Value Added Tax on cross-border services to businesses

Contents

1. Place of supply
2a. VAT treatment where the place of supply is moved abroad
2b. Invoicing on application of reversal of tax obligation
2c. Declaration obligations in Germany for non-taxable sales
3. Services related to land and property located abroad
4. Organisation and conduct of conferences and seminars, and artists– performances abroad
5. Commissions of commercial representatives
6. Repairs and expert opinions on movable objects abroad
7. Catalogue services
8. Outlook on planned EU changes from 2010 onwards

The increasing internationalisation of business relations means that services are being supplied not only within the home market, but increasingly also across borders. That applies to consulting and expert opinion services, and for services such as assembly and repair.

The question thereby arises how such cross-border services are to be treated in terms of VAT. The two main questions are:

1. What is the "place of supply", i.e. where is VAT payable on the service?
2. What rules have to be observed in drawing up the invoice?

The rules resulting from these questions differ depending on the country in question and the type of service provided. So that requires information on the VAT rules of the country where the recipient of the service is domiciled, or the country where the service is provided.

The purpose of our information sheet is to give an overview of the basic rules of VAT treatment of services which are provided particularly for businesses domiciled in another country. This information sheet does not deal with the VAT treatment of the services of forwarding agents and job order processing.

1. Place of supply

Under Art. 3a para. 1 Value Added Tax Act (UStG), services are considered to be supplied at the place from which the company operates its business, so that these services are subject to VAT there.

Example:

For VAT purposes, a car hire company provides its services at the place where it operates its business. For example a car hire company domiciled in Kiel may have as its customer a French company which uses the vehicle in Denmark. In this case, the invoice of the car hire company must be issued with German VAT.

However, there are many exceptions to the basic rule set out in the Act. It is therefore essential to check whether one of the exceptions stipulated in the Act is applicable (Art. 3a paras. 2-4 UStG). In these exceptions, the place of supply of the services is often moved abroad for VAT purposes.

2a. VAT treatment where the place of supply is moved abroad

If the place of supply of the service is moved abroad, there are basically three different ways of handling VAT:

1. Transfer of VAT tax obligation to recipient of services (reverse-charge procedure);
2. VAT registration abroad for the business supplying the services;
3. Appointment of a fiscal representative abroad.

For the company providing the services, reversal of the VAT obligation to the recipient of the services is the most favourable regulation. This reverse-charge procedure is regulated in German VAT law in Art. 13b UStG in particular for cases where a customer based in Germany places an order with foreign service providers. This case has been governed by Art. 13b UStG in Germany since 2002, with the principle of transfer of the VAT payment obligation to the customer domiciled in Germany, for service providers and work suppliers domiciled abroad.

If a German company provides services for a company abroad, the reverse-charge procedure has the advantage that the German company as a service provider does not have to register for VAT purposes abroad, and does not have to make a VAT declaration there. After receiving the invoice (which is made out as a net amount), the recipient of the service abroad calculates the VAT himself on the basis of the applicable tax rate of his country, declares this to his Tax Office and, provided that he is entitled to deduct input VAT, claims input tax offset at the same time.

However, the reverse-charge procedure or comparable practices are not available in every country. An overview for this purpose is given in the attached "Rules for tax obligation reversal in Europe" .

In the event that the reverse charge procedure is not applicable, VAT registration or appointment of a fiscal representative may be necessary. There are no unified rules for this abroad, so it is necessary to check carefully for every country whether VAT registration is necessary or whether the appointment of a fiscal representative is advisable. Further information on this is available from the Federal Central Fax Office.

If the German company does not comply with its registration obligation abroad, in principle it loses its right to deduct the input tax charged to it there.

2b. Invoicing on application of reversal of tax obligation

If the place of supply is transferred abroad, this also has an effect on invoicing by the service supplier, corresponding to the treatment indicated above. The service supplier is obliged to issue an invoice for the services vis-à-vis the recipient of the services. The invoice must then indicate the tax obligation of the recipient of the services (reverse-charge). This can be done by including the phrase "reverse-charge", "tax obligation shifted" ("Steuerschuld verlagert") or "VAT reversed". Please note that no German VAT may be shown, because otherwise the supplying company is obliged to pay this amount to the German tax authority.

