Germany: New guidance on entrepreneurial status and input VAT deductions for research institutions

The new guidance represents a change from the tax authority’s prior position

The new guidance represents a change from the tax authority’s prior position

The Federal Ministry of Finance (BMF) in January 2023 published new regulations on entrepreneurial status and input value added tax (VAT) deductions for research institutions in section 2.10 of the VAT Application Decree (section 2.10 UStAE).

The new guidance represents a change from the tax authority’s prior position that the scope of the entrepreneurial area of a research institution consisted of in-house research, contract research and technology transfer, insofar as the intention was to use the research results to generate income in the long term. Under the new guidance, basic research may also be attributed to the entrepreneurial sphere for the purposes of input VAT deduction if it serves to increase the entrepreneurial sales activity and strengthen the market position due to a factual connection. Moreover, the BMF guidance does not place high demands on this connection if basic research and business sales activities are in one organizational unit. 

KPMG observation

As research institutions, many universities may be able to benefit from the extended possibility of input VAT deduction in the area of basic research, especially since the new regulation is applicable to all cases that are still open. An input VAT deduction may even result for assessment periods for which VAT returns have already been submitted.

Many universities have been reluctant to apply the new guidance, however, due to:

  • Implications under State aid law due to the expansion of the university's economic activities
  • Possible claims for repayment by the funding agencies or funding cuts by them
  • Tax risks and additional burdens from tax audits and special VAT audits

Read an October 2023 report prepared by the KPMG member firm in Germany


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