German Federal Tax Court (case no.: XI R 22/19): withdrawal of the waiver of a VAT exemption regarding land purchase agreements

In its recently published decision (case no.: XI R 22/19) the German Federal Tax Court decided that the waiver of the tax exemption of section 4 no. 9 letter a of the German VAT Act can be revoked as long as the tax assessment for the year of service can still be challenged / objected or amended according to section 164 of the German Tax Code. Section 9 paragraph 3 sentence 2 of the German VAT Act does not regulate the revocation.

In its previous decision of October 21, 2015 (case no: XI R 40/13) the German Federal Tax Court decided that the waiver of the VAT exemption for the supply of a property outside of a foreclosure auction can only be declared in the notarized contract on which this property supply is based (Section 9 paragraph 3 sentence 2 of the German VAT Act). In a letter from the German Federal Ministry of Finance of August 2, 2017, the tax authorities adopted this view and continue to state that the same also applies to the withdrawal of the waiver of VAT exemption.

In general, in application of section 4 no. 9 letter a of the German VAT Act supplies that fall under the German Real Estate Transfer Tax Act are VAT-exempt. According to section 9 paragraph 1 of the German VAT Act, the taxable person for VAT purposes can, among other things, treat such supplies as taxable if they are carried out to another taxable person. The supplying party can waive the tax exemption of a property turnover due to section 4 no. 9 letter a of the German VAT Act according to the wording of section 9 paragraph 3 sentence 2 of the German VAT Act "only in the contract to be notarized in accordance with Section 311b paragraph 1 of the German Civil Code". The wording of section 9 paragraph 3 sentence 2 of the German VAT Act, therefore, excludes an option for VAT in a subsequent revision of this contract, even if this has also been notarized

The German Federal Tax Court now further explains in his decision that the wording of section 9 paragraph 3 sentence 2 of the German VAT Act only formally and time wisely applies to the waiver of the VAT exemption. The provision, however, does not apply to the revocation itself.

The option to pay VAT is usually advantageous if the buyer can claim input VAT deduction. When a property supply is subject to VAT, the seller retains the input VAT deduction from input services in connection with the property. The buyer on the other hand is not charged for the VAT for the property if he can deduct this as input VAT. Without exercising this option, the VAT exemption could become a real cost burden. The seller would try to pass the non-deductible input VAT on to the buyer via the sales price. In certain constellations, even if the property buyer is not entitled to input VAT deduction, the option to pay VAT can reduce costs.

In practice, however, the tax authorities regularly reject a subsequent revocation of the waiver of the VAT exemption. In the view of the tax authorities, the withdrawal of the option must already be declared in the purchase agreement to be notarized. Thereafter, a revocation of the option after the conclusion of the purchase contract would be de facto impossible.

With its new decision the German Federal Tax Court now clarified that the waiver of the tax exemption of section 4 no. 9 letter a of the German VAT Act can be revoked as long as the tax assessment for the year of service can still be challenged / objected or amended according to section 164 of the German Tax Code and that section 9 paragraph 3 sentence 2 of the German VAT Act does not regulate the revocation.

For optional redemptions that have been rejected by the tax authorities in the past, it should be checked whether, based on the new ruling by the German Federal Tax Court, a revocation of the waiver of the VAT exemption can still be achieved.