Revocation of the waiver of VAT exemption on the sale of real estate - BFH ruling XI R 22/19

Waiver of VAT exemption should be reversed

In the case decided, the plaintiff had purchased a property, whereby the seller waived the VAT exemption pursuant to Sec. 4 no. 9 letter a) of the German VAT Code. The waiver was declared in the notarial purchase agreement in compliance with Sec. 9 para. 3 sentence 2 of the German VAT Code. For the thus VAT-taxable sale of real estate, the VAT liability was transferred to the plaintiff pursuant to Sec. 13b of the German VAT Code, who also declared this turnover accordingly and claimed the input VAT deduction. Thus, there was no payment burden for the plaintiff.

The plaintiff later sold part of the property VAT exempted, which would have meant that she would have had to adjust her input tax deduction from the acquisition in accordance with Sec. 15a of the German VAT Code. The plaintiff and the seller therefore reversed the waiver of the VAT exemption in a further contract, which was also notarized. The plaintiff’s VAT return was equivalent to a tax assessment subject to review, which had not yet been abrogated at the time the waiver of the VAT exemption was revoked.

Tax office invokes VAT application decree:  revocation was too late

The responsible tax office considered the revocation to be invalid, as it should have been declared in the notarial purchase agreement on which the supply of real estate was based. This is provided for in Sec. 9.2 (9) sentence 3 of the VAT application decree, according to which the waiver and the revocation are to be treated equally in this respect. 

BFH (Federal Court of Finance): A revocation is possible as long as the VAT assessment is contestable or subject to review

The BFH rejected the view that the waiver and revocation are no longer to be treated equally ever since sentence 2 was inserted into Sec. 9 (3) of the German VAT Code, according to which the waiver can only be declared in the notarial purchase agreement. It is true that in its earlier case law, the BFH had spoken out in favour of such equal treatment. At that time, however, the waiver could be declared until the tax assessment became incontestable so that it was logical to allow the revocation within the same period. However, if ever since the law was changed the waiver must be declared in the notarial purchase agreement, it is senseless to require that the revocation be declared in the same purchase agreement. This would, in fact, exclude such a revocation.

There was also no need for equal treatment of the waiver and revocation because the fact that the waiver had to be declared in the notarial purchase contract was intended to protect the purchaser from being surprised by incurring a VAT liability. The revocation, however, relieves the purchaser of the VAT liability, thereby eliminating their need for protection in this respect.

Practical implications

The BFH decision has managed to solve this problem because the previous administrative interpretation is indeed senseless. The German Federal Ministry of Finance is expected to amend the application decree accordingly. Taxpayers to whom the tax office has denied the effectiveness of the revocation can refer to the BFH decision. One detail should be kept in mind though: due to the reverse charge in the case of a taxable sale of real estate, the question as to whether the tax assessment notice (or the VAT return equivalent thereto) is still contestable or subject to review depends on the recipient of the supply.