Germany: Revised definition of work deliveries

On 1 October 2020, the Federal Ministry of Finance issued a circular which finally reflects the jurisdiction of the Federal Fiscal Court regarding the definition of work deliveries as of 2013.

According to the ruling of the Federal Fiscal Court, a work delivery is a uniform supply of a product consisting of delivery elements and service elements in combination with the processing of components not belonging to the supplier, e.g. owned, procured or provided by the customer. The preconditions of a work delivery may also be met if the product would be permanently connected with real estate, as the process of creating the connection to the real estate would represent the processing of items not belonging to the supplier.

Until then, in the opinion of the German Tax Authorities, a work delivery was determined by the obligation of the supplier to produce the item (movable property) requested by the customer from materials procured or produced by it. Unlike the understanding of the Court, it was not required to process external objects, i.e. items not belonging to the supplier.

Thus, in the past, it could be observed that, e.g. the sale of a machine being assembled on the premises of the customer was considered as work delivery, although neither the processing of “foreign” components took place nor any permanent connection with real estate had been established. According to the new interpretation and due to a lack of processing items not belonging to the supplier, no work delivery must be assumed. Instead, the sale of the machine shall be considered as a so-called supply with assembly and/or installation, as per Article 36 of the VAT Directive.

However, the significant difference between a work delivery and a supply with assembly/ installation derives from the subsequent VAT consequences, i.e. the applicability of reverse-charge procedure in Germany, which only applies to work deliveries, but not to supplies with assembly and/or installation.

This revised opinion may have relevance for international machine and plant construction operations: a work delivery can be assumed if the supplier firmly connects the machine to the real estate on the premises of its customer. However, if the machine is not permanently connected to the real estate, a supply with assembly and/or installation would be given. As a consequence, a non-resident supplier would have to register for VAT purposes in Germany and would also be liable to collect and remit VAT on this supply to the German Tax Authorities.

The decree of the Federal Ministry of Finance provides a grace period to adapt to these new requirements. For any transaction for which VAT will fall due before 1 January 2021, the initial VAT treatment may be applied.

Industry associations have already termed the consequences of this revised approach as a “registration trap” for non-resident suppliers and requested modifications. Nevertheless, non-resident suppliers should take advantage of the grace period in order to revisit their transactions, evaluate whether they might be affected by potential VAT obligations and prepare the appropriate actions.