Announced reduction of VAT rates from 01.07.2020 to 31.12.2020 in Germany

On 3 June 2020, the coalition committee of the German government surprisingly decided on the short-term reduction of VAT rates from 19% to 16% and from 7% to 5% respectively. This measure is one of over 50 measures adopted to combat the consequences of the Corona crisis. The aim of the reduction is to strengthen domestic demand; the financial requirement is estimated at around EUR 20 billion. The reduction in VAT rates is to come into force as early as 1 July 2020 and is to remain in force until 31 December 2020. A reduction in average rates for agriculture and forestry was not announced.

Although the final law regarding the reduction in VAT rates has so far not been published, companies should prepare themselves for the temporary VAT rate change with immediate effect and put in place the necessary steps to accommodate the reduction in rates. There is now less than a month left in order to prepare for these changes, so you should be treating this as a top priority.

Should any new information become available or simplification regulations arise due to changes in the law or administrative instructions, then we will keep you informed.

The temporary change in VAT rates affects all entrepreneurs who carry out sales subject to VAT in Germany, and these could be entrepreneurs who are located overseas. There is a short-term need for action to be taken, as VAT accounting systems and processes will need to be adapted and, if necessary, contracts and permanent invoices will also need to be changed. It should also be noted that all accounting systems will probably have to be converted back to the currently applicable VAT rates by 1 January 2021. However, it is not certain what will happen at the end of this year, so flexibility in your approach is essential.

Below you will find an overview of the areas that are particularly affected by the change in tax rates:

• For the question of which tax rate is applicable, the point in time of the supply of services or goods is generally the test. The point in time when a contract is signed, when invoices are issued or payments are made is not relevant for the applicable tax rate. It is also irrelevant whether the turnover is taxed according to the remuneration received or according to agreed remuneration.

• If advance payments are received before 1 July 2020, the previous tax rate is initially to be applied to these payments. If the service on which the down payment is based is performed after 1 July 2020 but before 31 December 2020, the tax rate for the down payment must be corrected to the reduced tax rate in the final invoice.

• If there are subsequent adjustments to the remuneration, the date of the performance is decisive for the question of the applicable tax rate and not the date of the subsequent adjustment. If, for example, in the case of long-term supply relationships, flat-rate discounts are granted retroactively for the year 2020, these would be appropriately divided between the two tax rates to be applied differently.

• In the case of permanent services that are not deemed to have been provided until the end of 2020, the reduced tax rate applies to them all entirely. This is the case, for example, with licenses or membership fees. This also applies if advance payments have already been made. In these cases, the invoice may have to be corrected and the reduced tax rate applies.

• For continuous services such as rental or leasing the service is provided on a monthly basis for VAT purposes. Thus, if these services are subject to VAT, the currently applicable tax rate is therefore to be applied until 30 June 2020 and the reduced tax rate from 1 July 2020 until 31 December 2020.

• If a discount is taken from July 2020 for services performed before 1 July 2020, the tax rate before 1 July 2020 applies to the discount deduction.

• In the case of incoming invoices (ie sales invoices), it is imperative to ensure that the correct tax rate is used. If the new tax rate is not applied to an incoming invoice for services or goods supplied after 1 July 2020, the tax shown on the invoice is too high and not deductible as input VAT. I.E. in case a sales invoice states 19% VAT rate for goods supplied after 1 July 2020 the VAT rate is 3% too high. Although the recipient might pay 19% VAT to the supplier, he has only the right to deduct 16% VAT as input VAT.

• If contracts serve as invoices (for example, rental agreements) or permanent invoices have been issued, these must be adjusted as of July 2020. Otherwise, these documents that are used as invoices for input tax deduction will also contain an excessively high tax rate as of 1 July 2020, which partially excludes the input tax deduction.

• The IT systems need to be adapted. If necessary, new tax codes or sales accounts with automatic tax deduction or new tax keys must be set up. This also applies to intra-Community acquisitions and to incoming services for which the service recipient is liable for sales tax (reverse charge). POS systems must also be prepared and adapted accordingly.

• If vouchers are issued, it must be ensured that they are valid for redemption, depending on whether they are single-purpose or multipurpose vouchers. If vouchers can be redeemed both during the period of validity of the reduced VAT rates and after their expiry, they are likely to be multi-purpose vouchers, as the applicable rate is not known at the time of redemption when the voucher is issued.

• In the case of contracts concluded before March 2020, the reduction in tax rates could lead to compensation obligations under Section 29 of the German VAT Act (conversion of long-term contracts) between the service provider and the service recipient. This requires an individual review of the contracts.

• If customers are supplied via consignment stock, the decisive factor in determining the tax rate is when the customer takes the goods from the consignment stock. A delivery is considered to be executed when the customer removes the goods.

• If cars are provided to employees, it must be ensured that the new VAT rate is applied from 1 July 2020.