How non-resident landlords in Germany can prepare for VAT rule changes

The case involved a Jersey-registered company, Titanium Limited, letting a property in Vienna to two Austrian taxable persons, using the services of an Austrian property manager. Titanium claimed that they did not have fixed establishment, and therefore applied the reverse-charge mechanism rather than charging VAT on its invoices. While the Austrian tax authorities disagreed with this practice, the ECJ ultimately ruled in favour of Titanium. The rationale was that since Titanium, the non-resident landlord, didn’t have any staff in Austria overseeing the letting, this activity did not constitute VAT PE under current rules (Directive 2006/112/EC).

The ECJ’s decision applies across the EU, and many countries will soon amend their VAT registration regulations to comply with the ruling. This will affect VAT reporting obligations, reimbursement of input VAT, cash planning, lease agreements with tenants and other related considerations for non-resident landlords. While this article focuses specifically on Germany, changes will ultimately be implemented across all EU countries.

Practical effects of the ECJ ruling in Germany

Existing German tax law under the VAT Application Decree, or UStAE, contradicts this new interpretation of VAT rules. In Germany, it is common practice for non-resident landlords to let German real estate without having staff in the country to avoid paying German trade tax.

Under current German tax rules, owners of real estate in the country are considered entrepreneurs in Germany and must register in order to pay VAT and to receive the refund of input VAT. Real estate investors are then eligible for refunded input VAT on a monthly basis under the VAT filing process.

The introduction of the new rules, however, will mean that non-resident landlords will likely have to de-register for VAT in Germany, which means they will lose the ability to immediately reclaim input VAT. In this scenario, a property owner headquartered in, for example, Luxembourg might only be able to apply for a German VAT refund on a quarterly — or even annual — basis.

The ECJ ruling will likely affect reporting requirements for property owners. Under current German legislation, non-resident landlords must register in their home country and Germany, and they have a reporting obligation in both countries. Once the change is effective, the landlord will only need to register in their home country. While this may seem simpler, it’s possible that the reporting processes may be more complex and time-consuming in that country. 

There are also potential effects beyond VAT reporting. For example, landlords may need to change their invoicing processes and update tenant agreements.

How non-resident landlords can prepare

While the German tax authorities haven’t implemented changes to UStAE, it’s likely this will happen in early 2022 once the German VAT year concludes. German tax authorities may implement a temporary transitional rule to give all taxpayers the chance to comply with the new regulations. Any changes are likely to affect the majority of non-resident landlords, including property companies, family offices and real estate fund managers, though the extent to which they are affected will depend on the type of property they have and where they are headquartered or domiciled. Changes to VAT rules will primarily affect commercial property.

Non-resident landlords should take action now to prepare for new regulations, including taking the following steps:

• Examine how many countries they have properties in, what the current rules are and how any changes may directly affect VAT reporting obligations.
• If necessary, de-register for VAT in the country where the property resides.
• Consider how changes to the refund of input VAT could affect cash planning. This could be significant for some businesses.
• Understand the administrative costs. Rather than paying advisory fees in two countries, this may shift to just the home country and could affect costs.
• Review lease agreements, as they may need to be amended. This will be time consuming, and any changes will need to be explained to tenants. Critically, tenants may move to paying net rent, not gross, with VAT declared and paid by tenants through the reverse charge mechanism.

While the EU ruling will mean administrative changes for non-resident landlords, it's important to understand that they can continue to lease German real estate subject to VAT, and there will be the possibility to reclaim German input VAT. However, it will be critical to stay apprised of regulatory changes to ensure compliance with new processes.

Ulrich Creydt, head of tax advisory at Vistra Germany, and Christiane Doeringer, tax director at Vistra Luxembourg, contributed to this article.