The Decree will apply to VAT groups and holdcos from 31 December 2018, but local tax authorities have the authority to allow an earlier application with explicit reference to the Decree for all transactions performed (it is not allowed to single out transactions from the application). In Germany a VAT group exists (or ceases to exist) as soon as the requirements are fulfilled and that no separate request is necessary. Businesses will therefore need to assess in how far their group companies and/or limited partnerships will become a part/will no longer be part of their German VAT group.
Before the ECJ Larentia & Minerva case, German VAT law did not allow limited partnerships to be part of a VAT group (‘Organschaft’ in German) because of the financial link which can be challenging to establish. In the Larentia & Minerva case, the ECJ ruled that as long as the limited partnerships fulfil the requirements, they should be allowed in a VAT group. This Decree is now confirming the conditions under which limited partnerships can join a German VAT group and how the financial and organisational links can be fulfilled. In particular in insolvency cases, the German Ministry of Finance confirmed that the VAT group will cease to exist as soon as the insolvency proceedings are opened or even before that under specific circumstances.
The other part of the Decree relates to input VAT recovery by holdings for costs for the acquisition of capital in order to purchase company shares. If the acquired capital would be disproportionate to the shares held in the economic sphere, or if the setup is deemed to be an abusive practice, there will be no right to recover input VAT. The interpretation of ‘disproportionate’ and ‘abusive practice’ are not a given in the Decree and will need to developed in practice and/or case law. Finally, there is a change in wording of the condition under which shares are held. The active management accompanied by taxable supplies remains a requirement, but the requirement that the shares should be held ‘in so far as’ this occurs ‘for the purposes’ of the direct involvement has been removed. This leads to the question whether or not input VAT recovery is allowed already from the moment these supplies are intended to be carried out or from the later moment they are actually carried out, (the latter is not in line with ECJ case law). Companies therefore need to carefully review their VAT recovery for costs incurred in these particular situations, which may also occur when purchasing shares e.g. for a employee incentive plan.
If you have any questions please do not hesitate to contact Monica Azcarate, Senior Manager PwC Germany on firstname.lastname@example.org.
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