Second Coronavirus Tax Relief Act: Reduction of the Value Added Tax Rates as of 1 July 2020

1. Reduction of the Value Added Tax Rates as of 1 July 2020

The Federal Parliament (Bundestag) and the Federal Council (Bundesrat) today have adopted the Second Coronavirus Tax Relief Act. This Act provides for the reduction of value added tax rates (VAT) from 19 percent to 16 percent or from 7 percent to 5 percent for the period as of 1 July to 31 December 2020. A detailed application letter from the Federal Ministry of Finance (Bundesministerium der Finanzen, BMF) is meanwhile available.

2. General Bases

In principle, the value added tax rate applies when the services are provided; this should be unproblematic in case of deliveries.

However, difficulties may arise for other services which a provided for are period of time. These services are deemed to have been performed at the end of this period of time. If a performance of a service, thus, is started in June 2020 and is completed only in July 2020, it is deemed to have been completed for VAT purposes in July. In this case, the reduced value added tax rate shall prevail.

For settlements between entrepreneurs, the BMF letter provides that it is not complained about it for services which are provided in July 2020 if the services are inadvertently settled with the tax rate applicable until 30 June. The same applies to the VAT deduction.

3. Partial Services

In particular service recipients not entitled to VAT should review long-term (e.g. construction) agreements regarding agreed partial services and the value added tax rate applicable in the individual case to possibly benefit from the advantage of a lower value added tax rate until December 2020.

4. Advance Payments

In the case of down payments, partial payments, anticipated payments or advances, the tax pursuant to section 13 (1) no. 1a sent. 4 UStG is incurred when the payment is received.

There were concerns regarding the VAT deduction if deductions with 19 percent are received in June, however, the service is to be settled with 16 percent in July.

In the BMF letter, it is clarified that in this case the VAT deduction remains possible if all other conditions are fulfilled and the correction is made in the final invoice.

5. Price Changes through the Change in the Value Added Tax Rate

To what extent actual price changes arise under agreements through the temporary change in the value added tax rates is not a question of value added tax law but of civil law. Section 29 UStG provides for compensation claims for long-term agreements under certain circumstances. However, an unequivocal individual regulation between the contracting parties is recommended in any case. Long-term agreements should be reviewed in view of the changes.

6. Technical Implementation

The very short-term technical conversion e.g. of accounting, ERP and electronic cash register systems, is particularly challenging. However, there are at least simplifications regarding the reporting duties.

Sales at 16 percent or 5 percent are reported in sum as "taxable turnover at other tax rates" in the advance VAT returns and annual VAT returns. Corrections of sales originally declared with 19 percent or 7 percent and of the value added tax deduction are entered negatively in the respective lines to be filled in.

7. Postponement of the Maturity of Import Value Added Tax

The maturity of import value added tax will be postponed to the 26^th day of the second calendar month following the month in question. Hereby, companies receive a liquidity support.

There will be a separate BMF letter on this matter.

8. Conclusion

The BMF letter contains simplification rules that facilitate the temporary conversion to the lower tax rates. Due to the complexity of the subject matter, there is nonetheless still a need for clarification on various practical issues.

BEITEN BURKHARDT will be pleased to assist you with all tax and civil law questions and will also support you in questions of technical implementation e.g. in the accounting system.

Jens Müller