On August 30, 2001, the legislature passed the "Law to Curb Illegal Employment in the Construction Industry," which took effect on January 1, 2002. This law added sections 48-48d to the Income Tax Act. This is where the obligation of the client of a construction service is established to transfer 15% of the gross contract amount of a construction service to the tax office and to pay only the remaining 85% to the contractor. The payment to the tax office is credited against the tax liability of the entrepreneur.
The effects of this law are not seen or underestimated by the large number of people affected.
A common case: The owner of a retail business wants to visually enhance his shop. He commissions a painting company to clean the facade and repaint the plaster, windows and doors. A flat rate of €10,000 including sales tax is agreed. The work is carried out, paid for, and six months later the tax office demands a further payment of €1,304.35 from the client. Rightly so?
The problem with the new regulations is the risk of double taxation: If the contractor is paid the full amount of the wage, the tax office can still demand that the client pay the construction withholding tax. The retailer from the introductory example must therefore actually pay again and is dependent on the rocky road of recovery from the building contractor for factual and legal reasons. Every client of construction services should therefore be aware of the scope of application of the construction withholding tax in order to avoid economic damage.
The regulation obliges all entrepreneurs and public corporations. The term "entrepreneur" is interpreted broadly in the sense of § 2 UStG. An entrepreneur is anyone who uses a property not only for private purposes. The owner of the shop is therefore affected, as are the self-employed tax consultant or doctor. But it also applies to civil servants or employees who are the owners of an apartment building. So if construction work does not exclusively concern a private single-family house, caution is advised.
Construction work is also broadly defined in the sense of §§ 1 and 2 BaubetriebeVO. Not only construction or renovation work, but also all ancillary work such as the painting work described at the beginning and even facade cleaning work obliges the tax deduction.
The law may not have taken effect until January 1, 2002, but it does apply to all contracts that had not yet been fully completed by that date. If the contract was signed in 1999, the work was completed in 2000, but the payment is not made until 2002 due to a dispute over the amount of the invoice, the construction withholding tax is to be deducted.
However, there are some important exceptions to the obligation to deduct tax:
The exemption certificate is of practical significance. In this certificate, the relevant tax office confirms to the building contractor that he may collect the full amount of the wages and that the tax deduction can be omitted. The certificate is issued either for a single case or for a certain period of time, whereby the validity of this certificate can be checked via the Internet at the Federal Ministry of Finance (http://lxzopex1.bfinv.de/eibe/).
In addition, there are so-called de minimis limits. The law only applies if the contract value with a building contractor exceeds €5,000 in a calendar year. If services are ordered from private landlords, order volumes of €15,000 per year are tax-free. However, the respective clients will run into difficulties in the event of follow-up orders in the same year, so they should always have the exemption certificate presented to them.
The new legal regulation is not only important for the building owner, but must also be observed by service providers such as architects, project managers, property managers or Lawyers who work for the building owner in the context of the billing of construction services, in order to avoid their own liability.
The regulation must be observed not only at the time of payment itself, but also in the case of equivalent legal acts such as offsetting or setting off claims. There are no court rulings on this point as yet. In the opinion of the tax authorities, the 15% withholding tax must be paid to the tax office even if the possibility of offsetting claims exists in full.
In order to avoid additional administrative work and all risks, the recommendation to all clients can only be to have the entrepreneur send the exemption certificate with the offer, but at the latest with the invoice.
The statements represent initial information that was current for the law applicable in Germany at the time of initial publication. The legal situation may have changed since then. Furthermore, the information provided cannot replace individual advice on a specific matter. Please contact us for this purpose.