Temporary reduction of VAT rates

Arell BuchtaPartner & Managing Director, eureos gmbh steuerberatungsgesellschaft rechtsanwaltsgesellschaft

The German legislator is reacting to the expected economic consequences of the Corona pandemic with comprehensive measures. Probably the most surprising measure is the temporary reduction of VAT rates.

The so called First Corona Tax Aid Act already reduced the VAT rate for restaurant and catering services (except for serving beverage) rendered between July 1, 2020 and June 30, 2021 from 19 % to 7 %. The law was passed by the Bundestag on May 28, 2020. The Bundesrat approved the draft by vote on June 5, 2020.

With a Second Corona Aid Act, the German legislator is planning further comprehensive measures. Part of this further package is also the temporary reduction of the VAT rates (reduction of the standard tax rate from 19 % to temporarily 16 % and reduction of the reduced tax rate from 7 % to temporarily 5 %). The legislative process is expected to be completed before the end of June 2020.

This provision is intended to apply alongside the reduction of tax rates for restaurant and catering services.

The reduction in VAT rates is planned for the period from July 1, 2020 to December 31, 2020.

In principle, this affects all businesses that provide output services subject to VAT and/or are entitled to deduct input tax, as well as businesses that only provide tax-exempt transactions that exclude the right to deduct input tax and businesses that are taxable persons liable to pay tax (reverse charge).

The decisive factor for choosing the right tax rate is the time of performance. If the wrong VAT rate is mistakenly used tax risks occur.

These changes in value-added tax law result in considerable administrative expenses, in particular due to new allocation and delimitation issues in connection with the relevant date of performance, which is necessary for determining the correct tax rate. We therefore recommend taking action now to avoid possible tax risks. Measures that should be taken are in particular

  • Determination of performance dates and identification of other company-specific issues (down payments, adjustment of old contracts, etc.);
  • Technical adaptations in procurement and accounting
  • Close coordination with your tax advisor and, if necessary, training courses.

We would be pleased to support you with the implementation of the planned measures. Please do not hesitate to contact us.

We have collected the information available on our Corona news portal which includes a constantly updated overview regarding the measures to tackle financial impacts of the Corona crisis.