A property rented out and owned by a foreign property-corporation ("propco") without personnel on site is no permanent establishment for VAT purposes
Lately several surprising court decisions were taken regarding VAT regulations for real estate investments which should be taken into account by investors. Hereinafter we will review the possible impacts of an ECJ decision which states that a rented property without own personnel does not represent a permanent establishment for VAT purposes.
Foreign propcos holding a property in Germany and renting it out generally try to avoid founding a permanent establishment for income tax purposes in order to avoid becoming liable for trade tax. In this respect the definition of a permanent establishment as per § 12 of the German Fiscal Code applies. However, a permanent establishment for VAT purposes does not have to be in line with a permanent establishment for income tax purposes. In case of a permanent establishment for VAT purposes the definition of a “fix establishment” of the superior ranking EU law applies (Art. 44 and 45 of MwStystRL as well as Art 11 MwStVO).
For foreign propcos the situs principle applies for the definition of the place of the letting activity independent from the question if a permanent establishment is in place. Thus, the services of letting a property located in Germany are taxable for VAT purposes in Germany and – in case of an admissible option for VAT- also subject to VAT. However, the existence of a permanent establishment for VAT purposes has a significant impact on the VAT procedure. So, without a permanent establishment for VAT purposes the reverse charge mechanism needs to be applied for the vatable rents and the input VAT needs to be reclaimed in the special VAT reclaim procedure. The general taxation procedure for VAT is not applicable anymore.
Sofar the tax authorities generally assumed the existence of a permanent establishment for VAT purposes in case of a property rented out. Section 13b.11 (2) clause 2 and 3 of the German VAT guidelines (UStAE) says: "Entrepreneurs owing a plot located inland and renting it out subject to VAT are to be treated in this respect as domestically resident. They have to disclose this turnover in the course of the general taxation procedure."
Furthermore, it says in section 18.10 clause 4 UStAE:
"Entrepreneurs which own a plot located inland and which rent or intent to rent this plot are to be considered as residents."
Hence, a foreign property company with turnover from letting subject to VAT has to file for a VAT registration in Germany and to file preliminary VAT returns and annual VAT returns. The tax authorities assume in this case that a propco is to be considered as resident in Germany and consequently founds a permanent establishment for VAT purposes.
Now ECJ has decided in a current verdict very clearly that the letting of a property without own personnel “on site” does not represent a fix establishment and consequently does not cause a permanent establishment for VAT purposes (ECJ dated 03 June 2021, C-931/19).
Consequently, this means that foreign propcos with properties located inland are not to be treated as domestic residents if no own personnel is established “on site”. Hence a registration for VAT purposes in the country where the respective property is located would not be possible. This would consequently mean that foreign propcos need to apply for the reverse charge mechanism towards the vatable tenant. However, if the propcos erroneously still charge VAT on their invoices to the tenant it would have to be considered as unjustified disclosure of VAT (in Germany as per § 14c (1) UStG). Hence, the VAT would be owed by the propco but the tenant would not be entitled to input VAT deduction.
A further consequence would be that for the propco an input tax deduction would no longer be possible in the country in which the property is located and that only the complicated special VAT reclaim procedure (“Vorsteuervergütungsverfahren”) would be applicable .
It is not clear yet if the German tax authorities will, based on the ECJ decision, examine and adjust the aforementioned passages of the German VAT guidelines. In any case a protection of trust for the taxation periods until the respective adjustment of the guidelines is required. If such an adjustment is carried out, the foreign propcos need to significantly adapt their processes for the letting of properties subject to VAT.