Tax Office.

It is also questionable what requirements should be placed on the priority of civil claims. If it were required that legal action be exhausted through all instances, this could massively delay reimbursement.

The fact that the service recipient must wait to see whether the supplier itself asserts its refund claim against the tax authorities within the tax limitation periods also represents a high hurdle. Due to a wide variety of suspensions of expiration of the General Fiscal Code, the relevant assessment deadline can amount to decades in individual cases.

(Dated: 28 April 2022)