Proposal for a Council Decision authorising Germany to apply a measure derogating from Article 21 of the Sixth Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes
Date: 2004-02-10
Institutions: European Commission
Subjects: Germany, VAT, approximation of laws, basis of tax assessment, derogation from EU law, provision of services, tax evasion

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 10.02.2004 
COM(2004) 86 final 

Proposal for a 

COUNCIL DECISION 

authorising Germany to apply a measure derogating from Article 21 of the Sixth 
Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to 
turnover taxes 

(presented by the Commission) 

EN 

   EN 

 
 
 
  
  
1. 

2. 

3. 

4. 

5. 

6. 

EXPLANATORY MEMORANDUM 

Under  Article  27  of  the  Sixth  Council  Directive  of  17  May  1977  on  the 
harmonisation of the laws of the Member States relating to turnover taxes - Common 
system  of  value  added  tax:  uniform  basis  of  assessment,1  the  Council,  acting 
unanimously on a proposal from the Commission, may authorise any Member State 
to introduce special measures for derogation from the provisions of the Directive, in 
order to simplify the procedure for charging the tax or to prevent certain types of tax 
evasion or avoidance. 

In  a  request  submitted  in  the  form  of  two  letters  addressed  to  the  Commission, 
registered  by  the  Commission's  Secretariat-General  on  01.09.2003  and  12.11.2003, 
the German Government sought authorisation to introduce three measures derogating 
from Article 21(1) (a) of Directive 77/388/EEC.  

In  accordance  with  Article  27(3)  of  the  Sixth  Directive,  the  Commission  informed 
the other Member States by letter of 09.12.2003 and 24.01.2004 of the request made 
by the German Government. 

Article  21(1)  of  Directive  77/388/EEC,  in  the  version  of  Article  28g  of  the  said 
Directive,  stipulates  that,  under  the  internal  system,  the  taxable  person  supplying 
taxable goods or services is normally liable to pay value added tax (VAT). 

The purpose of the derogation requested by Germany is to make the recipient liable 
for  the  value  added  tax  due  in  three  specific  cases:  Firstly  on  the  supply  of 
construction  work  except  where  the  recipient  of  the  supply  exclusively  rents  not 
more  than  two  residences,  secondly  on  cleaning  services  for  buildings  and  parts  of 
buildings and thirdly for the supply of immovable property if the supplier has opted 
for taxation under Article 13 C of the 6th Directive. The requested measures are to be 
considered  as  measures  to  prevent  certain  types  of  tax  evasion  or  avoidance  in  the 
described sectors. 

The  German  Court  of  Auditors  established  considerable  VAT  losses  in  the 
construction and in the building cleaning businesses. These losses occurred in cases 
where  VAT  was  openly  invoiced  but  not  paid  to  the  fiscal  authorities,  while  the 
recipient  exercised  his  right  to  deduct.  In  these  cases  the  recipient  could  not  be 
refused his right to deduct and the supplier could not be held responsible because he 
was  insolvent  or  had  disappeared.  In  many  of  these  cases  bogus  firms  were  the 
suppliers and concealment techniques were used for preventing the fiscal authorities 
to  recover  VAT.  For  these  reasons  fiscal  and  non-fiscal  measures  aiming  at 
increasing administrative supervision of these businesses failed. The dilemma of the 
German  fiscal  administration  is  that  it  cannot  identify  non-compliant  operators  or 
that identification is achieved too late to recover lost VAT. The number of such cases 
has increased in a way which requires legal measures. The envisaged liability of the 
recipient for VAT only concerns businesses which can exercise their right to deduct 
and does not cover private persons. It is limited to two specific branches, where the 
losses in terms of VAT have achieved an intolerable dimension. A similar derogation 
has already been granted to Austria2. 

1 
2 

OJ L 145, 13.6.1977, p.1. Directive last amended by Directive 2003/92/EC (OJ L 260, 11.10.2003, p.8) 
Council Decision 2002/880/EC of 5 November 2002 (OJ L 306/24, 08.11.2002, p.24) 

2 

 
 
  
 
                                                 
7. 

