The German legislature has created a procedure for securing tax claims arising from construction work to curb illegal activity in the construction industry. As of January 1, 2002. the recipient of the service (the customer) is required to pay tax on construction services, which is 15% of the value of the service provided. The principal does not have to take a tax deduction if the contractor’s salary does not exceed €5,000 in the current calendar year. Both German and foreign entrepreneurs are covered by this regulation. To avoid paying tax on construction services, you can apply for a so-called Freistellung, a special certificate authorizing exemption from tax on construction services. Such a certificate is issued by the competent tax office in Germany, which then transmits the data to the Central Federal Tax Office. The certificates are collected in a special database so that they can be searched and their validity can be checked (§ 48b(6) EStG). The contractor is always required to provide the principal with a legible copy of the Freistellungsbescheinigung. If he fails to do so, the assumption should be made that he does not have a valid certificate, and therefore the principal is obliged to deduct the construction services tax from his salary and pay it to the tax office with jurisdiction over the service provider.
The German tax authority has determined which contractors are required to withhold tax at a rate of 15% of the gross remuneration for construction work performed. Potentially these are:
- small entrepreneurs in accordance with Section 19 UStG,
- All companies for which construction work was performed,
- All legal entities under public law,
- farmers and foresters who pay a flat tax in accordance with Section 24 UStG and
- Entrepreneurs who make only tax-exempt transactions, e.g., renting and leasing land.
Should I check the validity of the Freistellungsbeschinigung before paying for the service?
Yes, because Freistellungsbescheinigung must be valid at the time of payment for the service provided. In addition, the principal is civilly liable for the construction tax paid (§ 48a (3) EStG). The client is exempt from civil liability if the contractor had a legal and valid Freistellungsbescheinigung at the time the construction service was performed. Therefore, it is important for the principal to make sure that the certificate bears the official seal and all data is legible. You can check the validity of the certificate yourself on the website of the Central Federal Tax Office, but you need to register sooner.
When must the tax withheld from wages be reported and withheld?
The principal is required to report the tax deduction by the 10th. day of the following month in which the service was performed. To do so, he must provide the contractor’s tax office with a completed special form and then pay the tax within ten days.
How does the tax deduction between the principal and the contractor work?
The employer must agree in writing with the contractor to deduct tax at 15% from his salary. This must be done on the form “Anmeldung über den Steuerabzug bei Bauleistungen” and provide the following information:
1. name and address of the contractor
2. the date of the invoice, the amount on the invoice or the amount of remuneration transferred and the date of payment
3. the amount of tax withheld
4. the address of the order to be executed and the period of its execution
5. and the tax office to which the withheld tax was reported.
What conditions must the contractor meet to recover tax on construction services?
In order to receive a refund of German construction services tax, the entrepreneur must file an application (Antrag auf Erstattung von Abzugsbeträgen (§ 48c Abs. 2 EStG) with the tax office responsible for him. The tax on construction services will be charged to German entrepreneurs for advance tax payments for the year in which the construction services were performed, and any overpayment will be refunded after filing the tax return for the year.
In the case of foreign entrepreneurs, the relevant tax office shall refund the collected tax on construction services upon request. The condition is that you apply for verification of the existence of a tax liability in Germany in the calendar year, and if there is one, you must do a tax return, and that no tax claims arise in Germany in the future. If a refund is requested, the businessman must prove that he is a resident of the country by submitting a confirmation from the tax authority. The tax refund application must be submitted in accordance with an officially established template, no later than the end of the second calendar year after the assignment.
