Federal Tax Court, decision dated 16 December 2015, XI 28/13

Pursuant to Sec. 13c of the German VAT law, a purchaser of receivables incurs a secondary VAT liability pertaining to the VAT due for the seller's underlying supply, if the seller has not remitted the according VAT to its tax office and to the extent that the purchaser has collected the receivable from the debtor. In the decided case, the purchaser paid 80 percent of the gross amount when purchasing the receivable. The remaining amount was payable less service fees upon the full collection of the receivable from the debtor. In order to avoid a secondary VAT liability, the purchaser was granted a guarantee that the seller will remit the VAT payable for the underlying supplies to the tax office in full and in due time. However, the seller eventually went bankrupt and did not remit VAT to the tax authorities for a number of supplies.

The tax office held the purchaser liable for the seller's outstanding VAT payments. The purchaser litigated the secondary liability on the grounds that he obligated and enabled the seller to remit the VAT from the (partly) paid purchase prices. In the first instance the local tax court agreed to this objection and held the opinion that under these very circumstances a secondary VAT liability is unjustified (which means the VAT loss would have to be born by the state). In a revision of the case, the Federal Tax Court decided to the contrary as it found that Sec. 13c of the German VAT Act implies the possibility that a purchaser may settle the seller's VAT liability directly with the tax authorities, and this shall indeed be the only way for the purchaser to exclude a secondary VAT liability. The guarantee to comply with VAT obligations granted by the seller merely generated claims of the purchaser towards the seller within the seller's insolvency proceeding.

Receivables purchasers should be aware that they may incur a secondary VAT liability, if the VAT for the underlying supplies is not transferred to the tax office but to the receivables' seller in a first step. If a direct payment of VAT to the tax office is not possible, the purchaser may implement safeguards in order to check whether the seller actually complies with his VAT obligations. The parties may also create or increase a reserve for tax risks that will be paid out to seller only upon the completion of the transactions.