Luxembourg-based companies owning a real estate asset in Germany – Recovery of the German input VAT under discussion

A recent decision from the Court of Justice of the EU (hereafter “CJEU”) in the Titanium case (C-931/19) ruled that “a property which is let in a Member State in the circumstance where the owner of that property does not have his or her own staff to perform services relating to the letting does not constitute a fixed establishment within the meaning of Article 43 of Directive 2006/112 and of Articles 44 and 45 of Directive 2006/112, as amended”.

From this decision, Luxembourg (non-German) owners of German real estate asset(s) which (i) rent out this/these real estate asset(s) to business lessees (“B2B”) and (ii) have no employees in Germany, should in principle not be considered as having a fixed establishment for VAT purposes in Germany. This could impact structures investing in German real estate via Luxembourg-established companies, especially on the way such companies charge German VAT on their rents and recover German VAT on their costs.

VAT impact in Germany

The case suggests that non-German landlords should question whether they have and continue to correctly invoice for the rent to the business lessee (“B2B”) with German output VAT applied on the invoice and whether it is correct that they recover German input VAT via regular German VAT returns.

In contrast to the CJEU decision, Administrative Guidelines from the German Federal Ministry of Finance explicitly states that a person owning and renting out German real estate is considered as having a fixed establishment in Germany (regardless whether it also has any human resources in Germany).

The CJEU ruling appears to contradict this guidance as Titanium was held as not having a fixed establishment in Germany. As a consequence thereof, the reverse charge mechanism should be applicable for the rent charged on German properties and, consequently, any German input VAT relating to the activity should be recovered by Luxembourg landlords using  the EU VAT refund claim procedure and not via regular German VAT returns.

German input VAT recovery procedure for the year 2020

The practical question is whether there is a risk of non-recoverable VAT for Luxembourg landlords with business lessees and how they should recover German input VAT for 2020. Should 2020 German input VAT be reclaimed through an EU VAT refund claim procedure before the deadline of 30 September 2021?

It is considered unlikely that there is a practical risk for such Luxembourg landlords to face the German Tax Authority challenging that German input VAT has been reclaimed using the wrong method. Instead, based on the above quoted provisions in the German Administrative Guidelines, the German Tax Authorities are legally bound to these provisions as a legitimate expectation has been created.

Were the Tax Authorities to change their view, it is general practice that any such changes should not have retrospective effect in such case, and per previous CJEU decisions should be accompanied by transition rules and periods to enable taxpayers to  have sufficient time to transition effectively and not incur a loss.

Therefore, there should be no need for Luxembourg landlords which are currently recovering German input VAT via a German VAT return to safeguard their German input VAT deduction right for 2020 by filing a refund claim before 30 September 2021. Taxpayers who wish to apply the Titanium-principles (i.e. those not registered for German VAT) against the current rules of the German Administrative Guidelines should consider this decision further and act ahead of the 30 September 2021 deadline.

German input VAT recovery procedure for 2021 and onwards

We suggest the following points, which may need to be considered should changes be made by the German Tax Authority:

•  Rents invoiced by Luxembourg landlords to business lessees would be subject to the reverse charge mechanism in Germany – i.e. German VAT to be declared by the tenants in their German VAT returns;
• Luxembourg landlords would have to deregister for VAT purposes in Germany, except where they are liable themselves to self-account for German VAT under the reverse charge mechanism – e.g. performing intra-community acquisitions of goods in Germany, or receiving “real estate related” services from non-German suppliers (within the meaning of article 47 EU VAT Directive);
• Luxembourg landlords should recover German input VAT incurred on their costs via the EU VAT Refund Claim (Directive 2008/9/EC) where a German VAT registration is not required to be in place – i.e. through the Luxembourg VAT refund portal.
• Luxembourg landlords should be able to continue considering the rents received from German properties in the computation of their VAT deduction right.

However, based on initial soundings, it is expected that the German rules for foreign landlords shall remain unchanged and that the legislator shall take suitable measures to reflect the new Titanium jurisprudence of the CJEU.