Temporary VAT reduction in Germany – an opportunity for Lithuanian companies

Lithuanian companies operating in Germany (including distance selling) could benefit from 1 July 2020.

On May 28, 2020, the Bundestag (German parliament) passed the so-called “Corona Tax Assistance Act”, which reduces VAT for the supply of food (so-called restaurant sales) for a limited period of one year. On 3 June 2020, the German government also surprisingly announced an additional corona economic stimulus package. This reduces the VAT rate from 19% to 16% and a reduced VAT rate from 7% to 5% for sales from 1 July 2020 to 31 December 2020.

VAT Reduction for restaurants

For the supply of food served and consumed on the spot, i.e. in restaurants and canteens, the VAT rate will be reduced from the current 19% to 7% from 1 July 2020 until 30 June 2021. On 5 June 2020, the Bundesrat (upper house of the German parliament) decided to reduce the VAT rate for restaurant sales. If the Corona economic stimulus package described below is also passed, this would probably mean the following for restaurant sales: food will be subject to 5% VAT until 31 December 2020, then 7% for half a year (until 30 June 2021) and then again 19%.

VAT Reduction for all

In addition, the two VAT rates applicable in Germany are to be reduced temporarily, i.e. for all companies and not only for restaurateurs:

• The general VAT rate is to be cut from 19% to 16%

• Reduced VAT rate is to be cut from 7% to 5%.

The cutted rates of VAT enter into force on 1 July 2020 and remain in force for 6 months (i.e. until 31 December 2020).

Consequences

This measure constitutes a significant tax relief, in particular for businesses dealing with private consumers (B2C) and businesses that are not entitled to deduct input tax.

If prices are kept stable, companies can achieve a higher margin and thus a higher profit by reducing VAT. However, for companies in B2B business, i.e. companies that mainly supply goods and services to other companies, there is initially no tax relief, because here companies usually agree net prices without VAT.

It remains open, however, to what extent an adjustment of the usual invoice details and the VAT statement is necessary. The turnover tax regulation of § 14c German VAT Act states that turnover tax (19%) shown too high in an invoice must be paid even if a lower turnover tax rate (16%) actually applies.

Companies that do not adapt their invoice templates and sales management systems may therefore not be able to benefit from the VAT relief. However, such an adjustment represents a considerable bureaucratic burden for many companies. Under certain circumstances, IT solutions may have to be implemented at short notice.

Moreover, in practice there are numerous delimitation issues in certain case variants: in the case of recurring services (permanent services, e.g. taxable tenancies, leasing) or in the case of sales made during the period of the tax rate reduction but for which advance payments for services and the corresponding invoices have already been made, i.e. before 1 July 2020. For existing rental agreements, it should be checked whether a net or gross rent is agreed. Adaptability is also required in other sectors in order to benefit from the VAT reduction: Construction services are usually provided as uniform services at the time of acceptance. Under certain conditions, however, it is possible to agree partial services which are then subject to the applicable (lower) VAT rate.

These changes are likely to be of particular interest to Lithuanian enterprises that pay VAT in Germany, including enterprises engaged in distance selling. They should adapt their accounting systems accordingly and review their prices.

Sources:

• Law on the implementation of tax aid measures to cope with the Corona crisis (Corona Tax Assistance Act)
• Value Added Tax Act

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