No liability for wrongly shown VAT on transfer of tenancy

The plaintiff purchased a multi-storey office building by way of enforced auction. The building was let to, among others, a day clinic, a physiotherapy practice and a housing association. The previous owner had included VAT in the rental agreement, even though the tenants were engaged in VAT non-deductible rental transactions and the landlord was therefore unable to opt for VAT under Section 9 of the German VAT Act.

The plaintiff treated these rental transactions as VAT-exempt. Following a tax audit, the tax office assessed VAT under Section 14c of the German VAT Act on the basis of the wrongly stated VAT in the rental agreements in connection with the account statements of rental payments from the transfer of ownership. After an unsuccessful appeal, the tax court dismissed the case.

The ruling

The Federal Fiscal Court (BFH) ruled on 5 December 2024 (V R 16/22) that the plaintiff was not liable for VAT under § 14c of the German VAT Code, as this provision only imposes VAT liability on the person in whose name the invoice was issued. This presupposes that the person named as the issuer on the invoice was involved in the preparation of the invoice (which was not the case here) or that the issuance was otherwise attributable.

An incorrect VAT invoice issued by the previous owner could not be attributed to the purchaser under § 566(1) of the German Civil Code (BGB) in conjunction with § 57 the Forced Auction of Real Property Act (ZVG) According to this provision, the purchaser in the forced sale takes over the rights and obligations arising from the existing tenancy agreement. However, these provisions must be interpreted narrowly and only applied to the extent required for tenant protection. § 14c of the German VAT Code did not serve to protect tenants, though, and an incorrectly stated VAT charge was not one of the landlord’s rights and obligations, which the provision is intended to transfer.

According to the ruling, it was not necessary to decide whether the acquisition of a leased property, even in a forced sale procedure, was a sale of a totality of assets in which the purchaser assumed the tax obligations of the seller. Even in such a case, wrongly stated VAT in rental agreements did not form part of the transferred assets to which the individual succession for VAT purposes related.

Decision C-442/22 of the European Court of Justice (ECJ), according to which an employer is liable for an employee’s incorrect VAT display if they failed to carry out sufficient checks, is not applicable in this case because the plaintiff was not named as the issuer of the invoice in the rental agreements.

The wider legal context

The transfer of leased property is always prone to complications from a VAT perspective. It is to be welcomed that the BFH has at least eliminated the risk due to incorrect rental agreements under § 14c. However, the follow-up question remains as to whether the seller will continue to owe the wrongly shown VAT after the transfer of ownership as long as the rental agreement is not amended. Rental agreements should therefore be reviewed no later than when a transfer of ownership is imminent.