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The input tax credit was restricted or denied completely for certain types of expenses with effect from 1 April 1999. The input tax credit on travel expenses is among those presently denied by § 15 (1a) UStG where it relates to the cost of meals, overnight accommodations, or employee vehicles used for business travel. Responding to the ECJ's Ampafrance decision (see article no. 232), the Federal Tax Court and the German tax authorities have now recognised the invalidity of German VAT law at least as regards certain travel expenses.

1. Federal Tax Court Decision Of 23 November 2000

Article no. 232 reports on the Ampafrance decision of the European Court of Justice (19 September 2000 - C-177/99), which holds that the denial of an input tax credit for travel expenses is incompatible with the 6th EC Directive on value added tax harmonisation (Art. 17 (6) of the 6th EC Directive).

The Federal Tax Court affirmed this position in its judgement of 23 November 2000 (docket number V R 49/00 - DStR 2001, 23). Where employees incur costs for overnight accommodations during business travel, the court held that the business in question has a directly enforceable right to an input tax deduction under Art. 17 (2) of the 6th EC Directive. The denial of an input tax credit for this type of travel expense under § 15 (1a) no. 2 UStG is therefore overridden by EU law.

2. Reaction Of The German Tax Authorities

The Federal Ministry of Finance has issued a directive dated 28 March 2001 (file no. IV B 7 – S 7303a – 20/01 - DStR 2001, 621) instructing the state tax administrations how to apply the high court decision. The state tax authorities are directed to treat travel expenses as follows:

2.1. Input Tax Credit On Cost Of Overnight Accommodations

Provided the standard requirements of § 15 UStG are met, businesses are once again permitted to claim an input tax credit on the basis of invoices for overnight accommodations occasioned by business travel on the part of the owner of the business (the entrepreneur) or on the part of employees (business trips, travel to changing job locations, business driving, double household driving). The input tax deduction is only available if the business (the entrepreneur) is properly regarded as the recipient of the service rendered and the invoice on which VAT is separately stated is issued to the business (the entrepreneur), not in the name of the employee. These requirements apply in principle even to invoices totalling DM 200 or less. However, the input tax credit may be claimed for small-amount invoices as defined in § 33 UStDV even if the business (the entrepreneur) is not shown on the invoice as the recipient of the service and VAT is not separately stated.

2.2. Input Tax Credit On Meal Expenses

a. Meal Expenses Incurred By The Owner Of The Business (The Entrepreneur)

The business (the entrepreneur) is entitled to deduct input tax on meals purchased by reason of a business trip provided the standard requirements of § 15 UStG are met, i.e. the expenses are evidenced by invoices issued to the business (the entrepreneur) which show VAT separately or by small-amount invoices as defined in § 33 UStDV. One should, however, note that § 15 (1a) no. 1 and § 4 (5) sent. 1 no. 7 EStG prohibit the deduction of input tax with respect to "unreasonable" expenses (such as barroom expenses, to cite an example from the case law).

b. Meal Expenses Incurred By Employees

It is now possible for the employer to deduct input tax on meal expenses incurred by employees during business travel provided such costs are reimbursed to them in full by the employer and evidenced by invoices bearing the employer's name. Where the meal expenses are evidenced by invoices issued to the employee, the tax authorities will take the position that the supply was not rendered to the business. However, the input tax credit will be allowed where the meals were provided on behalf of the employer in connection with business travel by the employee if the employer bears the full cost of the meals and the expenses are evidenced by invoices issued in the employer's name on which VAT is separately shown, or by small-amount invoices as defined in § 33 UStDV.

Our reading of the new directive is that the input tax credit is in principle available in full to the employer for business-travel-related employee meal expenses, provided the invoice shows the employer to be the recipient of the supply or a small-amount invoice is involved. It makes no difference whether the employee pays the invoice and is reimbursed by his or her employer upon submission of a statement of expenses or the employer pays for the meals directly (e.g. by interbank transfer to the restaurant).

