Circular from German Ministry of Finance dated 8 December 2017 - III C 3 - S 7168/08/10005, 2017/1010657

The German Ministry of Finance has recently published new guidance concerning the application of a VAT exemption for the rental of real estate with furnishings by implementing related case law of the German Federal Tax Court.

Previously, the German tax administration held the view that the VAT exemption, which applies to the rental of real estate, generally cannot be extended to furnishings which are rented out together with the real estate. However, the German Federal Tax Court came to a different view in a ruling dated 11 November 2015 (V R 37/14).

Based on this decision, the German Ministry of Finance amended the German VAT guidelines for the tax administration by stating that the VAT exemption will now extend "as a rule" (exemptions are possible) to furnishings which are rented out together with the real estate (examples given in the amended guidelines include movable office furniture or movable inventory of a retirement home). However, the principles on the rental of operating equipment ("Betriebsvorrichtungen") remain unaffected, ie, such rental services are subject to VAT.

The amended guidelines are applicable to all open cases. However, it will not be objected to if rental services carried out before 1 January 2018 are treated in accordance with the previous guidance for the tax administration.

Taxpayers which have to switch from a rental of furnishings subject to VAT to a respective VAT-exempt rental service, have to review their related input VAT deduction and mangage potential correction obligations.