Temporary reduction of VAT rates from 01.07.2020

As an essential part of the so-called economic stimulus package, the German government has decided to reduce the VAT rates for six months from 19% to 16% (standard rate) and 7% to 5% (reduced rate).

This change, which is premused to be simple, means considerable administrative work for companies.

Above all, the ERP systems and cash register must be adjusted.

The following topics should receive special attention:

1. Output transactions

a) Relevant time of performance for VAT purposes

The question arises as to when and at what VAT rate to apply. This is determined by the time the relevant transaction is performed:

  • until 30.06.2020
    19 % standard rate and 7 % reduced rate
  • between 01.07. and 31.12.2020
    16 % standard rate und 5 % reduced rate
  • from 01.01.2021
    19 % standard und 7 % reduced rate

In the case of the supplies of goods, the performance of the supply means the time at which the recipient of the service has acquired the power of disposal over the good, more specifically, in the case of a supply with movement: time when dispatch or transport of the goods to the customer begins.

For the supply of services, the time of completion is decisive from a VAT point of view.

b) Advance payments

If, for example, an advance payment was made before 01.07.2020 for a supply that will be performed between 01.07.2020 and 31.12.2020, the advance payment is generally taxed at 19 % or 7 %. However, the VAT rate must be reduced to 16 % or 5 % at the latest within the final invoice.

If the advance payment was done between 01.07.2020 and 31.12.2020 and the supply has been carried out after 01.01.20121, the advance payment is taxed at 16 % or 5 %. However, the VAT rate of 19 % or 7 % is applicable at the latest upon final invoicing.

c) Other Particularities

So-called partial services should be subject to a special examination. In contrast to advance payments, these have the effect that the VAT finally occurs.

Further difficulties may arise in respect to general services (especially rentals), telecommunicationsservices, hotel and restaurant services, passenger transport, return of goods, construction services, vouchers and annual bonuses.

Special attention is required to avoid a VAT liability according to Sec. 14 c German VAT Act.

2. Input VAT

In the case of invoices relating to a supply between 01.07.2020 and 31.12.2020, input VAT deduction is only possible amounting to 16 % or 5 %. VAT that is shown on the invoice in addition to this is not deductible in accordance with Sec. 14 c German VAT Act and therefore cannot be deducted by the recipient.

So far it is still unclear whether an equity rule will be established for invoices issued before 01.07.2020, but only received by the service recipient after 01.07.2020.

In the case of advance payments, where the payment was done before 01.07.2020 but the supply has been effectuated between 01.07.2020 and 31.12.2020, the input VAT deduction is possible to the amount of the stated VAT rate (19 % or 16 % or 7 % or 5 %). However, in case of a final invoice, the VAT rate of 16 % or 5 % applicable at the time the service that was performed must be settled in full, so that the input VAT deduction is only possible up to this amount.

3. contractual agreements

In case of a so-called net price agreement, the taxable person normally has to pass on the tax advantage to the recipient.

If a so-called gross price agreement exists, the taxable person can generally benefit from the advantage of the reduced VAT rate.

However, there may be particularities if the contract itself shows a  fixed amount of VAT or if the contract is a long-term contract.

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