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In a judgement dated 15 September 1994 (DStR 1995, 133), Germany's highest tax court denied refund of input VAT paid in connection with a construction project which was abandoned before completion.
Under German VAT law, an entrepreneur is entitled to a refund of input VAT separately invoiced to him by other entrepreneurs on goods and services he has purchased for his enterprise (input supplies). However, no input VAT can be claimed on input supplies to the extent they are used by the entrepreneur to perform certain zero-rated output supplies. The lease of real property is one such zero-rated output supply. However, if the real property is leased to another entrepreneur, it is generally possible for the lessor to elect to lease subject to VAT, in which case he is entitled to refund of input VAT spent, for instance, to erect the building being leased.
In the judgement cited, the taxpayer had incurred expense in the planning phase of a parking garage which he first intended to construct. The project was later abandoned. The taxpayer claimed to have intended to lease subject to VAT and sought to recover input VAT expended in the planing phase. In effect, the taxpayer wanted the question of entitlement to the input tax refund decided with respect to the output supply he initially intended to perform, but never did.
The Court rejected this approach, holding that expense for aborted projects was to be attributed to output supplies actually performed in accordance with cost accounting principles. In other words, the abortive expense was to be attributed to the sales (output supplies) which, economically speaking, funded this expense. Unfortunately for the taxpayer, all of his actual output supplies consisted in leasing other parking garages free of VAT (zero-rated). Accordingly, no VAT was recoverable on the aborted project either.
The holding would appear to be applicable to cases of theft and accidental loss or damage as well. The approach indicated by the Court seems to be to permit refund of input VAT on such expense in the ratio which sales (output supplies) carrying input VAT refund entitlement bear to total sales.
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