If municipalities are planning larger purchases that are at least partly intended for later use against sales tax-paying fee, then they can claim a tax advantage. Because the input tax, which cities and municipalities receive back, can be measured pro rata temporis according to the respective expected VAT-payable performance. It is irrelevant whether the actual amount of the VAT-paying service is proportional to the amount of the VAT refunded. It only counts that the remuneration for the service is later appropriate. In this way, cities and municipalities can, for example, claim a large part of the VAT paid as an input tax deduction when constructing a publicly usable building, such as a concert hall.

Municipalities are legally public corporations. Therefore, they are also subject to tax laws, like all other taxpayers in Germany. This also includes the VAT Act. However, because cities and municipalities are obliged to perform special tasks towards the general public, certain exceptions apply here. For example, public services which they alone are entitled to perform are exempt from VAT.

However, cities and municipalities can also offer their citizens other services. Often these are social or cultural offers, but also education and sport can count. However, in these cases, the services are subject to VAT.

At this point at the latest, a clarification on the use of the term performance in this post is required. Unlike other services within the meaning of the Sales Tax Act, these are generally taxable services. So it can be about deliveries as well as other services. This should apply equally for our purposes in this contribution.

2. possibilities of deduction of VAT paid by cities and municipalities

However, where VAT is incurred, there is also the possibility of deduction of VAT. Because if cities and municipalities receive services that they need to provide services themselves, then they are entitled to the refund of the VAT paid as input tax. In practice, the withheld sales tax is simply charged with the input tax already paid to the own suppliers and service providers, so that only the difference after input tax deduction is received by tax registration and payment to the tax office. However, it should be noted whether the services received from the municipalities are perhaps also proportionally linked to government services. Since the public authorities calculate their public services without VAT, the deduction of input tax is excluded at least for this share of the services received.

Nevertheless, this can be an advantage that cities and municipalities can use in connection with the deduction of input tax. How this works exactly, we now want to explain in more detail below.

If municipalities are planning larger purchases, which are intended to be of use both within the framework of government services and by companies of a commercial nature, then input tax also plays a role in the planning. If a company of a commercial nature uses the purchase to provide services, then these are in principle subject to VAT. So, as already mentioned, there is a general possibility of deduction of VAT by the cities and municipalities. However, this can only be done proportionally.

Now the question has to be clarified, what is the proportion of the sales tax paid at the time of purchase, which the cities and municipalities can deduct as input tax. This can be very different, but generally depends on the use of the obtained power. Thus, a consideration of the respective wear of the object acquired for this purpose comes into consideration as well as a time-dependent use. This must be examined and decided on a case-by-case basis. And of course, this can also apply to services that are not objects. This refers in particular to services or the mediation and application of expertise.

What is particularly interesting, however, is that the amount of the VAT deduction and the VAT-paying income that you earn later on do not have to be proportional. The only aspect to consider here is that the amount of income is appropriate. This means that they operate within the usual framework, so that abuse in this regard is excluded.

To explain these connections in more detail, we would like to create a vivid example. Here we consider the fictitious municipality of Taxing.

4.1. Purchase of equipment with pro rata temporal use in the context of a business of a commercial nature

Taxing needs a new sports hall in the near future in order to fulfil its obligation to provide physical education to local schools. The construction costs of the new sports hall are to be EUR 10,000,000 plus EUR 1,900,000 sales tax.

However, there are also some sports clubs in taxing. They have previously used the existing sports facilities of the municipality for a fee. Therefore, all interested parties assume that, after the construction of the new sports hall, it will also be made available to sports clubs for remuneration. This aspect is therefore also relevant in the calculation of the input tax that taxing can recover from the tax office. Moreover, without this transfer of the establishment subject to VAT, Taxing would not be able to deduct input VAT.

4.2. Determination of the usage relationship as a basis for deduction

So we take part in the considerations related to the determination of the amount of input tax of the municipality Taxing in the construction of the sports hall.

It can be assumed that the sports hall is reserved on school days in the morning and partly also in the early afternoon for school purposes. Later in the day, however, it should be available exclusively to local sports clubs. While the school use is about eight hours a day (from 8 a.m. to 4 p.m.), we come to the clubs on a daily duration of about six hours (17 a.m. to 11 p.m.). However, the municipal administration of Taxing also expects the sports clubs to consider using the hall for about six hours on Saturdays. Every week, 40 hours are reserved for physical education and 36 for sports clubs. However, when calculating the temporal share of school sport, one must also take into account the fact that there are school holidays. For simplification, we want to assume a total of 12 weeks per year.

Therefore, we expect for one year: