Input VAT deduction for future shareholders and pre-incorporation companies - BMF circular letter dated 12 April 2022

Background information for the BMF circular letter

The prerequisite for deducting the input VAT is that the supply recipient is a VAT taxable person and intends to use the purchased supply for their taxed supplies - either directly and immediately or as part of the overhead costs. Before a company is established, its future shareholders often purchase supplies in their own name, either individually or as a so-called pre-incorporation company. This results in complex questions regarding input VAT deduction, which the ECJ dealt with in three cases:

In the Faxworld case (29 April 2004, C-137/02), a pre-incorporation company had transferred the assets it had acquired to the later Faxworld AG for consideration as part of a non-taxable transfer of a totality of assets. The pre-corporation company did not conduct any other supplies. The ECJ ruled that the pre-corporation company had been a VAT taxable person through the transfer of a totality of assets, even though this transfer of assets was excluded from the scope of VAT. According to the "Abbey National" case law, an input VAT deduction is allowed if a totality of assets is transferred - based on the company's other supplies. Although the pre-corporation company had not conducted its own other supplies, the ECJ attributed the output supplies of Faxworld AG to the pre-corporation company and allowed the pre-corporation company to claim the input VAT deduction.

In the Polski Trawertyn case (1 March 2012, C-280/10), the future shareholders had purchased a plot of land and later contributed it to the company, which was a VAT taxable but tax-exempt transaction under Polish law. The company claimed an input VAT deduction from the invoice for the land, which was issued to the shareholders. The tax office denied the input VAT deduction because the company was not the purchaser of the real estate. The input VAT deduction from the invoice issued by the notary to the company for the incorporation was also not granted because the invoice had been issued to a company that did not yet exist. The ECJ concluded that, due to the neutrality requirement, one of the two parties, i.e., either the company or the shareholders, should be granted the input VAT deduction from the invoices, but did not specify its position in this respect.

In the Malburg case (13 March 2014, C- 204/13, based on a referral of the Federal Fiscal Court dated 20 February 2013, XI R 26/10), a tax adviser had acquired a client base in return for payment with the objective of then transferring it free of charge to a tax consulting company in which he held a majority interest. The ECJ argued that the transfer of use free of charge was not a transaction for consideration and therefore there was no direct and immediate connection between the input supply and taxed output supplies. In such a situation, the company's supplies could not be attributed, as in the Polski Trawertyn case.

Taking these ECJ rulings into account, the BFH (11 November 2015, V R 8/15) had ruled on a case in which the plaintiff had received consulting services related to a planned acquisition of a company and the formation of a GmbH, which then did not happen. In the view of the BFH, the decisive factor was that the consulting services received would not have been transferable to the GmbH even if it had actually been established. No "investment goods" had been created by the consulting services. In this case, the BFH referred to the "Malburg" ruling.

Regulations of the BMF circular letter

In its circular letter, Germany’s Federal Ministry of Finance (BMF) addresses this BFH ruling and the ECJ case law cited therein and relies primarily on the concept of investment goods or investment turnover. By supplementing the VAT application decree, the following is regulated (condensed summary; further requirements may have to be observed in individual cases):

• A future shareholder or pre-incorporation company is permitted to claim input VAT deduction from input supplies that he/she transfers to the company in one act even though the transfer is a transfer of a totality of assets - even if the transfer of a totality of assets is the only turnover. The company’s intended turnover is the deciding factor.
• In the case of a gratuitous transfer, input VAT deduction is possible if, from the company's point of view, there is investment turnover and the company’s intended activity does not exclude the input VAT deduction.
• Investment turnover includes supplies of goods or services that the shareholder (or the pre-incorporation company) actually transfers to the company and that are used by the company for economic purposes. Input services that cannot generally be transferred to the company (as in the BFH case V R 8/15) or that are used by the company but not actually transferred to it must be treated separately from this.
• The BMF circular letter must be applied in all open cases.

Classification

With the "investment turnover", the BMF relies (like the BFH before it) on a term that was used by the ECJ but not defined. The BMF departs from the ECJ case law by allowing the input VAT deduction even if the input service is transferred free of charge. The gratuitous transfer is a non-economic activity in which the "Malburg" ruling disallows an attribution of the company’s output turnover already for this reason. The fact that in the "Malburg" case the client base was not transferred to the company’s assets was not the only decisive argument, but rather merely an additional argument for denying the input VAT deduction in addition to the shareholder's lack of VAT taxable status.

Shareholders and pre-incorporation companies that have been denied an input VAT deduction in comparable cases or have not yet claimed input VAT deduction should check whether this is possible based on the new circular letter from Germany’s Federal Ministry of Finance.

(Dated: 13.05.2022)