Equity measures for the flood disaster of July 2021; catastrophe decrees - BMF circular letter dated 23 July 2021

As a result of the recent disastrous flooding in several German states, the foundations of professional and personal existence literally lie in ruins for many people. Entrepreneurs were still suffering from the consequences of the COVID crisis, or had only just recovered from it, when massive volumes of water destroyed everything. The willingness to help is enormous. The tax administration supports those affected and helpers with various tax relief measures – amongst others for VAT.

Equity measure of the BMF letter for affected persons

Entrepreneurs availing themselves of a permanent deadline extension for the submission of preliminary VAT returns normally have to provide a special advance VAT payment. Upon application, this may be reduced to zero for the year 2021.

Equitable measures of the BMF letter for helpers

Entrepreneurs are providing support to those affected in a variety of ways without demanding payment for this. In many cases, this would normally be VAT taxed as a free transfer of value. If necessary, an input tax adjustment must also be made in accordance with Section 15a of the German VAT Code. If the entrepreneur already knows when purchasing an input service that they will use it for a free transfer of value, there is normally no input VAT deduction.

As an equitable measure, the BMF grants various temporary exemptions in which the taxation of the free transfer of value and the input tax correction pursuant to Section 15a of the UStG (German VAT Code) can be omitted as an exception, or in which the input VAT deduction can be claimed as an exception when the service is purchased. This applies, for example, to the provision of living space, donations in kind, the provision of personnel, or the use of company property to provide assistance.

Tax relief through catastrophe decrees of the federal states

The tax administrations of the affected federal states have also passed their own "catastrophe decrees". In its letter dated July 23, 2021, the BMF clarified that the above-mentioned equity measures can be included in these state decrees (which has already been done in part).

The catastrophe decrees of the federal states also provide for the possibility of deferring taxes due or to become due by October 31, 2021. As a rule, deferral interest is to be waived. The deferral may only be granted upon application and extends no longer than January 31, 2022. The prerequisite is that the taxpayer is demonstrably and directly affected. The applications must be specifically substantiated, although the tax offices are not expected to impose strict requirements when reviewing the preconditions.

The tax authorities also granted a deferral option during the COVID crisis. Experience from these proceedings has shown that tax advice should be sought when drafting the application. In particular, the indeterminate legal concept of being "directly affected" often causes difficulties. The catastrophe decrees make it clear that the general rules apply to those (only) indirectly affected, but they do not provide any guidance on how to differentiate between the two. Experience with COVID-related deferral has shown us that life is often more complex than the tax authorities had anticipated. The fact that each individual case’s specific facts determine whether it involves someone or something that was directly affected should be carefully documented with justifications.

Also relevant for VAT is relief for those cases involving the loss of accounting documents and other records due to the flood. The tax offices should not draw any adverse tax consequences as a result. The wording here is also rather vague and how the bases for taxation can and must nevertheless be substantiated in individual cases certainly depends on exactly which documents were lost.

Further sales VAT relief: uncollectibility

Supplementary note: If receivables are lost due to the disaster, it should be checked whether irrecoverability within the meaning of Section 17 of the German VAT Code can be assumed. In this case, the corresponding VAT does not have to be paid as long as the irrecoverability persists.

(Dated: July 28, 2021)