Annual Tax Act 2026: New rules on VAT groups

Background

Under the current Section 2(2)(2) of the German VAT Act (UStG), a VAT group exists where, based on the overall picture of the actual circumstances, a legal entity is financially, economically and organisationally integrated into the parent company’s business. Transactions within the VAT group are then not subject to VAT. The effects of the group are limited to Germany – which does not, however, mean that foreign parts of the business are generally excluded. Due to the fragmented case law in this area, it is often difficult for businesses to assess whether the conditions for integration are met. It is not uncommon for a VAT group to arise without those concerned realising it, triggering extensive correction obligations. Some refer to this scenario as a ‘VAT worst-case scenario’. The same applies to the unnoticed cessation of the integration requirements; for this, for example even minor changes in the management bodies of the parties involved may suffice.

The German economy has therefore long been pressing for the introduction of a so-called ‘application-based VAT group’, under which the VAT consequences of the VAT group would only take effect – even if all the requirements are met – if a corresponding application is submitted. From the perspective of European law, there is no objection to this, as under Article 11 of the VAT Directive, EU Member States have the option of choosing whether to introduce a VAT group.

Draft Bill: Declaration-based group

The draft bill repeals the existing Section 2(2)(2) of the VAT Act and transfers the aforementioned conditions for a VAT group to a new Section 2c(1) of the VAT Act. It is clarified that (in line with the case law of the ECJ and the German Federal Fiscal Court) partnerships may also be group companies.

The most significant change is that the legal consequences of a VAT group arise only through a declaration by the parent company to the competent tax office, which the parent company submits on its own behalf and on behalf of the group companies. This constitutes an additional legal requirement for a VAT group; a VAT group cannot be established by means of a declaration if the requirements are not met.

The manner in which the declaration is to be submitted is regulated in the administrative order to the German VAT Code (UStDV). Accordingly, individual companies may also be admitted to an existing group upon application, and the declaration may be revoked by the parent company with regard to the entire group or individual group companies with effect for the future. If the requirements are no longer met, the parent company must notify the responsible tax office of this immediately.

A VAT group must generally be reversed if the declaration was submitted even though the conditions for the VAT group were not met or have ceased to apply. In this case, the parent company is liable for the taxes of the group companies. Tax liability on the part of the group companies may also arise. There is a concession regarding interest: the interest period does not commence until 15 months after the end of the calendar year in which the VAT assessment was issued setting out the tax consequences of the lack of a VAT group.

The reversal of an incorrectly recognised VAT group may be waived if the parent company and the group companies jointly apply for this. The prerequisite is that this does not result in any risk of tax revenue shortfalls. The application is irrevocable.

The new rules apply from 1 January 2029. The declaration of a VAT group may be submitted to the tax office from 1 July 2028 with effect from 1 January 2029.

Analysis

The German economy had actually hoped for something different, namely an application-based VAT group. Under an application-based VAT group, the tax office would check whether the conditions for group status are genuinely met and issue a corresponding notice on which the taxpayer can rely. Under the ‘declaration-based group’ envisaged in the draft bill, the tax office does not carry out an initial check at the time of the declaration, but only in the event of a tax audit or a special VAT audit. The reason for this approach is likely to be that the tax authorities do not have the capacity to examine the volume of applications expected. The risk of having wrongly assumed that the conditions for a VAT group are met therefore lies with the taxpayer, making a careful review before submitting such a declaration essential.

The fact that the Federal Ministry of Finance (BMF) has managed to incorporate the waiver of the reversal of an incorrectly assumed tax group into the law somewhat alleviates the fear of the ‘worst-case scenario’ mentioned at the outset. Some tax offices are already prepared to do this today, but there is as yet no legal entitlement to this approach. It should be noted that this is restricted to cases where there is no threat of a tax shortfall. However, VAT groups are often established precisely when companies outside the group are not entitled to input VAT deduction, meaning that waiving the reversal would in fact lead to tax losses. In many cases, therefore, there should be no possibility of waiving the reversal. Careful monitoring of declared tax groups therefore remains essential.

There are no explicit rules on how to deal with existing VAT groups. As, under the revised law, the legal consequences of a VAT group only take effect upon declaration, it must be assumed that all those wishing to maintain an existing VAT group must submit a corresponding declaration in good time. If this is not done, separate VAT returns must be submitted from 1 January 2029.

The question of whether companies can be excluded from a VAT group even though the conditions for inclusion are met, is answered by the wording of the new Section 2c(1) sentence 5 of the VAT Act. Accordingly, the legal consequences apply to the parent company “and the affiliated companies named in the declaration”. This creates a new possibility to actively limit the VAT group. However, careful monitoring of the conditions for inclusion remains necessary. In this respect, the new regulation does not really contribute to the much-discussed reduction of bureaucracy.

Author: Nadia Schulte