For the formal requirements of the invoice itself, the invoicing rules of the foreign state are applicable. However, these are largely harmonised in the EU, so that compliance with the German rules is appropriate. The invoice must contain the following data:

• Complete name and full address of the supplying company and the recipient of the service;
• Tax number related to tax office, or VAT Registration Number (VAT Reg. No.) of the issuer of the invoice;
• Date of issue of the invoice;
• Sequential invoice number;
• Quantity and usual commercial designation of the goods supplied or extent and nature of the services supplied;
• Time of supply of goods or services;
• Amount payable, with breakdown by VAT rate/exemptions, for the goods or services;
• Any reduction amount of payment agreed in advance;
• Amount payable, and VAT amount applicable to it;
• In the event of tax exemption, indication of tax exemption (e.g. intra-Community supply);
• If applicable, note in the invoice on the retention period to be observed by the recipient of the goods or services (e.g. for construction goods and services);
• Indication of tax obligation of recipient of service (Reverse-Charge procedure)

In summary, it is advisable to obtain information in good time on the respective national law. A first contact for this purpose may be the respective German Foreign Chamber of Commerce at www.ahk.de.

2c. Declaration obligations in Germany for non-taxable sales

The German VAT preliminary declaration [Umsatzsteuervoranmeldung] is to be used, entering the relevant sales volume in line 42, ”Non-taxable sales (place of supply not in Germany)– [”Nicht steuerbare Umsätze (Leistungsort nicht im Inland)–].

3. Services related to land and property located abroad

Services related to land and property are (as an exception to the general rule indicated above) always attributed to the geographical location of the land or property, cf. Art. 3a para. 2 No. 1 UStG. Easily movable objects (e.g. camping trailers and tents at camping sites), which do not have to be inseparably connected with the ground, may be regarded as a service related to land and property. This rule also applies to all services which are in close factual connection with land and property, e.g.

• Rental services;
• Expert assessment of real estate;
• Preparation of construction plans, and estate agent activities; and
• Construction and assembly work of German trade fair stand builders abroad.

However, here again, it is necessary to make a careful distinction and classification of the activity. In the specific case, expert advice is to be obtained through the tax consultant or the German foreign chamber of commerce.

4. Organisation and conduct of conferences and seminars, and artists– performances abroad

A further exception from the general basic rule (see Section 1) is the provision of services in connection with the organisation and conduct of conferences and seminars, etc., abroad, as regulated in Art. 3a para. 2 No. 3 UStG. These services are subject to the VAT of the country in which the taxable subject mainly conducts his activities. It makes no difference if for example the services are mainly supplied to German citizens abroad. The only relevant criterion is that the conditions for the provision of the services are set abroad, thus the economically predominant activity took place abroad. The same applies mutatis mutandis for artists– performances. For an artist, only the place of performance is decisive, not the place at which the artist made his/her preparations.

5. Commissions of commercial representatives

Typical services related to carriage of goods include the services of commercial representatives. The range of services of the commercial representative comprise intermediary services. That means services which are provided on behalf of and for the account of the recipient of the service mediated, and services rendered on behalf of and for account of the company which supplies the services mediated.

As set out in Art. 3a para. 2 No. 4 UStG, a mediating service in the above sense is rendered at the place where the service mediated is provided. However, if the recipient of the service uses vis-à-vis the intermediary a VAT Reg. No. issued to it by another member state, the intermediary service used under this number is deemed to have been supplied in the territory of the other member state.

To avoid the German VAT obligation of a foreign commercial representative, the reverse-charge procedure is likewise applied here. The taxable person is then the orderer of the service, on the basis of the relevant national regulations of the relevant member state.

