Time of input VAT deduction in case of payment on accruels - ECJ ruling "Grundstücksgemeinschaft Kollaustraße" (C-9/20)

German VAT law does not explicitly regulate the point in time at which the right to an input VAT deduction arises in the case of input services provided by taxable persons using taxation based on payments received. However, in Section 15.2 (2) of the VAT application decree, the tax authorities have, until now, assumed that the input VAT deduction must be claimed in the VAT return period in which the supply is received, even if the supplier taxes the transaction upon receipt of the payment in accordance with Section 13 (1) no. 1 (b) and Section 20 of the German VAT Code. In its ruling of 10 February 2022 (C-9/20), the ECJ declared it infringes EU law that the recipient must claim the input VAT deduction upon payment if the supplier uses taxation based on payments received.

Facts: Real estate community rents from a taxable person using taxation based on payments received

The real estate community Kollaustrasse 136 rented out real estate which it had, in turn, rented from a landlord. Both the real estate community and the landlord had opted for VAT; there existed a properly prepared permanent invoice. Both made use of the taxation based on payments received (cash accounting) pursuant to sec. 20 of the German VAT Code. The landlord had partially deferred the rental payments so that the real estate community did not pay the rental payments until years after the respective rental period.

The real estate community claimed the input VAT deduction for the time of payment. However, the tax office argued - in accordance with the previous regulation in the VAT application decree - that the input VAT deduction should be claimed when the service was rendered, i.e., for the respective rental period. As some of the periods in which the services were rendered were time-barred, this resulted in a definitive loss of input VAT for the real estate community.

ECJ: The right to claim an input VAT deduction is linked to payment in the case of taxation based on payments received

The Hamburg Regional Fiscal Court (FG Hamburg) referred the question to the ECJ as to whether the German regulation, according to which the right to deduct input VAT arises at the time of the supply even if the supply is taxed based on payments received, is compatible with Article 167 of the VAT Directive. According to Article 167 of the VAT Directive, the right to an input VAT deduction arises when the entitlement to the deductible tax arises. Despite the unambiguous wording, the Hamburg Regional Fiscal Court raised the question of whether this might merely be a "guiding principle” instead of a mandatory requirement. The ECJ disagreed. It pointed out that Article 167 of the VAT Directive must be reconciled with Article 66 (1) (b) of the VAT Directive. Accordingly, the Member States may provide (as was the case in Germany) that the tax becomes chargeable at the latest when the fee is collected. Accordingly, if the taxation is based on payments received and the tax claim arises when the fee is received, this must also apply to the input VAT claim.

Practical implications only for the recipient of the supply

Please do not confuse the two: This ruling does not concern the taxpayer using taxation based on payments received itself, but only the input VAT deduction of its customer. The fact that the real estate community itself also used taxation based on payments received was irrelevant in the present case. It is true that Article 167a of the VAT Directive also contains a provision that concerns the input VAT deduction of the supplier using this scheme. Member States have the option of only allowing the supplier to deduct input VAT once this person has paid the VAT to their supplier. However, Germany has not made use of this option.

The Hamburg Regional Fiscal Court is expected to rule in accordance with the ECJ's guidance, and the Federal Ministry of Finance is expected to amend the VAT application decree accordingly - possibly with a non-objection rule for a transitional period. Until this happens, the tax offices will probably allow the recipients of supplies from a person making use of taxation based on payments received to claim the input VAT deduction upon receipt of the service. If this is not the case, the input VAT deduction can now be claimed for the time of payment - before the VAT application decree is amended - if this is disclosed to the tax office. After the VAT application decree has been amended (and, if applicable, after a transitional period has expired), the tax offices will refuse the input VAT deduction for when the services are received; it can then be claimed for the time of payment and will not be lost. If applicable, interest may accrue.

It will be difficult for the recipient of the supply to determine whether the supplier is being taxed based on when the payments are received. Until now, suppliers have not been required to refer to cash accounting in the invoice because Germany has not incorporated Article 226 No. 7a of the VAT Directive into the VAT Act. The legislator should take action here.

(Dated: 09.03.2022)