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An overview by Flick Gocke Schaumburg, Taxand Germany
In October, Germany’s Bundestag passed the Annual Tax Act 2024, introducing various VAT amendments. These amendments include a number which diverge from the government’s initial draft, particularly in areas such as tax exemptions for educational services and loan management which have had stirred debate.
Experts from our German member firm Flick Gocke Schaumburg have analysed some of the key changes from the Act along with their impact, including the following:
Read the full article below:
Changes in German VAT law in the Annual Tax Act 2024
On 18 October 2024, the German parliament (Bundestag) passed its Annual Tax Act 2024, which introduces several amendments in relation to VAT.
Some of these changes diverge from the government’s draft. These were requested by the Finance Committee of the German parliament, particularly in areas that had stirred debate, such as tax exemptions for educational services and loan management.
Amendments to the government’s draft
The planned new regulation for a tax exemption for services in connection with sports (Sec. 4 no. 22 (c) of the German VAT Act draft) has been removed. This is an attempt to reduce uncertainty on the part of municipalities.
The planned expansion of the tax exemption for financial services in the management of loans and loan collateral experienced the same fate. This was due to the financial impact and the tight budgetary situation.
Meanwhile, the implementation of changes to input tax deductions for services purchased by taxpayers who, upon application, calculate their taxes based on remuneration received instead of the invoices received (so called Istversteuerer) has been pushed back to 1 January 2028. Under the new rule, input tax deduction will only be possible upon payment rather than upon receipt of the invoice.
For those taxpayers, there will be an additional invoice note in accordance with Sec. 14(4) no. 6a of the German VAT Act (“Taxation after remuneration received”).
Both the input tax flat rate and the average rate for agriculture and forestry were set at 8.4%. Further, Annex 5 introduces a formula for determining the flat rates from 2026. This was not included in the government’s original draft.
Educational services
The most comprehensive changes to the government’s draft concern education services.
Although Sec. 4 no. 21 of the German VAT Act was to be extensively amended in the government’s draft of the Annual Tax Act 2024, the final version is much more restrained. In particular, the certification requirement in Sec. 4 no. 21 (a), (bb) of the German VAT Act, removed in the government’s draft, has now been retained. This will in turn retain the bureaucracy caused by the involvement of multiple authorities working in parallel. A positive takeaway for affected entrepreneurs is that the additional requirement proposed in the government’s draft for further training, which unlike vocational training would be tax-free only if not systematically profit-driven, has been removed.
Public-law institutions have now also been brought into scope. Additionally, Sec. 4 no. 21 (a) (bb) of the German VAT Act has been amended to expand the scope of services eligible for preferential tax treatment. Previously limited to services that properly prepare for a profession or an examination administered by a public-law entity, the scope now includes school and university education, vocational training and further training, and vocational retraining, including the supply of services and of goods closely related thereto. Also, school and university lessons given by private teachers are now VAT-exempt.
The amendment to the law is aimed at closely aligning the requirements of EU law in Art. 132 (1) (i) and (j) of the VAT Directive without disrupting the status quo to the detriment of current beneficiaries of the tax exemption.. As a result, the Finance Committee’s explanatory memorandum states that the changes are intended to make sure that “previously VAT-exempt services maintain their VAT-exempt status”. Entrepreneurs whose services in this area were previously VAT-exempt should therefore generally not expect any changes. However, it remains to be seen whether valid certificates will have to be reapplied for due to the change in the content of Sec. 4 no. 21 (a), (bb) of the German VAT Act.
In the adopted version, the exempt supplies referred to in Art. 132 para. 1 i) of the VAT Directive are included in Sec. 4 no. 21 (a), (bb) of the German VAT Act and their substantive examination is thus assigned to the competent authority. The certificate issued by the competent authority could therefore now become even more important for the examination of tax exemption by the tax authorities. With this in mind, taxable persons that have previously treated services in the education sector as liable to VAT should once again consider applying for an exemption certificate. This applies in particular with regard to the extension of the catalogue in Sec. 4 no. 21 (a), (bb) of the German VAT Act that now includes further training services, for example.
Other amendments
The Annual Tax Act 2024 also introduces numerous other amendments to the German VAT Act that were already included in the government’s draft.
Among other things, the VAT warehousing regulation (Sec. 4 no. 4a of the German VAT Act) will be removed with effect from 1 January 2026.
The legal definition of the so called work supply (Werklieferung) will be amended, as was previously the case with the administrative instructions. In future, the processing of a third-party object will be a prerequisite.
Despite concerns from Germany’s Federal Council (Bundesrat) that the EU Commission could initiate infringement proceedings, the mandatory application of Sec. 2b of the German VAT Act was pushed back by a further two years to 1 January 2027.
The place of taxation for events in the B2C sector is now shifted to the place of residence, domicile or habitual abode of the consumer if he or she attends online (Sec. 3a(3) no. 3 of the German VAT Act).
The removal of the restrictions in Sec. 12(2) no. 1 and nos. 12 and 13 of the German VAT Act means that the supply, intra-Community acquisition and import of works of art and collectors’ items will be subject to the reduced VAT rate.
The regulation on the unauthorised tax statement (Sec. 14c(2) of the German VAT Act) is extended to credit notes.
The small-business regulation is no longer applicable only to entrepreneurs based in Germany, but is extended to companies throughout the EU, combining it with a reporting system (Sec. 19a of the German VAT Act). Further, the non-levying rule has now been replaced by a tax exemption. This applies if the total domestic turnover did not exceed EUR 25,000 in the previous calendar year and will not exceed EUR 100,000 in the current calendar year. If this threshold is exceeded in the current year, the tax exemption under Sec. 19 of the German VAT Act ceases to apply for the next turnover. The small-business exemptions for small businesses in the EU will also apply in other EU states from 1 January 2025 if the annual turnover in the entire Community territory does not exceed EUR 100,000 neither in the previous nor the current calendar year. The new Sec. 34a of the German VAT Ordinance sets out the requirements for invoices from small businesses.
This is still awaiting approval from the Federal Council, which is planned for its meeting of 22 November 2024.
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