Example 1:

A German commercial representative based in Germany acts as an intermediary, obtaining orders for German suppliers from Spanish customers:

The place of service supply by the commercial representative is Germany, because the sale which he has arranged is regarded as being implemented in Germany, cf. Art. 3a para. 2 No. 4 UStG. For intermediary services for intra-Community supplies, it is assumed that for the sales volume mediated shipment is the relative criterion, i.e. the place from where the goods were dispatched, if the commercial representative was given the order by the supplier.

If the commercial representative was given the order by the acquiror, the place of destination is relevant for VAT purposes. The German commercial representative should check with his Spanish client whether the latter can take on the VAT obligation.

Example 2:

A Greek commercial representatives with registered office in Athens obtains orders for German suppliers for delivery to Greek customers:

The place of supply for the Greek commercial representative is Germany, because the sales volume mediated is also considered to be executed in Germany. Thus a foreign company is rendering a service in Germany. As the Greek commercial representative is not domiciled in Germany, the German recipient of the services has the VAT obligation for the services used (reverse-charge procedure) pursuant to Art. 13b UStG. The Greek commercial representative therefore has to draw up a net invoice.

6. Repairs and expert opinions on movable objects abroad

Repairs of movable objects which are located abroad trigger VAT obligation at the place of the activity. This applies in particular to repair and maintenance work on machines and vehicles, that is work which involves job contracts under which goods are improved, processed or converted. The place of the activity is applicable for the assessment of movable objects for their evaluation and for determination of the extent of damage of such objects. Such operations are taxable abroad, and are thus liable to foreign VAT, if the reverse-charge procedure is not available at the place of performance. If that is not the case, again it is necessary to have VAT registration, or to use the services of a fiscal representative.

7. Catalogue services

There are further exceptions for a series of services, where the recipient of the services is a business (Art. 3a para. 3 UStG). That applies in particular to the ”catalogue services–, which are enumerated in Art. 3a para. 4 UStG. If a service is included in the catalogue of services, the place of supply is transferred to the country of the recipient of the service, departing from the principle of VAT place of supply.

For the services listed below, the place relevant for VAT obligation is where the recipient of the services operates its business, cf. Art. 3a para. 4 UStG:

Example:

An advertising agency in Germany conducts an advertising campaign for products of a French company with registered office in Paris. This service is taxable not in Germany but in France, pursuant to Art. 3a para. 4 UStG in conjunction with Art. 3a para. 3 UStG.

8. Outlook on planned EU changes from 2010 onwards

On 4 December 2007 the Ministers of Economics and Finance of the 27 EU member states adopted the ”VAT package–. The goal of this package is to simplify VAT returns and reimbursements for companies operating abroad. On 12 February 2008, the Economic and Financial Affairs Council (ECOFIN) also adopted a comprehensive package of VAT regulations. The following are some of the details of these two packages:

• From 2010 the place of supply of services rendered by one business to another business is to be specified on a uniform basis as the registered place of business of the recipient of the services, so that it is taxable there.
• For services rendered to non-businesses, the applicable rules remain unchanged, so that the service is in principle taxable at the place where the supplier of the services has his registered place of business.
• From 1 January 2015 the rules for place of supply in the case of electronically provided services, telecommunication services and radio and television services is to be changed such that in those cases where the recipient of the services is a private consumer, the services are liable to tax at the place where the recipient is domiciled.
• The contact points of financial administration for companies operating across borders are from 1 January 2010 to be reduced to just one contact point in each EU member state. This contact point in the respective home member states is to maintain an electronic portal where the company can submit its VAT declarations centrally for other member states in which it has no offices.
• The reverse-charge procedure is to be established as the general principle for services rendered to other companies. It will then no longer be necessary to file tax registrations of the companies in other member states for this purpose.
• Legal entities having a VAT Registration Number are from 1 January 2010 to be treated like companies for purposes of application of the rules of the place of supply of services.

For further information, please contact the Chamber of Industry and Commerce responsible for you.

Despite careful research, we cannot guarantee the correctness of the data given here. In case of doubt, please contact the Tax Office responsible for you.

Status: October 2008