On June 3, 2020, the German government adopted a new economic stimulus package announcing targeted measures totaling 130 billion euros to support and stabilize the economy in Germany. In order to help entrepreneurs and provide incentives for investment, the German stimulus package includes the following fiscal measures:
- The value added tax will be reduced for a limited period from July 1, 2020 to December 31, 2020. The regular tax rate will be reduced from 19% to 16% and the reduced tax rate from 7% to 5%. This benefits private individuals. But companies and nonprofit corporations that cannot deduct input tax also benefit from this.
- For the fiscal years 2020 and 2021, companies will receive temporarily improved depreciation possibilities for movable assets such as machinery. This so-called degressive depreciation provides investment incentives.
- The possibility of offsetting losses against profits of the previous year for tax purposes is being extended. The tax loss carry-back will be raised for 2020 and 2021 to a maximum of 5 million euros (or 10 million euros in the case of joint assessment). In addition, the possibility will be introduced to make the carry-back usable already in the tax return for 2019.
- The due date of the import turnover tax is postponed to the 26th of the following month. This provides companies with additional liquidity.
- Corporate income tax law is being modernized and now provides, among other things, private companies with the option of being taxed as corporations. This improves the competitive conditions for companies.
Shortened debt relief procedure
The corona pandemic could lead to many companies getting into a state of financial distress through no fault of their own. The Federal Government’s numerous support measures are designed to help entrepreneurs avoid insolvency. Wherever this is not possible despite all efforts, a quick restart after bankruptcy should be facilitated. Therefore, the debt relief procedure for natural persons is to be shortened to three years. In the area of corporate insolvencies, a pre-insolvency restructuring procedure is to be introduced.
The economic stimulus package has not yet been passed into law and therefore only represents an announcement by the coalition committee of the German government.
New value added tax rates in Germany from July 1, 2020
The Federal Ministry of Finance is currently preparing announcements to facilitate the practical implementation of the VAT reduction as a step backwards in relation to the last letter by the Ministry of Finance on increasing the VAT from 16% to 19% dating back to August 11, 2006 (IV A 5 – S 7210 – 23/06). Simplification rules for practical application are expected, some of which we will pre-simulate.
From our experience, the German tax offices’ telephones are currently running hot. However, they are at a loss as to how the practical implementation will be designed and are still reluctant to provide information on what needs to be considered in June 2020. If the proposed law on the reduction of value added tax comes into force as planned in June 2020, the new tax rates of 5% (reduced) or 16% (regular) will apply from July 1, 2020.
Entrepreneurs and Nonprofit Organizations should take these immediate measures:
Value added tax on down payments
If you are receiving down payments until June 30, 2020, the previous tax rate of 19% applies. Up until June 30, 2020, 19% of partial services must be invoiced, taking into account the advance payments made by your customers. A final invoice must be issued immediately upon final delivery or execution of the service. The tax rates of 16% and 5% are applicable to the partial service provided after June 30, 2020 but before December 31, 2020.
In analogy to the Ministry of Finance’s letter of August 11, 2006, it is expected that, for reasons of simplification, the VAT (3 percentage points) no longer owed in the case of partial payments can be refunded for the advance notification period in which the remaining payment is collected. If the entrepreneur receives the remaining amount in several instalments between July and December 2020, he/she may calculate and pay the VAT, insofar as it is still due on partial payments received before June 30, 2020, for the pre-notification period in which the last instalment is received.
Value added tax assessment basis
As a result of this measure, the basis of assessment for VAT purposes for all charges in commercial transactions will be reduced in the aforementioned period. The decisive factor is when the delivery of the object or the service is effected. In all cases, the occurrence of VAT depends on the realization of a certain actual transaction (performance of the service). Entrepreneurs cannot avoid the accrual of the turnover tax due on the transaction by not issuing an invoice to the recipient of the service (Federal Fiscal Court 07/07/1983, VR 197/81).
Invoice all deliveries and services until June 30, 2020!
“At the end of the pre-registration period”, the sales tax amounting to 19% for 2020 will arise for the last time on June 30, 2020, i.e. at the end of the last day of June 2020. Accordingly, companies are obliged to invoice all deliveries already made and all services already rendered by June 30, 2020. Agreements on refunds (“sales bonuses”) to your customers must therefore be settled by June 30, 2020, if they have been incurred up to that date, if necessary by extrapolating the half-yearly results to determine the amount of the refund.
Invoicing separable services
Services are considered to have been provided when a divisible service has been agreed upon and rendered – these must be invoiced by the end of June 2020.
Invoice work deliveries until June 30, 2020!
Work deliveries with an acceptance date in June 2020 are to be invoiced within this month.
Value added tax for deliveries
For deliveries, the time of the procurement of the power of disposal is the relevant date, e.g. in case of shipment, the invoice is to be issued at this point in time, irrespective of Incoterms. Additional services share the fate of the main service. If a different accounting period is agreed for ancillary services than for the main service, the tax rate at the time of execution of the respective main service applies to the ancillary service according to the Federal Ministry of Finance’s letter from 2006.
