Communities of part owners are not business entities from a VAT point of view. The Federal Fiscal Court (Bundesfinanzhof, BFH) recently decided this in its ruling from 22.11.2018 and thus changed its previously held legal position.
Issue – VAT in the case of grants of licenses
In the case that the BFH ruled on, (case reference: V R 65/17) the claimant, together with other persons, had invented methods for the early detection of tumours. In order to market the system the inventors had concluded a license agreement with a German limited partnership (Kommanditgesellschaft, KG). The KG issued credit notes addressed to the inventors that listed the respective shares of the royalties of the inventors and showed the standard rate of VAT of 19%.
The claimant paid tax on his respective share of the royalties as a sole trader at the reduced VAT rate. The tax authorities objected to the application of the reduced VAT rate and issued an amended tax assessment notice. Subsequently, the claimant argued that it was not him but, instead, the community of part owners, which consisted of him and the other inventors, that constituted the supplying business. Therefore, it was the community of part owners that was liable to pay the VAT for the grant of licence vis-à-vis the KG.
Community of part owners is not the supplying business entity
In its decision the BFH ruled that a community of part owners did not constitute the supplying business entity and, therefore, the claimant was liable to pay the VAT on his respective share of the royalties and, namely, at the standard rate. To substantiate this, the BFH explained that a community of part owners cannot be a business entity from a VAT point of view due to its lack of legal capacity. Despite this, in the view expressed hitherto in case law and by the tax authorities, a community of part owners had been considered to be a business entity for VAT purposes.As a service provider and service recipient the community had been authorised to make input tax deductions and obliged to pay VAT. The BFH no longer accepts this view.
The entity that provides a service or receives a service will be governed by the legal relationship that underlies that service and the assessment of this will normally be determined by rules under civil law. According to these, a community of part owners may not incur any liabilities and thus may not provide any VATable services. Therefore, the provider is not the community of part owners but its co-owners. The services that are provided proportionally by the respective co-owners, as business owners, have to be taxed by them. Accordingly, a community of part owners will not be authorised to issue invoices.
Another effect of the change to case law is that, from a VAT point of view, communities of part owners cannot be recipients of services. These will be the individual co-owners in accordance with the size of their stakes. Therefore, the input tax deduction can only be ensured if the incoming invoices are issued pro rata to the respective co-owners.
Please note: The ruling will have consequences not only for communities of inventors. Other communities of part owners, in particular joint property ownership associations in the real estate sector will likewise be affected by the BFH’s decision. The ruling will not impact companies under civil law (Gesellschaften bürgerlichen Rechts, GbR) and associations of co-owners of apartment buildings under the Residential Property Act (Wohnungseigentumsgesetz, WEG) as these have legal capacity and can thus be business entities within the meaning of the German VAT Act.
Recommendation: Affected parties should closely monitor the response of the tax authorities in order to be able to react to any changes in good time. In cases of doubt you should seek advice in order to be able to evaluate the potential legal consequences that could arise.
RAin/StBin [German lawyer/tax consultant] Antje Ahlert
From: PKF newsletter 07-08/2019