The rental of real estate with sales tax allows the deduction of the landlords. This allows landlords to get the sales tax incurred on the construction of the property refunded via the input tax deduction. Thus, a savings potential of 19 % is possible, which corresponds to the amount of the applicable sales tax. However, such a rental is only possible if the tenants themselves provide services subject to VAT as entrepreneurs. In addition, there is a period of ten years, which you have to comply with after the VAT associated with the construction. The VAT paid by such entrepreneurs on the rent does not constitute additional costs because they themselves are also entitled to deduct input tax. Therefore, they also receive the sales tax paid on the rent back.

Imagine you wanted to build a property that you intend to rent in the future. You will now receive the bills for the construction of the property and read there that these services also require 19% sales tax. Of course, you also have to pay this amount. But it would certainly be very gratifying if only the net costs could be satisfied. Because then you would have saved 19% of the actual costs. And yes, that would be too nice if the financial administration reimbursed 19% of the construction costs.

However, this is by no means just a nice daydream of an imaginative tax consultant. In fact, there is a possibility with which one can rent real estate with deduction of the sales tax incurred during construction. Therefore, we dedicate this contribution to the question of what must be considered in order for this dream to become a reality for you as well.

For this purpose, we enter into the legal framework that is relevant for a rental of real estate with pre-tax deduction. For this we must consult the VAT law as the only legal basis. In particular, the regulations that treat the rental of real estate for sales tax are extremely important here. We find it in § 4 no. 12 UStG. The basis for the application of this important paragraph is that the rental of real estate pursuant to § 1 (1) no. 1 UStG constitutes a taxable service. In fact, the rental of real estate meets all the requirements for this. This is because it is a domestic service provided against remuneration by an entrepreneur. Finally, according to VAT law, a landlord is also to be regarded as an entrepreneur (§ 2 UStG).

Having clarified this, we come back again to the enormously important § 4 UStG and here to the number 12 contained therein, which, like all other numbers of this paragraph, is an exception to taxation. More specifically, point 12 stipulates that the rental of real estate, although it meets all the conditions for taxation, still remains tax-free. At first glance, this may seem like a tax relief, because consumers would also have to pay the otherwise applicable sales tax. However, this is relevant to our concerns in another way. Because if you rent real estate tax-free, then your own right to deduct input tax (§ 15 UStG) expires. But we want to use exactly this tax privilege later.

We succeed in doing this because there is a separate exception to the exception in § 4 no. 12 UStG. In fact, you can exercise a right to vote for this, which allows landlords to still calculate sales tax at the rental. However, certain conditions apply here. Thus, a rental subject to VAT is only allowed if the tenant himself is also an entrepreneur who is entitled to make a deduction. Thus, the renting entrepreneur also provides services subject to VAT.

Now that we have provided ourselves with the legal tools, we can venture into a thought experiment. Of course, this is about the rental of real estate with pre-tax deduction. And of course, in the end, the saving of 19% of the construction costs of the property, which is regularly incurred as sales tax, attracts.

Our fictitious wife Findig may have an undeveloped plot of land. She intends to build a building on it, which she would like to rent after completion. Since Ms. Findig involves an experienced tax consultant in her planning, she also receives the best possible advice in all questions. This also applies to the use of the property in its future rental. Therefore, the building is designed in such a way that it can initially be used for commercial purposes, but a conversion into a residential property remains quite feasible without great circumstances.

The construction of the building is quickly coming to an end. Mrs Findig receives a series of invoices from the companies entrusted with this task. Of course, these companies are obliged to calculate their deliveries and services under the Sales Tax Act at 19% Sales Tax. So Mrs Findig pays these gross amounts. In addition, we assume that these costs total a net amount of EUR 2,000,000, so that a further EUR 380,000 in sales tax is added. Ms. Findig thus pays a total of EUR 2.380,000 for the construction of the property.

After construction, Ms. Findig finds a company that now wants to rent her property. You agree on an annual amount of EUR 100,000 as rent. This company is Net-Impact GmbH. As an advertising agency with marketing and influencer activities, the GmbH also provides services subject to VAT. So we remember that the GmbH is therefore entitled to the input tax deduction.

Ms. Findig thus meets all the requirements to opt for the rental of the property subject to VAT. She now announces this to the tax office. On this basis, Ms. Findig exercises her right to deduct input tax when renting the property. Consequently, the tax office reimburses her the previously paid amount of EUR 380,000. Although this is usually associated with an audit of all invoices paid that included VAT, this is also understandable. Because what happens if there is no adequate examination, you have noticed in the Cum Ex scandal. Fortunately, in our case, verification by the tax office is much easier.

But how might the GmbH as a tenant react to the surcharge of 19% sales tax on their rent? After all, this means a considerable additional effort, right? At this point one can immediately give all-clear. Because since the GmbH as a tenant also provides services subject to VAT, she herself is also entitled to the input tax deduction. This of course applies both to all purchases subject to sales tax, such as for their office furniture or studio equipment, as well as to the sales tax applicable to the rental. Thus, the GmbH can also claim the sales tax paid on the rent as an input tax deduction. So she gets it back from the tax office.

But anyone who believes that the sales tax lease is necessary at best as a short-term alibi function in order to be able to claim the deduction in connection with the construction or acquisition of real estate is mistaken. In fact, this requirement must be met for at least ten years. Otherwise there will be a retroactive correction of the deduction. If, for example, Ms. Findig were to rent the property to a resident doctor after eight years, she would have to refund the VAT received in the amount of two tenths of the EUR 380,000, because the requirement remains unfulfilled in two of the ten years.

Although a human physician is also an entrepreneur in terms of sales tax, his services are generally also subject to the VAT exemption of § 4 UStG (in this case by number 14 letter a). Thus, there is no deduction of input tax in such a case. Consequently, Ms Findig also lost her right to deduct input tax when renting the property. It is different again for a veterinarian, because such services are actually subject to VAT, so that veterinarians are also entitled to deduct input tax.

But if Ms. Findig accepts a dentist as a tenant after ten years, for example, the deadline has already passed. Therefore, it can then carry out the rental of the property without VAT without jeopardising its previous deduction. Of course, this also applies if Ms. Findig would decide after the deadline to convert the property into a residential rental property in order to rent it to private tenants in this way. It goes without saying that, in such a case, the VAT paid on these conversion costs would be excluded from the deduction.

In addition, one should be prepared that the tax office may object that these changes could constitute misuse of design. However, this can usually be refuted very well. However, a good tax consultant should be involved. Finally, you also want to be sure that one receives the necessary professional support in a proceeding at the tax court to win such a process.