In analogy to the letter from August 11, 2006, it should be permitted to declare 16% VAT in invoices issued before June 30, 2020 for partial payments received up to June 30, 2020 for services performed between July 1 and December 31, 2020.
Gross price agreement
If in the case of a gross price agreement – e.g. because the reduction of the VAT rates was not foreseen at the time of the conclusion of the contract – an explicit consideration of the VAT is not made, then the agreed gross price remains valid, even if the VAT obligation arises only afterwards or if the parties involved do not make an adjustment by mutual agreement. In principle, there is no obligation to subsequently adjust the contract, e.g. by increasing or decreasing it by the amount of VAT payable on the agreed amount (Federal Court of Justice dated May 11, 2001, V ZR 492/99, and Federal Fiscal Court dated December 14, 1977, VIII ZR 34/76). The supplying entrepreneur bears the risk and the chance that his/her price will be reduced or increased by the legally provided division into payment (net) and VAT by deducting the VAT portion if the recipient, in order to obtain the input tax claim, invokes invoicing with tax statement.
Adjust price clauses and standing invoices!
Contracts with price clauses relevant in terms of value added tax must be adapted. For continuing obligations which are not usually settled individually, e.g. rental or leasing subject to VAT, a standing invoice updated to the new tax rate must be issued as of July 1, 2020.
There is a need for action in the case of contracts for ongoing services, which are to be regarded as invoices: It is expected that the Federal Ministry of Finance will explicitly point out that these contracts will have to be adjusted to the new temporary tax rate of 16%.
Compensation of additional or reduced burdens
Section 29 of the German Value Added Tax Act (UStG) contains a civil law provision to compensate for additional or reduced tax burdens resulting from changes in the Value Added Tax Act. The standard is only applicable if the parties to the contract have negotiated the agreed price with the “old” VAT rate after February 29, 2020 for a delivery or service provided after July 1, 2020. This shall not apply if services are invoiced according to fee schedules or regulations for charges, which, like the Tax Consultant Remuneration Ordinance, the Lawyers’ Fees Act or the Cost Regulations, stipulate that the service provider (lawyer, tax consultant, notary) is entitled to reimbursement of the value added tax due for his/her work. This means that the service recipient owes the legally applicable value added tax; he/she cannot claim section 29 UStG.
The entrepreneur can demand an appropriate compensation for the additional VAT burden (Section 29 para. 2 UStG), provided that
- the service is based on a contract concluded before June 30, 2020;
- the contracting parties have not agreed otherwise, e.g. that claims for compensation in the event of an increase or decrease in the tax rate are excluded.
Check incoming invoices for 19%
From July 1, 2020 until presumably December 31, 2020, other entrepreneurs (your suppliers) may not charge you the “old” tax rate of 19%. The input tax deduction for the absolute difference of 3% at the applicable tax rate of 16% is excluded. We therefore recommend that you check your incoming invoices meticulously to ensure that you do not end up stuck with these additional costs. Nevertheless, it is important to note that your suppliers can make corrections in cases like this.
Some tax consultants are currently expressing great expectations that a non-objection rule from the Ministry of Finance could be such that an excessively high input tax deduction of 19% after June 30, 2020 should not present a problem if the supplying entrepreneur has actually paid the (then invalid) 19% VAT. In practice, no one can know this for sure or do any research into it, which is why we recommend that you insist on correcting your bills. Moreover, the fiscal courts are not bound by letters from the Ministry of Finance. In formal legal terms, no reliance on such a simplification rule can be contested in court in individual cases.
Conversion and changes in the tax base
If, after June 30, 2020, there is a reduction or increase in the basis of assessment for a taxable transaction carried out before July 1, 2020 (e.g. by way of a discount, rebate, other price reduction or retroactive billing), the entrepreneur who carried out this transaction will most likely have to correct the amount of tax due for it (Section 17 para. 1 sentence 1 UStG). The tax rate of 19% applies both in the case of taxation according to agreed remuneration (target income) and according to received remuneration (actual income). The same applies to the adjustment of the deduction. Specific rules apply in particular to the granting of vouchers, deposit contributions and annual bonuses. When an item is exchanged, the original delivery is cancelled and replaced by a new delivery. If an item delivered before July 1, 2020 is exchanged after this date, the tax rate of 16% applicable from July 1, 2020 is to be applied to the delivery of the replacement item.
Value added tax on vouchers
Single-purpose or multi-purpose vouchers are treated differently:
- In the case of multi-purpose vouchers, it depends on when the service is provided for which the voucher is redeemed.
- Single-purpose vouchers issued up to June 30, 2020 will not benefit from the reduction in VAT.
Adjust cash register systems!
Companies should temporarily adjust their IT and cash register systems to the changes mentioned above.
Benefits in kind (private use of company cars) and gratuitous provision of value (private telephone use) will also be subject to the reduction in value added tax from July 1, 2020. The payroll accounting must therefore be adapted accordingly.
WINHELLER advises companies on value added tax
Do you have questions about the reduction of the sales tax in your company? Our tax experts will be happy to provide you with individual advice on how to deal with the reduction in value added tax. Please do not hesitate to contact us with your inquiries.
German Tax Law and Tax Advice for Business Companies