The  German  Court  of  Auditors  has  also  drafted  a  special  report  on  supplies  of 
property;  according  to  this  report  such  supplies  are  particularly  vulnerable  to  fraud 
and  avoidance  of  VAT,  where  the  supplier  has  used  the  option  to  make  the  supply 
taxable.  In  fact  such  supplies  of  immovable  property  are  exempt  under  Article  13 
part  B  letters  (g)  and  (h)  of  the  6th  Directive  and  only  become  taxable  where  the 
supplier  exercises  the  option  to  render  the  supply  taxable  (Article  13  C  of  the  6th 
Directive). Two main scenarios of VAT losses were identified. In the first case the 
supplier is almost insolvent and therefore encouraged by his main creditor, usually a 
bank, to sell his immovable property and exercise his right to make this sale taxable. 
The  sales  price  plus  VAT  is  then  transferred  to  the  creditor.  The  effect  is  that  the 
creditor  gets  more  money  paid back from his debtor than he would normally get if 
the sale had been exempt from VAT. The recipient can exercise his right to deduct 
and the supplier will pay no VAT to the fiscal authorities. The later cannot recover 
VAT from the supplier because in the meantime he has declared his insolvency. In 
the second scenario a newly established company acquires immovable property; the 
supply  is  invoiced  with  VAT.  The  acquirer  recovers  VAT.  Then  the  entire 
transaction  is  cancelled  and  re-settled  on  the  basis  of  contractual  obligations  in  the 
agreement  concluded  between  supplier  and  acquirer.  The  supplier  is  not  obliged  to 
pay VAT to the fiscal authorities because the cancelling (Article 11 C (1) of the 6th 
Directive).  The  VAT  recovered  by  the  acquirer  is  lost  for  the  fiscal  authorities 
because  meanwhile  the  newly  established  company  has  declared  its  insolvency. 
Immovable property is a high value good; thus also the taxable amount and the losses 
in terms of VAT - even on one single transaction - are particularly high. Based on the 
number  of  cases  discovered,  the  German  Court  of  Auditors  estimates  that  these 
losses achieve millions of Euros. The abolishing of the option to render a supply of 
immovable  property  taxable  is  no  solution.  The  value  of  the  immovable  property 
usually contains hidden VAT and the maintaining of the option is therefore necessary 
to  keep  the  VAT  system  neutral.  Against  this  background  it  appears  that  the 
envisaged liability of the recipient for VAT is in fact the most appropriate solution in 
the  specific  circumstances  and  for  the  particularly  high  risk  involved.  For  both 
problem  scenarios  described  above  it  avoids  the  loss  of  VAT  because  there  is  no 
VAT paid from the fiscal authorities to one of the economic operators involved. The 
solution  avoids  a  double  tax  responsibility  of  supplier  and  recipient,  which  would 
involve a higher economic risk for the recipient and burdensome recovery procedures 
for the fiscal authorities which could only address the recipient, when recovery from 
the  supplier  proved  to  be  impossible.  It  avoids  the  fiscal  responsibility  of  a  third 
person  like  the  notary,  which  would  result  in  higher  charges  for  supplier  and 
recipient.  As  in  practice  the  derogation  will  only  cover  supplies  between  taxable 
persons, it is limited to specific cases; in fact, the option to make the supply taxable, 
is only used, where the recipient can exercise his right to deduct.  

8. 

In view of the above, the Commission considers that the derogations requested by the 
German Government should be authorised. 

