Is the VAT refund procedure a way out for foreign landlords? - ECJ-ruling "Titanium" C-931/19

In its judgement of June 3, 2021 (C-931/19) in the "Titanium" case, the ECJ ruled that a rented property is not a fixed establishment for the application of the reverse charge procedure if the owner of the property does not have its own staff in that country for the performance of the rental service in question (as we reported). This prevents many entities from registering for VAT purposes and offsetting the input VAT via the preliminary VAT returns. The tax authorities still see this differently. How should companies deal with this uncertainty?

What does the ECJ ruling mean for foreign rental companies with properties in Germany?

According to Section 13b.11 (2) Sentence 2 of the VAT application decree, the German tax authorities always treat non-resident companies that rent out real estate located in Germany as being resident in Germany when it comes to the applicability of the reverse charge procedure. This means that these rental companies must (and are allowed to) register for VAT purposes in Germany. This has the advantage that they can offset German input VAT via the regular preliminary VAT returns and save themselves the lengthy input VAT refund procedure.

In this respect, the VAT application decree is likely to no longer be tenable given the "Titanium" ruling. This means that foreign rental companies that only rent out in Germany VAT-taxable must apply the reverse charge procedure and have no obligation or entitlement to register for VAT. This also means that input VAT can no longer be reclaimed via the preliminary VAT returns. It is therefore conceivable that, given the "Titanium" ruling, the responsible tax office will deny the input VAT deduction and refer the foreign real estate companies to the input VAT refund procedure in this respect. However, as is well known, EU resident companies are bound to strict deadlines because the input VAT from 2020 must be claimed by September 30, 2021. Input VAT from earlier periods will no longer be refunded. For non-EU resident companies, the application deadline for 2020 was already June 30, 2021.

Who is not affected?

This problem only affects foreign rental companies that solely provide VAT-taxable rental services. If VAT-exempt rentals are also conducted, the reverse charge procedure does not apply to these transactions, meaning that the obligation (and the right) to register for VAT in Germany continues to apply to the VAT-exempt transactions. This means that German input VAT can also continue to be offset via the preliminary VAT returns.

What is likely to happen now?

We assume that the tax authorities will adopt the ECJ ruling. However, they are unlikely to desire all foreign real estate companies to amend all their VAT returns and preliminary VAT returns that have already been submitted but are not yet time-barred. The chronically overburdened Federal Central Tax Office (BZSt) probably has no desire to receive a flood of refund applications from foreign rental companies. Moreover, the rental company’s input VAT is of course, not the only problem. It would lead foreign rental companies to also submit huge volumes of corrected rental invoices and issue new ones without the VAT but with a reference to the reverse charge procedure. The VAT shown so far would be unjustifiable in the sense of Sec. 14c Para. 1 of the German VAT code and would have to be deducted again in the preliminary VAT return for the month of the issue of the corrected invoices. This would also result in tenants having to correct their VAT returns and preliminary VAT returns.

The fact that input VAT was claimed using the wrong procedure (via the preliminary VAT return) without the companies being aware of this fact, but would be generally time-barred in the input VAT refund procedure, may violate constitutional law in our view. We therefore expect a corresponding transitional/non-objection regulation from Germany’s Federal Ministry of Finance stating that it will not object to foreign rental companies continuing to behave according to the previous version of the VAT application decree until a specific date.

How to deal with uncertainty?

According to our information from Germany’s Federal Ministry of Finance, the Titanium ruling is currently being discussed with the highest tax authorities of the federal states. In addition to the considerations outlined above, this leads us to expect that there will be a circular letter with a transitional regulation. However, this is not certain.

Those who do not wish to rely on this should, to be on the safe side, claim the German input VAT both in the preliminary VAT return and in an input VAT refund application, insofar as this is still possible before the deadline. Although the foreign rental companies owe VAT in Germany pursuant to Sec. 14c of the German VAT code due to the VAT shown in the rental invoices, they are not excluded from the input VAT refund procedure, Sec. 18 Para. 9 Sentence 3 of the German VAT code.

Doing so will prevent input VAT from being permanently forfeited if, contrary to expectations, there is no transitional regulation. For EU-based companies, a refund application for input taxes from 2020 is still possible until September 30, 2021. For third countries, the deadline for 2020 has already expired. For input VAT from 2021, they still have time and can apply for a refund until June 30, 2022. In this respect, they can certainly wait and see what position the Federal Ministry of Finance takes.

To avoid the accusation of double-claiming the input VAT, both the responsible tax office and the Federal Central Tax Office should be informed that the application for an input VAT refund was only made as a precautionary measure because of the uncertain legal situation.

(Dated: 20 September 2021)