Input Tax for Companies with Virtual Offices

For ages, international investors were troubled with input tax doubts from their local tax office because the office did not want to accept companies having only a virtual office. Complaints have reached the German Federal Fiscal Court. Since these German judges were not sure whether German law was in conflict with European law, they presented their questions to the European Court of Justice to decide them. This article will briefly discuss ECJs decisions in the case for this judgment brings good news to businesses who only have a virtual office in Germany.

Both cases are based on circumstances around the formalities of an invoice to constitute eligibility of deducting input tax.

Causa Geissel, re C-374/16

The causa Geissel, re C-374/16, is about a car vendor, who claimed input tax for purchased cars in 2008. These purchased cars were from a GmbH who had bought the cars from another European (i.e. non-German business). The tax office denied the deduction of input tax from the invoices of E GmbH because this company was considered as a dummy company. The GmbH was allegedly not operating because it lacked an operational address inside Germany. The registered address was provided in the invoice but that address only had a virtual office.

BFH wanted to have determined whether a full address is a listed requirement in §15 UStG and art. 226 no. 5 VAT-Directive needs to be the address where economic activity is being performed, or whether the address of a virtual office suffices.

Causa Butin, re C-375/16

The case of Butin, re C-375/16, is also about a car vendor who only had an online business but no car shop with a lot full of cars. Butin's company issued its invoices from their virtual office. Sold cars were handed over when he met his customers on public addresses  e.g. like on parking lots of commuter train stations. The tax office denied the deduction of input tax because Butin only lead his company from a fake address. The address functioned only as a manned mailbox. There was nothing at that address what implicated a genuine business.

It is undisputed that no business was performed at the virtual office. The entry level court held that the formal requirement of address in terms of §14 IV cl. no. 1 UStG does not require business activities under the registered address of the company. The court contradicted standing case law of the Federal Fiscal Court because, in the perspective of the development of modern technology and recent changes in business interaction, this case law was outdated.

The BFH wanted the ECJ to clarify whether the requirement for "complete address" in terms of art. 226 no. 5 VAT Directive requires that the entrepreneur's activities be performed under the registered address or not.

The European Court of Justice held that the wording of art. 226 no. 5 VAT Directive the tax payer's complete name and complete address and that of the purchaser resp. recipient of a service do not strictly mean that the address has to be the place of business but any address where the tax payer can be reached. Such kind of address can be that of a virtual office. The main thing is that the recipient can be reached there. The Member States are not to more restrictively construe the details in art. 226 by stipulating even stricter requirements as such that arise out of the wording of VAT Directive. This number is easily available and can be easily controlled by the tax administration. Based on this, ECJ concludes, the tax authorities can perform their control duties.

To wrap it all up, these verdicts provide that the performing your business from home and using a virtual office as registered address are sufficient to meet the formal requirements of invoicing to be eligible to deduct VAT. An information source to identify a business.

Update

The Federal Tax Office published new internal instructions in December 2018, instructing the local tax offices to apply these rules in still open cases and for the future. If you or your company were just recently audited and the officer denied invoices in contrary to the rules mentioned above, it might be interesting for you to file an appeal.     

Related Articles:

Defense Against Denial of Input Tax During Audit

Supply of Goods on Presentation of Gift Coupons as Input Tax

When is VAT due and when input tax, if only an invoice exists?

Flat input Taxation Payment for Translators