Time of input VAT deduction in case of taxation based on accruals - Opinion Advovate General "Kollaustraße" (C-9/20)

Case: Tenant claims input tax from rental invoice only in the month of payment

In the underlying case, a taxable person leased a property to another taxable person without using the VAT exemption and issued a standing invoice for this agreement. The landlord made use of taxation based on payments received pursuant to Section 20 of the German VAT Code (Umsatzsteuergesetz). As a result, the VAT for the rental services arose upon payment of the rent rather than upon performance of the service, in deviation from the general principle. Due to payment difficulties, the tenant did not pay the rent until years after the relevant rental periods in some cases. The tenant did not claim the input VAT deduction until the respective filing period of the payment.

Tax office: Input tax VAT must be claimed for the respective rental period

However, the tax office argued that, according to Section 15 (1) sentence 1 no. 1 of the German VAT Code, the right to deduct input VAT arises when the service is performed. The tenant would therefore have had to claim the input VAT deduction in the preliminary VAT return for the respective rental period. Since these periods were partly already time-barred, the tenant could no longer retroactively claim the input VAT for these periods.

Question referred: Does the German law on the deduction of input VAT stand in conflict with European Union law?

The Hamburg Finance Court then referred the question as to whether Section 15 (1) sentence 1 no. 1 of the German VAT Code was compatible with the VAT Directive to the ECJ. Under Article 167 of the VAT Directive, the right to input VAT accrues when the right to the output VAT arises (i.e. upon accrual of the tax office’s claim against the supplier). In the case of taxation based on payments received, which is expressly permitted by the VAT Directive, the tax office’s tax claim does not arise until payment is made. According to the wording of Article 167 of the VAT Directive, this should also be the point in time at which the input VAT claim accrues. However, Section 15 (1) sentence 1 no. 1 of the German VAT Code stands in conflict with this practice, as it states the input VAT claim should also accrue upon performance of the service in the case of taxation based on payments received.

In its order for reference, the Hamburg Finance Court considered a wide range of issues as to whether Article 167 of the VAT Directive should be taken literally or whether it merely expresses a kind of guiding principle from which the Member States may also deviate. The Advocate General rejects these considerations and takes the view that Section 15 (1) sentence 1 no. 1 of the German VAT Code is incompatible with EU law.

Recommendation: Appeal and application for suspension of proceedings in similar cases

The final decision of the ECJ remains to be seen. However, the incompatibility of Section 15 (1) sentence 1 no. 1 of the German VAT Code with the wording of Article 167 of the VAT Directive in the case of taxation based on payments received is a very strong argument. It is difficult to imagine the grounds on which the ECJ should come to a different conclusion here. Taxable persons can directly refer to Article 167 if the ECJ states that input VAT deduction from invoices of taxable persons using taxation based on payments received must be claimed at the time of payment. Those who have been denied an input VAT deduction because they did not claim it until the time of payment can file an appeal within the appeal period and apply for a stay of proceedings pursuant to Section 363 (2) of the German Fiscal Code with reference to the pending ECJ proceedings. An application for suspension of execution pursuant to Section 361 (2) of the German Fiscal Code due to serious doubts about the legality of Section 15 (1) sentence 1 no. 1 of the German VAT Code also has a chance of success in our view.

Under other circumstances, it must be carefully examined whether protection of legitimate expectations can be granted, for example.

(Dated: 01.10.2021)