As of 2002, every client of a construction service must in principle withhold a tax deduction of 15 % from the payments and pay it over to the tax office. Construction services are all services that serve the construction, repair, maintenance, modification or removal of structures. The concept of a structure is to be interpreted broadly and includes all installations connected in some way to the ground and made with structural equipment. This also includes fixtures and fittings if they are permanently attached to a building, e.g. shop fittings, window displays, restaurant equipment or fitted kitchens in rented residential buildings. Exclusively planning services (e.g. by structural engineers, architects, surveyors and civil engineers), on the other hand, are not construction services. This regulation becomes particularly problematic if the property was purchased in 2001, but payments still have to be made in 2002: As a rule, the developer’s bank will insist on full payment to itself so that the transfer of ownership can take place “free of encumbrances”. The homebuyer may find himself in the predicament of either evading the tax (which is obviously not advisable) or having to negotiate with the seller and the seller’s bank for a contract adjustment. Every client of a construction service is obliged to deduct VAT if he is an entrepreneur in the sense of § 2 UStG. For VAT purposes, an entrepreneur is someone who carries out a commercial or professional activity independently and on a sustained basis. The deduction obligation therefore also applies to small entrepreneurs, flat-rate taxpayers in agriculture and forestry and entrepreneurs who only carry out tax-exempt transactions. This also includes the renting and leasing of real estate. The deduction obligation only concerns the entrepreneurial sphere of the client. If a construction service is provided exclusively for the non-business area of an entrepreneur, e.g. for his own home, no tax deduction is to be made. There is mitigation in that landlords who rent out up to two apartments do not have to take the tax deduction on construction work for the apartments. This means that in addition to owners of property used for private residential purposes, small landlords are now also generally exempt from the tax deduction obligation. The tax deduction also does not have to be made if the performing contractor, etc., presents a valid exemption certificate. If an exemption certificate is not submitted, the following may be
tax deduction even if the payments to this entrepreneur in the current calendar year are not expected to exceed the amount of 5,000 EURO. The exemption limit of 5,000 EURO is increased to 15,000 EURO if the client only carries out rental transactions that are exempt from turnover tax. The contracting authority is obliged to check the exemption certificate; in particular, it should ascertain whether the exemption certificate bears an official seal and a security number. If a copy is submitted, all the information on the exemption certificate must be legible. It is particularly problematic that the client should always check with the tax authorities whether the exemption certificate is still valid, because this document does not indicate whether the tax authorities have long since revoked the exemption ? But: The service recipient now has the possibility at any time to obtain certainty about a possible liability risk by checking the validity of the exemption certificate. To this end, he can obtain confirmation of the validity of the certificate by making an electronic enquiry at the Federal Finance Office (www.bffonline. de) or. by enquiring at the tax office indicated on the exemption certificate.
Source:Fiala, Freiesleben & Weber Law and Patent Attorneys, Auditors and Tax Consultants
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Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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