Reverse charge procedure: Who has to pay?

Requirements for the recipient in the case of reverse charge

Do you use platforms such as Amazon, TikTok or Facebook and place advertisements there, for example? Then the new ruling from the Federal Fiscal Court (BFH, judgment of January 31, 2024, V R 20/21) is of the utmost importance to you: You are obliged to pay the VAT for the advertising space yourself instead of paying it to the platforms. This is the so-called reverse charge or shifting of tax liability. It is very important for companies, as mistakes can easily be made when applying this complex regulation when issuing invoices.

Reverse charge procedure

For other services provided by an entrepreneur based in another EU country to an entrepreneur based in Germany, the recipient of the service is liable for VAT if the recipient of the service is an entrepreneur. The case concerned a company based in another EU country that provided other services in Germany by electronic means. The company operated an online marketplace where both traders and non-traders offered goods for sale. The company's services consisted of granting the sellers of the goods access to and use of the online marketplace.

Shifting the VAT liability if the recipient is an entrepreneur

In order to use the online marketplace, service recipients first had to register and indicate whether they wanted to use the marketplace as a private individual or as a business. If the service recipient entered a VAT identification number (VAT ID no.), the company checked this for validity. If the service recipient was registered as a business user, but did not enter a VAT ID number or entered an invalid one, the company checked and confirmed that the service recipient was a business if one of three criteria defined by the company itself was met. According to this, the entrepreneurial status was given if the service recipient:

1. made or had made a certain number of sales in the current year or the previous year,
2. performance fees of a certain minimum amount were incurred in the same period or
3. if the recipient of the service had registered on a special platform reserved for commercial traders.

During a special VAT audit, the auditors of the tax office took the view that only those recipients of services for whom a valid VAT ID number was available should be treated as entrepreneurs. In the opinion of the auditors, the three criteria applied by the company itself were not suitable for assuming the entrepreneurial status of the service recipients. As a result, the transfer of the tax liability was not accepted by the tax office for the estimated charges and VAT was subsequently claimed from the company.

No need for a valid VAT identification number

The tax courts took a different view. Both the tax court and the Federal Fiscal Court ruled in the subsequent legal and appeal proceedings that the use of a valid VAT ID number by the recipient of the service is not a prerequisite for the recipient of the service to be considered an entrepreneur and for the tax liability to be shifted. However, the person of the service recipient must be sufficiently known and identifiable in order to be able to assess the entrepreneurial status. An entrepreneur is anyone who independently carries out a commercial or professional activity, regardless of whether they have legal capacity under other regulations. The company comprises the entire commercial or professional activity of the entrepreneur. According to the wording of the law, entrepreneurial status does not require a valid VAT ID number. But what exactly do these criteria mean for business practice?

Recipient must be identifiable

The statutory regulations do not specify which information and/or documents the supplier must submit to the tax authorities regarding the person of the recipient of the service in order for the conditions for a reverse charge to be considered fulfilled. However, the supplying business has a burden of proof if it wishes to make use of the favorable regulation.

In any case, the BFH considered the information submitted by the company, which included the name, company name and addresses of the service recipients, to be sufficient to verify the existence and identity of the service recipients and their status as entrepreneurs. As the tax court had not examined the documents to a sufficient extent, the case was referred back to the tax court.

Conclusion

The use of a valid VAT ID number by the recipient is not mandatory for the reverse charge mechanism. However, the supplier bears the burden of establishing that the recipient fulfills the entrepreneurial status for the reverse charge mechanism. However, no specific form of proof is required.