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Current developments regarding the introduction of § 2b UStG

The introduction of the new § 2b of the German Value Added Tax Law (Umsatzsteuergesetz, UStG) also entails the reform of the entrepreneurial status of legal entities under public law. Therefore, all activities of churches have to be reassessed from a VAT perspective.

Currently, the federal government is planning a renewed extension of the transitional provision of § 27 (22) sentence 3 UStG in conjunction with § 27 (22a) UStG. If this comes into force, legal entities under public law would not have to apply the new VAT law until the beginning of 2025. The entities concerned should use the time gained to make the necessary preparations to become compliant with § 2b UStG.

Tax consequences of § 2b UStG for the church

§ 2b UStG defines the entrepreneurial sphere in much broader terms than the previous reference to commercial operations. Asset management and so-called assistance services will also be included. Only the performance of tasks in public law form, which are incumbent on the churches within the framework of “public authority” and which do not place them in competition with private providers, will be exempt from taxation.

Our experience with corresponding transition projects confirms that the entrepreneurial sphere of churches will grow significantly as a result of the § 2b UStG provision.

Chart (in German only)

Graphic UStG Church

With the new provision, any turnover is already subject to value added tax if a service is provided on a private-law basis in return for remuneration. If no value added tax exemption applies, VAT is incurred from the first euro. The existence of a commercial operation for income tax purposes is irrelevant. This change in the tax classification of activities is particularly important for churches. For example, value added tax may apply to (church) bazaars and similar events, as well as to the rental of individual parking spaces. To date, no value added tax has usually been payable on these types of activities, as the sales resulting from them are often below the relevant limit for businesses of a commercial nature (EUR 35,000 under R 4.1 (5) sentence 1 of the 2015 Corporate Income Tax Directive [Körperschaftsteuer-Richtlinien, KStR]; EUR 45,000 as of 2022). This makes them irrelevant for both income tax and VAT purposes.

With the new § 2b UStG, considerably more activities and circumstances will have to be declared in the advance VAT returns and annual returns: Our study shows that the new provision increases the number of tax-exempt activities of the entrepreneurial sector relevant for VAT purposes by an average of ten times. The number of taxable sales turnover transactions increases by a factor of four on average.

Impact on small church congregations

For churches, there is another complicating factor: So far, mostly only large church institutions have been affected. Since value added tax is not subject to any materiality thresholds other than the small business provision, VAT-relevant circumstances will emerge for almost all church congregations in the future. Individual institutions often lack employees with the necessary tax knowledge to be able to recognise such activities.

Church-specific training measures as an effective tool

In order to manage the requirements arising from the introduction of § 2b UStG, church employees should also be given more knowledge regarding value added tax. The employees of individual church congregations should be prepared and appropriately informed at an early stage. In order to achieve this, training measures can be particularly effective.

There is no need to train all employees to become tax experts who master every facet of the legal requirements. Instead, it is important to create a basic understanding among employees so that tax-relevant activities and related information can be recognised with greater ease, comprehensiveness and accuracy. That way, the person holding the internal tax role can determine the tax status in a targeted manner and minimise compliance risks with respect to § 2b UStG in the church’s daily operation.

Organisational effort and costs usually play an important role when selecting suitable training measures. Typically, as the size of the church institution increases, and with it the number of people to be involved, both factors increase rapidly.

E-training, i.e. virtual training, is an efficient option for comprehensive training, and, once a certain number of employees is reached, it also becomes cost-effective. It eliminates the need to organise in-person training sessions, and employees can complete the training at their own pace, according to their time availability and preferences.

Practical e-training by KPMG & WTT Campus One specifically for churches

In order to meet the requirements of the new § 2b UStG, to facilitate the transition and to make employees fit for the new VAT-related tasks, KPMG has developed the “Value Added Tax for Churches” virtual training programme in cooperation with WTT Campus One, an award-winning provider of innovative e-training. The training programme uses entertaining and intuitive didactic methods as well as practical examples to impart relevant specialist knowledge regarding § 2b UStG. For more information on the training, please visit the “Virtual learning that's fun” page. If you are interested, please contact us.