Germany: No VAT adjustment for subcontractor with respect to assigned bad debt (General Court decision); other VAT developments
Subcontractor not entitled to reduce its VAT taxable amount if assigned receivable later proves irrecoverable.
The General Court held that a subcontractor that accepts an assignment of a receivable as payment from a main contractor is not entitled to reduce its VAT taxable amount if the assigned receivable later proves to be irrecoverable.
The court found that the right to a VAT reduction remained with the original supplier in the transaction with the developer—the main contractor. The court reasoned that the subcontractor had received full consideration for its services, as the assignment of the receivable itself has economic value and settled the debt. The right to adjust the taxable amount for VAT is intrinsically linked to the original taxable person and cannot be transferred via a private-law agreement like an assignment.
Read a May 2026 report prepared by the KPMG member firm in Germany.
Other recent VAT developments that may affect businesses in Germany include:
- VAT and transfer pricing: The Court of Justice of the European Union (CJEU) determined that transfer pricing adjustments made to ensure a target profit margin for a national sales company do not, in principle, constitute consideration for a separate, taxable supply of services. Instead, such adjustments may be treated as a subsequent change in the purchase price of the originally supplied goods.
- Default interest on VAT: The CJEU confirmed that a rigid, statutory system for default interest on VAT arrears is compatible with EU law, provided the interest serves both preventive and compensatory purposes and is not disproportionate. Such interest is generally not considered a "criminal sanction" under the EU Charter.
- Intra-Community supply: The German Federal Fiscal Court (BFH) held that a VAT exemption for an intra-Community supply can be upheld even without a formal "confirmation of arrival," as long as the supplier has exercised the diligence of a prudent businessperson and possesses other coherent documentary evidence.
- Input VAT on advance payments: The BFH held that for a business to claim an input VAT deduction on an advance payment, it must genuinely expect the supply to be performed at the time of payment. If it becomes clear the supply will not happen, the right to deduct may be denied.
- Full interest on VAT: The BFH held that the German system of charging full late-payment interest on VAT assessments is compatible with EU law and does not violate principles of neutrality or proportionality.
- Import VAT deduction: The Munich Fiscal Court held that a business is entitled to deduct import VAT even if the goods are immediately re-exported and never enter economic circulation in the country, as long as the business has obtained the power to dispose of the goods.
- Input VAT and change of use: The Berlin-Brandenburg Fiscal Court held that a change in an asset's use, even within the year of acquisition, must be corrected via an adjustment under the rules for subsequent years (Section 15a of the German VAT Act), rather than via a correction of the original input VAT deduction.
- Multi-purpose vouchers: The German Ministry of Finance (BMF) provided guidance on the VAT treatment of distribution chains for multi-purpose vouchers, clarifying how to determine the taxable base for the "intermediation service" provided.
- VAT on travel services: The BMF extended the transitional rule allowing non-EU established businesses to apply the margin scheme for travel services until December 31, 2029.