Temporary reduction of German VAT: how to deal with continuous services

The German Federal Government agreed on June 3, 2020, to stimulate the German economy by reducing VAT rates from 19% to 16% (standard rate) and from 7% to 5% (reduced rate) in the period from July 1 to December 31, 2020 (see also our blog article).

Rentals, leasing (cars, machines, etc.) and other continuous services often include monthly payment agreements. For these services, VAT generally arises at the end of the monthly period for which the lease payment is due. In case of a leasing installment per calendar year, this would be at the end of December of a year.

The standard VAT rate of 19% applicable until June 30, 2020 applies to permanent services with monthly payment arrangements that are rendered before July 1, 2020 and that are subject to VAT. The standard VAT rate of 16% applies to continuous services performed between July 1 and December 31, 2020.

The following aspects should be considered:

  • Contracts for continuous services, which are to be regarded as an invoice for tax purposes, may need adjustment to the VAT rate applicable from July 1, 2020 to December 31, 2020, e.g. by an addendum to the contract. Contracting parties should therefore identify relevant contracts and adjust them if necessary.
  • A continuous service contract which is changed due to the temporary reduction in VAT rate, must contain all mandatory information required by the service recipient for the input VAT deduction; otherwise input VAT deduction may at least partially refused by the tax office.
  • Private beneficiaries of continuous services subject to VAT should ensure that from 1 July to 31 December 2020, the amount debited from their bank account (e.g. leasing rate) is reduced by 3 percentage points.

Photos: Jamie Street, Unsplash

Disclaimer: We assume no liability for the accuracy of the information. The information listed here does not constitute recommendations for action.

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