Construction tax constitutes a specific form of income tax in Germany. It applies to all types of construction services provided within this country. All entrepreneurs providing construction services in Germany, both domestic and foreign, including those ones posting workers to Germany, should be aware of their obligation to pay this tax.
1. What is construction tax?
Bauabzugsteuer, i.e. construction tax, is a type of income tax levied in connection with the provision of construction services in Germany. The tax in question is regulated in § 48 – § 48 d of the Income Tax Act (EStG).
Construction services performed in Germany are subject to construction tax. The German legislator defines ″construction services″ as those ones that serve the production, repair, maintenance, modification or demolition of buildings. It is assumed that ancillary services related to construction ones are also subject to construction tax.
2. How is construction tax in Germany paid?
The entity to which the service is provided is responsible for collecting tax. This may be an entrepreneur within the meaning of § 2 of the German Value Added Tax Act, as well as a legal person governed by public law. The obligation in question doesn’t apply to the service recipient who is private individual.
The recipient of the construction service is obliged to deduct 15% of the value of the invoice issued by the contractor and then to transfer the deducted amount to the Tax Office competent for the entity providing the service.
The amount deducted is calculated on the basis of the gross value of the invoice. In other words, it is determined based on the remuneration plus VAT. Also, in the event that the invoice was issued without VAT with the reverse charge, the recipient of the service should make a deduction from the amount including the tax due.
The obligation to deduct construction tax from the invoice value is independent of the country of origin of the entity providing construction services. In other words, it arises both when services are provided by German and foreign entities. Due to the fact that many entrepreneurs from the construction industry in Poland provide services in Germany, they can expect that the invoice issued by them will be reduced by the service recipient by the value of construction tax, unless they obtain an exemption from this tax.
The client of a construction service is obliged to transfer the construction tax to the Tax Office and submit a settlement declaration by the 10th day of the month following that one in which the service was performed.
3. Advance payment of income tax
The amount deducted by the recipient of the construction service constitutes an advance payment of income tax in Germany. It is credited towards the taxes paid by the entrepreneur providing construction services (§ 48c EStG).
4. When there is no need to pay building tax
Construction tax applies to construction services provided in Germany. Therefore, there is no tax liability for services provided outside Germany, even if the recipient is a German entity.
It should also be noted that not every case of providing construction services in Germany gives rise to a tax liability. This applies to the following situations:
- the remuneration doesn’t exceed EUR 15,000 in the current calendar year, and the recipient of the construction service only makes tax-exempt transactions in the field of property rental;
- the total value of invoices for a single service recipient doesn’t exceed EUR 5,000 gross in a given calendar year;
- construction services are performed in apartments rented by the recipient of the construction services, provided that it doesn’t rent more than two flats;
- the entity providing construction services has obtained exemptions from construcion tax in Germany – Freistellungsbescheinigung/Freistellung.
In order to verify that the limits referred to in points 1 and 2 haven’t been exceeded, the construction works completed and planned to be performed for the same recipient in a given year shall be added together.
5. Freistellung
Freistellung constitutes an exemption from German construction tax. In practice, this means that if an entity providing construction services is exempt from construction tax, the service recipient can’t deduct the construction tax and the contractor will receive the full invoice amount.
Both entrepreneurs registered in Germany and these ones from abroad are entitled to apply for exemption from construction tax.
An entrepreneur applying for Freistellung shouldn’t have any tax arrears in Germany. It should also demonstrate its ability to fulfil all obligations in accordance with the provisions currently in force.
Freistellung is issued by the Tax Office at the request of the entity concerned. The application must be accompanied by a significant number of documents – their type depends on the form of economic activity carried out and the applicant’s country of origin.
The exemption from construction tax is granted for a fixed period. The first one is issued for a period of 3 months, and subsequent ones – usually for 1 year. It’s possible to apply for renewal of the exemption. This procedure is complex and requires the submission of a number of documents. During this process, the German Tax Office verifies, among others, the possibility of a tax liability arising in this country.
6. Construction tax refund
The provider of construction services may recover the construction tax by which the invoice due to it has been reduced. For this purpose, it should submit an appriopriate application to the Tax Office.
The request for a construction tax refund shall be submitted on the official form by the end of the calendar year following the year in which the construction tax was collected in Germany.
In the event that the Tax Office states that the applicant has no tax arrears in Germany and there is no risk of them arising in the future, it will consider the request positively and refund the tax deducted in full.
7. Legal notice
The study is a work within the meaning of the Act of 4 February 1994 on Copyright and Related Rights (OJ 2006, No. 90, item 631, consolidated text, as amended). Publishing or reproducing this study or its part, quoting opinions, as well as disseminating in any other way the information contained therein without the written consent of Crede sp. z o.o. is prohibited.
