Withholding tax for construction services and its tax risks for businesses, lessors & Co.
The term ‘construction services’
Construction services should generally be understood to mean any services for the purposes of the construction, restoration, maintenance, modification or destruction of structures. In order to answer a question that regularly arises in individual cases, namely, which works have to be classified as construction services, the Federal Central Tax Office (Bundeszentralamt für Steuern) has produced the ‘Information leaflet on the withholding of tax in relation to construction work’ (abbreviated in German to: StAb-Bau-Merkblatt 2022); this leaflet provides initial practical guidance (the English and German versions are available from the website of the ‘Bundeszentralamt für Steuern’).
The BFH, in its ruling of 7.11.2019 (case reference: I R 46/17; constitutional complaint under case reference 2 BvR 1392/20 is pending) stated that the term ‘structure’ (Bauwerk) on which the construction services are carried out should be broadly interpreted. The Federal Ministry of Finance (Bundesministerium der Finanzen, BMF) took this on board in its circular of 19.7.2022 (published in the Federal Tax Gazette 2022 I, p. 1229). According to that, structures are not just buildings but also all installations that are affixed somehow to the ground, or rest upon it by way of their own weight, that are created with building materials or building components by using construction tools and equipment.
Please note: Consequently, photovoltaic systems (on open land), shop fittings, display windows, restaurant equipment, illuminated signage, green roofs on structures or service connections to houses provided by power supply companies should also be regarded as structures.
Scope of application of the withholding tax for construction services
The aim of the withholding tax for construction services is to safeguard tax revenues for construction works by extending reporting obligations and deducting taxes at source. To this end, businesses, as recipients of construction services that have been carried out by German or foreign contractors have to withhold tax.
A recipient of construction services and, thus, the party liable to withhold taxes can also be a lessor. The installation/maintenance of PV systems on (family) homes by their owners likewise usually constitutes construction services.
Even foreign (general) contractors that do not themselves work as building contractors in Germany, - but invoice the recipient of the services for the works carried out by a subcontractor engaged to perform the work - as foreign businesses, have to withhold taxes in Germany for other foreign persons (Section 48(1) sentence 4 of the German Income Tax Act). There is a requirement to register with the tax office that has central responsibility for the respective country (e.g., for Spain this is the tax office in Kassel-Hofgeismar).
However, besides the withholding tax for construction services, including income tax, foreign building contractors also have to coordinate the payroll tax and VAT consequences.
Please note: In the private sphere, no tax needs to be deducted insofar as, e.g., a freelance journalist (thus someone who works as a self-employed businessperson) has their tiles replaced in their owner-occupied private residential property.
The withholding tax procedure and the consequences of non-payment
For construction services received in Germany, the contractor has to withhold 15% of the gross amount invoiced (the fee plus VAT minus any discount) and declare and pay this amount to the local tax office by the 10th of the following month. The date of payment by the recipient of the service is crucially important; the cash inflow for the supplying contractor or the date of the invoice for the construction works are not relevant. In the case of advance and final payments, an amount has to be already directly withheld.
If the declaration is not made within the prescribed time limit then the consequence could be a surcharge for late filing; if the tax is not paid within the prescribed time limit then late payment penalties may be determined. In the event of a failure to provide a tax return, the recipient of the service in Germany may be held liable via a notice of liability and administrative/criminal consequences could arise as a result of the failure to submit a return because submitting a withholding tax return has been put on an equal footing with submitting a tax return.
Please note: According to the above-mentioned BFH ruling of 7.11.2019, for the withholding tax for construction services, it generally makes no difference whether or not the construction services that were carried out are taxable as income in Germany.
Exemption from the withholding tax
An exemption from withholding tax will apply in cases of so-called ‘small lettings’ and solely for residential letting of not more than two properties. In the case of more than two residential lettings, no tax has to be withheld insofar as the value of the construction services that have been provided does not exceed €15,000 per calendar year. In all other cases the de minimis threshold level of €5,000 will be applicable.
In practice, the most frequent case of exemption from the obligation to withhold tax is if the supplying contractor presents an exemption certificate. For each payment, an exemption certificate that is valid at the time has to be provided to the recipient of the services (a clearly legible copy, or one that is sent electronically), so that there is no withholding obligation with potential liability. The recipient of the services has to check that the scope of the certificate is not restricted to a specific construction service and that it has been affixed with an official seal and bears a security number. The recipient of the services is also able to check the validity of the certificate by submitting an online inquiry via the EIBE Portal on the website of the ‘Bundeszentralamt für Steuern’.
The recipient of the services is required to retain the exemption certificate it receives for six years. It is not sufficient for a service provider to merely refer to the existence of such a certificate (e.g. when an invoice is subsequently issued).
Implementation in a tax controls system
In order to meet the requirements for the withholding of tax in relation to construction work, we would recommend mapping the process within the scope of the tax compliance management system (Tax CMS) at the company level since that is where information will be available about construction services that have been provided including the payments. The fiscal administration will attach great importance to such a Tax CMS with regard to its assessment of the actions of a company’s executives and whether or not these were wilful or negligent.
Please note: Furthermore, a controls system that has been checked and, in the context of an external tax audit, found to be effective by the fiscal administration could result in this audit field no longer being audited by the fiscal administration in the future. This change came into force on 1.1.2023 (Art 97 Section 38 of the Introductory Act of the German Fiscal Code within the framework of DAC7).