Germany: Input VAT Recoverable If Relevant Foreign Outputs Could Have Been VAT-ed If Performed At Home

The case before the Court was brought by the German owner, an investment fund, of Dutch commercial property. The buildings were let as office space to Dutch businesses and the owner opted to charge Dutch VAT on the rentals. The German tax office denied the owner the right to deduct the (German) input tax, on the grounds that Sec. 205 of the official VAT Guidelines excludes the right of deduction where the relevant foreign output would have been free of VAT if performed in Germany. Sec. 205 also says that a German option to waive the output tax exemption is to be ignored.

The Court held that the sentence in Sec. 205 referring to the output tax exemption waiver option was unfounded in law and ran contrary to the VAT system. It could not therefore be sustained. The fact that the rentals had been charged to Dutch VAT was conclusive evidence that a corresponding option in Germany would have been exercised. However, the existence of a corresponding option was a matter for German law, and this forced the Court to refer the case back to the lower court for further facts, in particular as to whether the identity of the tenants would have curtailed the German option. This would have been the case for office space let to a bank. The Court also made the point that the input tax could only be deducted if its charge was appropriate. The inputs were described to the Court as "services for the construction of buildings, such as the selection of a property and tax and legal advice". If this description meant that the inputs were "in connection" with a Dutch site, they should not have been subjected to German VAT in first place. The Court asked the lower court, in its referral, to clarify this matter too.

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