Cost of a new heating system does not entitle the landlord to deduct input VAT: BFH ruling from 7 December 2023, V R 15/21

The costs associated with the installation of a new heating system are not apportionable as operating costs. They can only justify a rent increase if they meet the requirements of an “energy-efficient refurbishment”. If the conditions are not met, the landlord is stuck with the costs. It would help the landlord if at least the input VAT deduction could be claimed for these expenses. In the opinion of the BFH, however, this is not permissible.

The facts:  A new heating system

The plaintiff let a house with two flats as VAT exempt.  The rental agreement stipulated that the rent consisted of the basic rent, the "cold" operating costs (without heat and hot water) and the heating costs (heat and hot water); the advance payments for heating and hot water were calculated and invoiced annually. Each tenant had their own metre and could regulate the temperature for their flat individually and contact the heating supplier directly if a problem occurred. The plaintiff had a new heating system installed to replace the existing one, waived the small business VAT rule and declared output supplies at 19 % for the heat and hot water supplies in the amount of the advance payments made by the tenants. The plaintiff claimed an input VAT deduction for the costs of the new heating system, which led to an input VAT surplus.

Decision: No input VAT deduction

Input VAT deduction from the costs of the new heating system would only be permitted if these expenses were directly and immediately related to a taxable supply of heat and hot water. However, if these expenses are related to the VAT-exempt letting of residential property, there is no right to deduct input VAT.

The BFH (Federal Fiscal Court) ruled that if the landlord is also responsible for supplying heat and water in connection with the contractual use of the flat, the costs of the heating system are then considered directly and immediately related to the VAT-exempt letting, assuming that these expenses are not operating costs that the tenant must bear them separately. Whether this is the case is determined by the provisions of tenancy law. § 535 (1) sentence 3 BGB (German Civil Code) generally assumes that the rent charged by the landlord includes the costs associated with the permission to use the heating system.  However, it can be agreed instead that the tenant bears these operating costs separately in addition to the rent. However, § 565 (1) sentence 3 BGB in conjunction with § 1 (2) no. 2 BetrKV (Betriebskostenverordnung, Ordinance on the Statement of Operating Costs) states that maintenance and repair costs are excluded from the definition of operating costs. Accordingly, construction and other acquisition costs in particular are not ongoing expenses but rather one-off expenses and are therefore not to be regarded as operating costs. The cost of the new heating system is therefore not classified as an operating cost.

The BFH also sees its legal opinion confirmed by the fact that a significantly improved heating system would have led to a rent increase in accordance with §§ 555b, 559 BGB, i.e. to an increase in VAT-exempt remuneration, but not to apportionable ancillary costs. This also corresponds to the provisions of the Heating Costs Ordinance (HeizkostenV) which states that the costs of acquiring the system are not included.

For this reason, the expenses for the heating system are, in the opinion of the V. Senate, costs associated with the letting. The result would be the same even if the allocated operating costs for heat and hot water were to be regarded as remuneration for the independent supply of heat and hot water supply for VAT purposes because the German regulations on the definition of operating costs do not allow the cost of the heating system to be allocated to these supplies. 


The ruling, in this case, had been eagerly awaited - it was assumed that the BFH would issue a decision on whether heat and hot water were considered ancillary supplies to the letting, taking into account the ECJ ruling "Wojskowa Agencja Mieszkaniowa w Warszawie" of 16 April 2015, C-42/14. In this case, the question would have arisen as to whether the rental component was VAT exempt, but the heating/hot water supply component was taxable, i.e. whether components of a uniform supply were to be treated differently for VAT purposes. According to the most recent ECJ ruling on this topic ("Finanzamt X", C-516/21 of 4 May 2023), which the V. Senate of the BFH has endorsed (BFH ruling V R 7/23 (previously V R 22/20) of 17 August 2023), this would probably not have been possible. If the supply of heat and hot water were an independent supply, it would have been expected that the expenses for the heating system would be included in its cost elements and would therefore be eligible for input VAT deduction.

The surprising thing about this judgement is that the VAT category of the uniform supply was not a decisive factor for the V. Senate in this case. Instead, it has applied purely civil law standards, stating that if the costs of the heating system are not operating costs under tenancy law, they must be included in the calculation of the rent itself and, in the view of the V. Senate, should for this reason also not be cost elements of the heat/hot water supply for VAT purposes. Even if the Senate was able to leave open the question of independent performance/ancillary performance with this approach, it makes it clear that this result would not change even if the supply of heat/hot water were independent from a VAT perspective. This is surprising because although civil law is always the starting point for the assessment of supply relationships for VAT purposes, specific VAT criteria ultimately apply.. In the present case, one would have expected the VAT category of uniform or independent supplies to take precedence over categories derived from tenancy law.

The ruling of the V. Senate is nevertheless convincing in its result because the decision is essentially based on the assumption that every landlord of residential property must provide a functioning heating system - regardless of whether the parties to the tenancy agreement have agreed to pay a consumption-independent "warm" rent, whether the landlord bills the heating and hot water supplies separately and based on consumption, whether the tenant can choose between different providers, and also in those cases in which the tenant independently concludes a supply contract with an external provider. If the landlord is obliged to provide a functioning heating system even if the tenant opts for an external supplier, it is clear that this is a fundamental part of the letting service. If (possibly with reference to the ECJ judgement "Wojskowa Agencja Mieszkaniowa w Warszawie") there are independent supplies of heat/hot water, the landlord may be able to deduct input VAT from the purchase of natural gas, oil, etc., but not from the costs of the heating system.

It will be interesting to see how the XI. Senate of the BFH resolves a similar case pending before it (X R 8/21). This case concerns the question of whether electricity supplied to tenants via a landlord's photovoltaic system is a dependent ancillary supply of the VAT-exempt letting. 


Nadia Schulte
+49 211 83 99 330