Foreign business may recover input tax through VAT return if sales were incorrectly invoiced with VAT

The Supreme Tax Court has held that a business of uncertain residence that has invoiced its German sales with VAT must recover its input tax through the return that must be filed, regardless of whether the VAT invoices were rightly or wrongly issued.

A KG partnership in German/Danish ownership and under German/Danish management operated an offshore wind farm selling electricity to a German public utility owned by the local authority. It did not have its own offices or any fixed onshore establishment. However, it invoiced its sales to the German utility with VAT and filed a VAT return of that turnover and claiming a deduction for its German input tax borne. The tax office rejected the claim, saying the KG was a foreign business that should have recovered its input tax through the refund procedure for foreign businesses.

The Supreme Tax Court has now sided with the KG. If the KG was effectively a German business, its return was correct as filed. If it was resident in Denmark, its sales should have been reverse-charged by its German customer. Even in this case, however, it was liable for the VAT incorrectly charged and therefore required to file a VAT return. If required to file a VAT return for any reason, it was required and entitled to deduct its German input tax from the amount due. Thus, the return at issue was correct in substance, regardless of the (unclear) residence of the taxpayer.

Supreme Tax Court judgment V R 41/13 of November 19, 2014 published on February 11, 2015.