Value added tax obligations for landlords

Leasing and letting activities generally generate income that is exempt from value added tax (VAT). In certain constellations, however, landlords decide to waive the tax exemption and opt for VAT in order to be able to deduct the VAT they have paid themselves (e.g. to a craftsman) as input tax. The prerequisite for opting out is that the leasing and letting must be to an entrepreneur for their business and not to a private individual. As a result, the turnover from leasing and letting services can be treated as taxable if the recipient of the service uses or intends to use the property exclusively for transactions that do not exclude the deduction of input tax. For procedural reasons, the waiver of the tax exemption cannot be declared indefinitely, but only up to the expiry of the assessment period. 
 
In its ruling dated 22.09.2023 (case reference 5 K 2141/20 U), the Düsseldorf tax court addressed, among other things, the question of whether a landlord who only generated tax-free turnover before subsequently exercising the option for VAT liability is generally obliged to submit a VAT return pursuant to § 18 (3) sentence 1 of German VAT Act (UStG).

The son and plaintiff took over the operation of an ice cream parlor from his father in 2013. The premises for this had been rented commercially by his parents for some time for exclusive use as an ice cream parlor and stating the corresponding VAT. The son joined the existing rental agreement by means of a supplementary agreement and has since taken over the rental payments to the original tenant in full. In addition, the son became the sole user of the premises, as he was the sole operator of the ice cream parlor. The tax court interpreted these circumstances as VAT-exempt subletting of the ice cream parlor premises by the parents to the son.

In the case in dispute, the plaintiff sought a full input VAT deduction from his rental payments made in accordance with the original rental agreement. He stated that the requirements for this were met: both parents had retroactively made use of the option pursuant to § 9 UStG and waived the VAT exemption for sales from subletting to the son. For this purpose, they issued invoices in mid-2019 for the rental services they provided to their son in the years 2013 to 2018 and submitted the VAT returns for the years in question to the tax office.

The tax office only partially granted the plaintiff's claim. In this case, the deduction of input VAT from the father's invoices was ruled out due to his insolvency proceedings. For the mother, the tax office assumed that the VAT returns for 2013 and 2014 were received late after the assessment period had expired, as there was no VAT return obligation in the years before the option was exercised. The tax court did not follow the opinion of the tax office and ruled that landlords who only generate tax-free sales before exercising the VAT option are also generally obliged to submit a VAT return. In practice, the tax authorities refrain from carrying out an assessment in such cases for reasons of administrative economy, as it would only result in a tax assessment of EUR 0. However, in the opinion of the court, the wording of the law does not contain any exception to this; therefore, entrepreneurs with only tax-free turnover - such as the plaintiff's mother with her rental business - are also generally obliged to submit a VAT return.

As a result, the plaintiff's mother exercised the VAT option right due to the postponement of the start-up period before the limitation period for assessment had expired. This means that the plaintiff is also entitled to deduct input VAT for the proportionate VAT according to his mother's invoices for the years 2013 and 2014. Due to the fundamental nature of the question regarding the VAT declaration obligation for entrepreneurs with exclusively tax-free turnover, the appeal is now pending at the BFH (case reference V R 26/23).