3 

 
 
  
 
Proposal for a 

COUNCIL DECISION 

authorising Germany to apply a measure derogating from Article 21 of the Sixth 
Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to 
turnover taxes 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Sixth  Council  Directive  (77/388/EEC)  of  17 May 1977  on  the 
harmonisation of the laws of the Member States relating to turnover taxes - Common system 
of  value  added  tax:  uniform  basis  of  assessment3,  and  in  particular  Article 27  paragraph  1 
thereof, 

Having regard to the proposal from the Commission4, 

Whereas: 

(1) 

(2) 

(3) 

In  a  request  submitted  in  the  form  of  two  letters  addressed  to  the  Commission, 
registered by the Commission's Secretariat-General on 01.09.2003 and 12.11.2003, the 
German  Government  sought  authorisation  to  introduce  three  measures  derogating 
from Article 21(1)(a) of Directive 77/388/EEC, 

Considerable  VAT  losses  were  established  in  the  construction  and  in  the  building 
cleaning  businesses,  where  VAT  was  openly  invoiced  but  not  paid  to  the  fiscal 
authorities,  while  the  recipient  exercised  his  right  to  deduct.  The  non-compliant 
operators could not be identified or identification was achieved too late to recover lost 
VAT. The number of such cases has increased to an extent requiring legal measures. 
The envisaged liability of the recipient for VAT only concerns businesses which can 
exercise their right to deduct and does not cover private persons. It is limited to two 
specific  branches,  where  the  losses  in  terms  of  VAT  have  achieved  an  intolerable 
dimension. A similar derogation has already been granted to Austria5, 

VAT losses were also identified for supplies of immovable property under Article 13 
part B, letters (g) and (h), appearing particularly vulnerable to fraud and avoidance of 
VAT,  where  the  supplier  has  exercised  the  option  to  make  the  supply  taxable. 
Immovable  property  is  a  high  value  good;  thus  the  taxable  amount  and  the  losses  in 
terms of VAT - even on one single transaction - are particularly high. The maintaining 
of  the  option  to  render  a  supply  of  immovable  property  taxable  is  necessary  to  keep 
the  VAT  system  neutral.  In  the  specific  circumstances  of  the  supply  of  immovable 
property, the envisaged liability of the recipient for VAT appears the most appropriate 
solution  for  addressing  the  particularly  high  risk  involved.  It  avoids  a  double  tax 

3 
4 
5 

OJ L 145, 13.6.1977, p.1. Directive last amended by Directive 2003/92/EC (OJ L 260, 11.10.2003, p.8) 
OJ C , , p. . 
Council Decision 2002/880/EC of 5 November 2002 (OJ L 306/24, 08.11.2002, p. 24) 

4 

 
 
  
 
                                                 
responsibility of supplier and recipient, which would involve a higher economic risk 
for  the  recipient  and  burdensome  recovery  procedures  for  the  fiscal  authorities  and 
prevents  a  fiscal  responsibility  of  a  third  person  like  a  notary,  resulting  in  higher 
economic  charges  for  suppliers  and  recipients.  In  practice  the  derogation  will  only 
cover supplies between taxable persons and is therefore limited to specific cases, 

(4) 

The  derogation  in  question does  not affect the amount of value added tax due at the 
final  consumption  stage  and  has  no  impact  on  the  European  Communities’  own 
resources from valued added tax, 

HAS ADOPTED THIS DECISION:  

Article 1 

By way of derogation from Article 21(1) (a) of Directive 77/388/EEC, as worded in Article 
28(g)  thereof,  Germany  is  hereby  authorised,  with  effect  from  1  January  2004,  to  designate 
the recipients of the supplies of services referred to in Article 2 of this Decision as the persons 
liable to pay VAT. 

Article 2 

In the following instances the recipient of the supply may be designated as the person liable to 
pay VAT: 

1. 

2. 

where construction work and/ or building cleaning services are supplied to a taxable 
person, except where the recipient of the supply exclusively rents not more than two 
residences; 

where immovable  property is supplied to a taxable person under Article 13 part B, 
letters (g) and (h) and where the supplier has exercised his right to tax the supply. 

This Decision shall expire on 31 December 2008. 

Article 3 

Article 4 

This Decision is addressed to Germany. 

Done at Brussels,  

For the Council 
The President 

5