Construction withholding tax - Key features and risks for recipients of construction services
The construction withholding tax, which is laid down in Section 48 of the Income Tax Act (Einkommenssteuergesetz, EStG), constitutes a particular tax-collecting mechanism in the construction sector. It requires the recipients of certain construction services to make a deduction for tax from the payment for the services and to pay this to the local tax office. The aim is to prevent tax evasion in the construction industry and to ensure that the service providers are taxed. For the recipients of construction services this give rise to practical obligations as well as considerable liability risks, which are frequently overlooked.
Basic mechanism of the construction withholding tax
According to Section 48(1) sentence 1 EStG, construction withholding tax is collected for construction services in Germany. The recipient of construction services is required to withhold 15% of the consideration (including VAT) and pay it to the tax office responsible for assessing the service provider’s tax. Exceptions apply for small invoice amounts, for example, if construction services costing no more than (an anticipated) €5,000 are received from a specific contractor within one calendar year.
The construction tax that is withheld will be set off against the service provider’s tax liability in accordance with Section 48c EStG. However, the tax generally has to be deducted regardless of whether or not the service provider is at all liable to pay tax in Germany.
Exemption certificate as a key derogation
In practice, the exemption certificate pursuant to Section 48b EStG, in particular, is of major importance. If the service provider submits a valid exemption certificate to the recipient of the construction services then the recipient would no longer be required to withhold tax. The determining criterion here would be the validity of the certificate on the date that the invoice is paid.
Therefore, for a recipient of construction services it is absolutely essential to closely scrutinise the exemption certificate. It is possible to verify the validity of the exemption certificate either electronically, via the Federal Central Tax Office (Bundeszentralamt für Steuern, BZSt), or on the basis of a confirmation directly from the tax office stated on the exemption certificate.
Practical obligations of the recipient of construction services
The recipients of construction services play an active role in the tax collection process. Their main responsibilities here include:
- carrying out a basic check to determine whether construction services that have been performed are subject to withholding tax in accordance with Section 48 EStG,
- obtaining and verifying the exemption certificate,
- if required, calculating and withholding tax deductions (15% of the invoice amount),
- electronic reporting and payment of the construction withholding tax in accordance with Section 48a(1) EStG by the 10th day after the end of the month in which the payment was made,
- issuing a tax withholding certificate for the service provider that states the amount of tax that was deducted in accordance with Section 48a(2) EStG.
Liability risks for recipients of construction services
The liability regime is one element of the construction withholding tax that is of high practical relevance. If recipients of construction services fail to withhold tax as required by the law then, under Section 48a(3) EStG, they would be liable for the tax that was not withheld and paid. The retrospective reporting of the construction withholding tax that would then subsequently be required here could be both time-consuming and complicated. In such cases, given that the recipients of construction services have to subsequently pay the construction withholding tax although they did not withhold it when they settled their invoices, consequently, the recipients must also come to an arrangement with the service providers regarding the reimbursement or offsetting of the withholding amount. As a result, the following risk situations may typically arise for recipients of construction services.
Failure to recognise a construction service - If a recipient of a construction service fails to recognise it as such and therefore, subsequently, does not take the necessary steps (obtain an exemption certificate from the service provider or make a tax deduction) then the recipient would be liable for the construction withholding tax that was not paid. Caution is required, particularly in cases where it is questionable whether the construction services affect the substance of the building (e.g., maintenance work on a section of the building), or in cases where there are combined services that consist not only of supplying the materials but also incorporating them into the building.
Missing or invalid exemption certificates - Moreover, considerable risks can also arise as a result of missing or invalid exemption certificates. If the recipient of construction services does not monitor the submission as well as the validity of the certificate that is presented (e.g., by enquiring at the BZSt) then the recipient would be fully liable. In practice, liability risks frequently arise especially when there are time gaps between two exemption certificates.
Breach of exemption limits - If a construction service is received that initially falls within the exemption limits regulated in Section 48(2) EStG and, consequently, no construction tax is withheld, then the recipient of the construction service would have to continuously monitor the exemption limits for the remainder of the calendar year. The failure to recognise a breach of the exemption limits as a result of receiving further construction services, in the same calendar year, from the identical service provider would likewise give rise to liability risks here for the recipient of the construction services.
