Basically, the VAT deduction serves to ensure that the entrepreneurial use of goods and services is not finally burdened with VAT. Rather, only the end user should be burdened. Therefore, the deduction of VAT neutralises the burden of VAT on goods or services. For non-entrepreneurs, on the other hand, the tax burden remains in principle. Value added tax is the value added tax charged to the trader by the other trader for the service provided to him. German VAT law is characterized by the deduction of input tax according to § 15 UStG. But what is the VAT deduction and when are you entitled to it? These questions are clarified in the contribution.

The deduction of input tax within the meaning of § 15 UStG constitutes a recovery claim of the entrepreneur against the tax office. Accordingly, if the entrepreneur has the conditions for services that he receives from other entrepreneurs and then recycles them (so-called input sales) can recover the tax levied on them from the Treasury.

The VAT deduction is only granted if certain conditions are met. First, the entrepreneur would have to receive an input from another entrepreneur. Furthermore, there must be a benefit received by the trader making the deduction. The expenses of non-entrepreneurs, however, remain burdened. The service must continue to be performed for the recipient’s company.

Prerequisite for the deduction is the entrepreneurial status. According to § 2 I UStG, an entrepreneur is one who carries out a commercial or professional activity independently. Commercial or professional is gem. § 2 I 3 UStG any sustainable activity for the purpose of generating revenue, even if the intention to generate profit is lacking or an association of persons acts only towards its members. In the context of the assessment of entrepreneurial status, the individual indices are to be weighted in the context of an overall assessment. It should also be noted that the entrepreneurial status does not yet arise by virtue of legal form. In addition, a deduction of VAT is sometimes also possible for municipalities and cities, but the relevant conditions must be examined. Relevantly, services received are distinguished from government services, because these are not subject to VAT and therefore there is no entitlement to deduct input tax.

In addition, the service must be provided for the company of the recipient. The VAT deductible therefore does not include benefits received for the private life of the trader. There must therefore be a sufficiently close economic link between the benefit-reference and the entrepreneurial activity. Problems are conceivable here, especially in connection with mixed uses.

2.2.1. Mixed use & VAT deduction

If the services that the company receives are used for different purposes, the entrepreneur must decide on the allocation for purposes of deduction. The entrepreneur can choose between fully private or professional assignment or proportional assignment.

2.2.1.1. Partial supplies

If several divisible items are delivered by one operation, the individual items may be divided according to their use. A deduction may then be made only in respect of the goods with a business purpose.

2.2.1.2. Services economically distributed

If private or business use can be determined or estimated on the basis of external characteristics, services can be divided according to objective criteria according to the use. The input tax can then only be deducted in proportion to the business use. In this case, it must be based on the extent of the respective use.

2.2.1.3. No divisibility

If the attribution to the enterprise is not possible due to lack of objective allocation rules, the performance must be assigned to one of the uses. The deduction of input tax can only be sought in the case of mixed expenses if the entrepreneurial cause dominates the private one.

2.2.1.4. Fixed assets assets

For assets that are permanently intended for operation but are used in a mixed manner, there is an assignment option from an operational use of more than 10%. Less than 10% of business use is an assignment to the private sphere mandatory. In addition, you can assign the economic good either completely operationally or privately or according to the proportionate use. If you assign them fully operationally, it should be noted that the private share of use is taxable as a withdrawal under the conditions of § 3 IXa No. 1 UStG. They must adequately document the full allocation and inform the tax office in a timely manner. For this, the general filing period for the VAT annual registration applies, i.e. May 31 of the following year (§ 149 II 1 AO). The minimum requirement is that you also make the full deduction.

By an initial complete deduction of input tax with only time-proportionate withdrawal taxation of private use, you can gain considerable liquidation advantages. It may therefore be advantageous to declare the full deduction. However, the aforementioned allocation option was limited for mixed-use properties. In addition, the possibility of assessing private use as withdrawal of use is only possible with regard to private consumption purposes, which are completely foreign to the taxpayer's business activities. In cases where the non-business use serves social purposes, the deduction of VAT is only possible on a pro rata basis.

Furthermore, a proper invoice of the contractor is required. Without an invoice, a deduction of VAT is unfounded. In this case, however, they can directly invoke the VAT system directive as interpreted by the ECJ and provide any other proof that appears sufficient. However, this should only be chosen if another proof does not seem possible for you. However, the subsequent loss of the invoice does not constitute an exclusion of entitlement. There are then only difficulties of proof.

If the trader assumes that the conditions for deduction are met, but they are not actually met, he is actually not entitled to deduction. Nevertheless, the entrepreneur may invoke his good faith. The condition is that he had taken all reasonable steps to verify the deduction conditions. However, the financial administration rarely assumes this, for example, in the case of the unrecognizable deception of the contributor about his entrepreneurial status or in difficult delimitation questions, if the entrepreneur follows an erroneous administrative concept. If one of these cases is present, the tax office can take into account §§ 163, 227 AO and grant the deduction of input tax despite the lack of conditions. It may be useful to make a request for binding information in the event of doubts as to the conditions for deduction.

According to § 15 II 1 No. 1 UstG, input taxes for services received, importation or intra-Community acquisition of goods are excluded from the deduction of input tax, insofar as they are used for carrying out tax-free transactions. This means that you cannot claim a VAT deduction if you use the services for tax-free transactions. Tax-free transactions are finally listed in § 4 UStG. However, in certain cases of tax-free transactions the exclusion from the deduction does not occur (listed in § 15 III UStG).

The trader who is the recipient of the services must make the deduction. It is basically inconsiderable who pays the service or who benefits it. An exception to this has been found by the ECJ for cases in which the payer himself is the client or the customer, but wants the service to benefit a third party. Then the payer is entitled.

When receiving benefits on behalf of third parties, it is crucial that the negotiator of the company entitled to deduct has effectively acted on behalf of the latter. Only then can the company claim the deduction. If the negotiator is not an entrepreneur and acts on his own behalf, he is not actually entitled to a deduction of VAT. In particular, a pure holding company does not in principle have its own input tax deduction. In addition, it does not arrange any such for its entrepreneurial subsidiaries. However, the ECJ has granted the VAT deduction to the pre-foundation company, which itself is not yet entrepreneurial, if the benefits are directly economically linked to the turnover of the later capital company.

In the respective tax period (§ 16 I 2 UStG) the entrepreneur can deduct the input tax incurred in the same period from the VAT incurred. If the entitlement to VAT exceeds the turnover tax, a surplus shall be reimbursed. If this surplus is not refunded within a reasonable period, the entrepreneur is entitled to default interest, even if the waiting periods of § 233a AO have not yet expired.