2.3. Input Tax Credit In Other Situations

The Federal Ministry of Finance expressly states in its directive that the Federal Tax Court judgement of 23 November 2000 has no impact on the other input tax credit exclusions contained in § 15 (1a) UStG. The tax authorities therefore remain of the opinion that input tax is not deductible for the cost of employee-owned vehicles used for business travel and for the cost of moving employee households to new locations. The prohibition is said to apply even when the relevant invoices are issued in the employer's name.

It furthermore remains impossible to deduct input tax on lump sum travel costs (reimbursement of standard amounts as per diems, for overnight accommodations, or for kilometres driven). This is due to the elimination of §§ 36 - 38 UStDV from 1 April 1999 onwards.

The new Federal Ministry of Finance directive supersedes the directive of 6 November 2000 (BStBl. I p. 1505) and is applicable to all open assessments.

3.. Recommendations

3.1. Cost Of Accommodations And Meals

a. Individual Documentation Requirements

The new Federal Ministry of Finance directive permits an input tax credit on travel expenses on monthly and annual VAT returns with respect to the costs of overnight accommodations and meals in connection with business travel or field work provided the above described requirements (above all, an invoice issued to the business) are met.

Taxpayers in possession of travel expense invoices and statements for the period from 1 April 1999 to the present which show the employee instead of the employer as the recipient of the relevant supply, should – to the extent such invoices can no longer be corrected and the amounts involved are substantial – consider claiming the associated input tax credits after the fact on the basis of the good faith principle (application by analogy of § 242 BGB) and/or on equitable grounds. One could argue that the legislature's enactment of a statute that contravened EU law is a proximate cause of the failure of the invoices to be issued to the business. Businesses were unable, or at least not required, to anticipate that the designation of the business on the invoice would have VAT relevance. Under these circumstances, the tax authorities would act in bad faith were they to deny an input tax credit because the relevant invoices do not show the business as the recipient of the supply, since this would be tantamount to "punishing" businesses that assumed the statute to have legal validity and therefore took no steps to have the invoices issued in their name.

b. Lump Sum Reimbursements

We consider it doubtful whether the input tax credit can be successfully claimed on lump sum travel reimbursement amounts. Decisions to preserve the relevant rights by claiming such input tax amounts should be made on a case by case basis.

3.2. Other Restrictions On The Input Tax Credit

In light of the decisions handed down both by the German tax courts (Federal Tax Court and the lower tax courts) and by the European Court of Justice, we continue to recommend that taxpayers claim a full input tax credit with respect to the following expenditures:

  • Expenses to promote business relationships (deduction denied by § 15 (1a) no. 1 UStG)
  • Travel expenses (deduction denied by § 15 (1a) no. 2 UStG)
  • Moving expenses (deduction denied by § 15 (1a) no. 3 UStG)
  • Expenses for company cars with more than 5 % private use (deduction limited to 50 % by § 15 (1b) UStG)
  • Expenses for assets used less than 10 % for business purposes (deduction denied by § 15 (1) sentence 2 UStG)

With regard to the above expenditures, the decision to claim the input tax credit and, if so, whether on the monthly VAT return or only on the annual return, should be made on a case by case basis in consultation with tax counsel.

Regardless of the decision taken, appeals should be timely filed in all cases in which the tax authorities disallow the input tax credit, in order to prevent foreclosure of the underlying substantive rights on procedural grounds. All appeals should be accompanied by requests to stay collection of the tax.

Please note that all input tax amounts deducted on monthly or annual VAT returns with respect to expenditures of the sorts described above (except under the new rules for meals and accommodations) should be disclosed to the tax authorities at the time of filing of the relevant return in order to avoid the risk of criminal penalties. For instance, a separate attachment calling express attention to the deduction of such input tax amounts can be included with the return.

Editorial cut-off date: 05 June 2001

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