• VAT Correction If a Down Payment Has Been Received and the Performance Has Subsequently Not Been Rendered
  • May 13, 2011 | Author: Rupert Klar
  • Law Firm: Sibeth - Munich Office
  • In taxation on the basis of the agreed remuneration, the VAT fundamentally arises at the end of the tax period in which the contractor has rendered its performance. However, if down payments are made, the contractor must pass on the VAT which arises on the down payment to the tax office at the time when the down payment is received (minimum cash accounting for VAT).

    In its ruling of 2 September 2010, the Federal Court of Finance (BFH) had to decide when the contractor can correct the VAT arising from the down payment (and claim a refund) if the agreed performance is then not rendered. The court decided that for a correction of the VAT, it is necessary for the contractor to have repaid the down payments to the party which paid them. A mere agreement between parties not to implement the transaction was not deemed to be sufficient.

    This ruling is of special importance in insolvency proceedings. If the insolvency administrator decides not to fulfil the outstanding contracts after the institution of insolvency proceedings (Section 103 of the German Insolvency Act), he can only claim a VAT correction from the tax office if the payment has really been refunded to the creditor.