+++ Corona +++ Update: Decrease of the VAT rates

Click here to see what enterprises need to do due to the temporary decrease of the German VAT rates.

+++ Update 1 July 2020 +++

The Federal Parliament and the Federal Council accepted the draft of the “Second Corona Tax Assistance Act” without any changes. As a consequence, the decrease of the VAT rates is effective as of 1 July 2020 (cf. sec. 28 para. 1 to 3 VAT Act).

Also, the Federal Ministry of Finance has published its final version of the guidance letter (click here). There are no significant changes in the final version compared to the last draft (letter dated 26 June 2020).

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For the first time since the implementation of the current VAT system in Germany, VAT rates will be decreased. This causes a variety of practical problems that enterprises will have to cope with. The updated guidance letter intends to facilitate the adjustment process for enterprises and to clarify some of the uncertainties discussed so far. The most important new “simplification” is the “no-objection rule”.

1.  No-objection rule

The Federal Ministry of Finance clarifies that stating the old tax rates of 19 % or 7 % in an invoice, although the service is rendered between 30 June 2020 and 1 January 2021 and therefore the new VAT rates of 16 % or 5 % apply, generally leads to an incorrect tax statement (“overstated VAT”) (cf. sec. 14c VAT Act).

However, the new draft now contains a non-objection rule for July 2020: For B2B services rendered in July 2020 for which VAT has been overstated, i.e. the invoice shows 19 %, there is no necessity to correct the invoice. Even more important: The recipient is allowed to deduct the full amount as input tax “for reasons of practicability”.

2.  Reverse-Charge-Mechanism

If the Reverse-Charge-Mechanism applies – i.e. the recipient is the liable for paying VAT – the non-objection rule applies mutatis mutandis to the VAT that must be calculated by the service recipient.

To see the full draft guidance letter click here.