247. Construction Work Withholding Tax

Thomas Sauter, KPMG Frankfurt

For editorial cut-off date, disclaimer, and notice of copyright see end of this article.

1. Introductory

The Act for the Curtailment of Illegal Employment in the Construction Industry (Gesetz zur Eind‰mmung illegaler Bet‰tigung im Baugewerbe) of 30†August 2001 became law on 7†September 2001 (BGBl†I 2001, 2267). The law was prompted by concerns that contracts awarded to foreign construction firms, shady subcontractors, and sham enterprises were resulting in tax evasion, reckless understatement of tax, and other acts jeopardising the collection of tax revenues.

The core requirement of the new law is that, starting on 1†January 2002, the recipient of construction work (the purchaser) must withhold 15†% of the gross amount of the consideration (generally, money payments) paid to the party performing construction work (the contractor). The amount withheld is remitted to the appropriate tax office for the account of the performing party, which may credit the amount withheld against its tax liability. This compliance mechanism is intended to secure the tax authorities' claims against the performing party for wage tax and personal and corporate income tax.

The new provisions are contained in ß߆48 ff. EStG (Income Tax Act). Regulations governing application of the statutory provisions were issued by the Federal Ministry of Finance in November 2001 (FR 2001, 1237). The 2001 Tax Amendment Act modified ߆48 (1) EStG so that the construction withholding tax (Bauabzugssteuer) no longer applies to construction work commissioned by landlords who let no more than two dwellings.

The law applies to all construction work provided to public law legal entities (juristische Personen des ˆffentlichen Rechts) or to entrepreneurs within the meaning of ߆2 UStG (VAT Act). Construction work is defined as all work of the types listed in ß߆1 and 2 of the Construction Business Ordinance (Baubetriebsverordnung - BauBVO) involving the construction, repair, maintenance, modification, or removal of buildings or other structures. The term thus extends beyond erecting and adding onto structures to include repair work (such as installation work or painting), causing such work to fall within the scope of the statute.

In late September 2001, the Federal Ministry of Finance issued a publication (available on the Internet at www.bundesfinanzministerium.de) providing guidance on the application of the construction withholding tax.

2. Substantive law (ß 48 EStG)

2.1 Basic rules

Persons commissioning construction work supplied in Germany to an entrepreneur within the meaning of ߆2 UStG or to a public law legal entity must withhold 15†% of the gross amount of the consideration owing. The rule applies to lessors of residential property who purchase construction work only if they let three or more dwellings.

The purchaser may dispense with withholding only if, at the time of payment, the purchaser is in possession of a valid certificate of exemption as defined in ߆48b EStG (see below) or if the entire consideration conferred by a purchaser on a performing party in the calendar year is not anticipated to exceed certain limits. The general limit is Euro†5,000. A higher limit of Euro†15,000 applies for purchasers that effect solely tax exempt (zero-rated) output supplies within the meaning of ߆4 no.†12 sent.†1 UStG (such as persons who let real property).

Compliance with ߆160 (1) sent.†1 AO (requiring identification of creditors and recipients of payments) is waived where tax is withheld as required or where no withholding applies because an exemption certificate was issued or the de minimis limits were not exceeded.

Consideration is defined as the sum paid plus VAT owing thereon.

2.2 Comments

Withholding at the 15†% rate is required even with respect to work performed by "reputable" domestic firms since application of the tax only to foreign firms could disadvantage them and hence violate European law.

Withholding is required on all consideration passing on or after 1†January 2002 including advance payments, part payments, and payments on account. Non-cash consideration such as tangible objects or the performance of services also constitutes consideration within the meaning of ߆48 EStG. The law does not specify how withholding is to take place in such circumstances, however. The publication issued by the Federal Ministry of Finance also provides no guidance on this issue.

If initially no tax was withheld in the expectation that the stated limits would not be exceeded, tax on the entire amount of consideration that has passed becomes owing as soon as the limit is exceeded.

3. Procedural matters (ß 48a EStG)

3.1 Basic rules

The purchaser is required to file a return on an official...