VAT for rental and leasing contracts

The Federal Ministry of Finance has revised the criteria for the VAT treatment of a rental or leasing contract as a supply or other service.

The VAT classification of a rental or leasing contract determines when the VAT arises from the contract. If it is a delivery for VAT purposes, the VAT is due in full immediately, whereas in the case of other services, the individual installments are subject to VAT, so that the VAT is spread over the term.

Previously, leasing contracts were deemed to be a supply if the lessee could dispose of the asset like an owner. The decisive factor for this was the attribution of the leased asset for income tax purposes, which depended in particular on the ratio of the non-cancellable basic lease term to the normal useful life, an economically viable usability after expiry of the lease term at the lessor and the ratio of the purchase price to the book value at the time of expiry of the lease term.

In the case of rental agreements with a purchase option, on the other hand, a supply was previously only deemed to have taken place if both contracting parties issued a corresponding declaration of intent. However, due to a ruling by the European Court of Justice (ECJ) in 2017, the German regulations are no longer tenable as the ECJ is of the opinion that the question of whether a supply or other service is involved must be clearly clarified at the time the contract is concluded in the interests of legal certainty.

The German Federal Ministry of Finance has therefore published a letter on the VAT treatment of rental and leasing contracts, with which the VAT application decree was adapted to the case law of the ECJ. Two conditions must now be met for a supply to be assumed:

1. The contract on the basis of which the asset is transferred must expressly contain a clause on the transfer of ownership of this asset from the lessor to the lessee. The ECJ considers this requirement to be met if the contract provides for an option to purchase the leased asset.

2. In addition, it must be clear from the contractual terms - to be objectively assessed at the time the contract is signed - that ownership of the asset is to be automatically transferred to the lessee if the contract is executed as planned by the time it expires.

If the contract contains a formally non-binding purchase option, the second condition is met if, in view of the financial terms of the contract, exercising the option appears to be the only economically rational option for the lessee. The contract must therefore not offer the lessee a genuine economic alternative in the sense that, at the time when he has to make a choice, he can purchase, return or continue to lease the asset, depending on his interests. The regulations apply mutatis mutandis to the transfer of an asset outside of a typical leasing procedure, for example in the case of rental agreements with the right to purchase.

The new regulations for VAT assessment must be applied in all open cases. However, for leasing and rental agreements concluded before March 18, 2020 - including for the purposes of input tax deduction - there will be no objections if the parties involved agree to apply the old assessment standards.