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Treating fees as pass-through expenses

An expense will be deemed to be a pass-through expense if the business that collects and disburses such amounts merely acts as an intermediary in the payment transaction without itself having a claim for the amount against the paying party and without being obliged to pay the recipient.

The Federal Ministry of Finance (Bundesministerium der Finanzen, BMF) published a circular (of 11.1.2023, reference: III C 2 – S 7200/19/10004 :005) on treating fees as pass-through expenses or service charges . In 2014, the Federal Fiscal Court (Bundesfinanzhof, BFH) decided that fees are pass-through expenses even if the enterprise and the recipient of the service are jointly and severably liable to pay the amount that is owed. This was however a contradiction of the previous opinion of the fiscal authority as set out in the German VAT application decree. According to that, the presumption of a pass-through expense would be eliminated if an enterprise together with the recipient of its service jointly and severably owe the amounts. However, in the future, this criterion will no longer be important. The BMF engaged intensely with the ruling and amended the German VAT application decree accordingly. The Ministry clarified that the principles set out in the BFH ruling from 2014 should not be applied beyond the specific case that was ruled on, insofar as the BFH stipulated that the precondition for posting an item as a pass-through expense is its corresponding treatment in the taxpayer’s accounting records.

Please note: The principles set out in the BMF circular have to be applied to all cases that are still open. However, for transactions that were carried out up to 31.12.2022, there will be no objection if an enterprise makes reference to the administrative opinion that was applicable up to the date of the issue of the BMF circular.

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