Freistellung

The German legislature has created a procedure for securing tax claims arising from construction work to curb illegal activity in the construction industry. As of January 1, 2002. the recipient of the service (the customer) is required to pay tax on construction services, which is 15% of the value of the service provided. The principal does not have to take a tax deduction if the contractor’s salary does not exceed €5,000 in the current calendar year. Both German and foreign entrepreneurs are covered by this regulation. To avoid paying tax on construction services, you can apply for a so-called Freistellung, a special certificate authorizing exemption from tax on construction services. Such a certificate is issued by the competent tax office in Germany, which then transmits the data to the Central Federal Tax Office. The certificates are collected in a special database so that they can be searched and their validity can be checked (§ 48b(6) EStG). The contractor is always required to provide the principal with a legible copy of the Freistellungsbescheinigung. If he fails to do so, the assumption should be made that he does not have a valid certificate, and therefore the principal is obliged to deduct the construction services tax from his salary and pay it to the tax office with jurisdiction over the service provider.

The German tax authority has determined which contractors are required to withhold tax at a rate of 15% of the gross remuneration for construction work performed. Potentially these are:

– small entrepreneurs in accordance with Section 19 UStG,
– All companies for which construction work was performed,
– All legal entities under public law,
– farmers and foresters who pay a flat tax in accordance with Section 24 UStG and
– Entrepreneurs who make only tax-exempt transactions, e.g., renting and leasing land.

Should I check the validity of the Freistellungsbeschinigung before paying for the service?

Yes, because the Freistellungsbescheinigung must be valid at the time of payment for the service provided. In addition, the principal is civilly liable for the construction services tax paid (§ 48a(3) EStG). The principal is exempted from civil liability if the contractor had a legal and valid Freistellungsbescheinigung at the time the construction service was performed. It is therefore important for the client to ensure that the certificate bears the official stamp and that all data is legible. You can check the validity of the certificate yourself on the website of the Central Federal Tax Office, but you must register sooner.

When must the tax deducted from wages be reported and withheld?

The contractor must report the tax withheld by the 10th day of the following month in which the service was provided. To do so, he must provide the contractor's tax office with a completed special form and then withhold the tax within ten days.

How is tax deducted between the principal and the contractor?

The principal must agree in writing with the contractor that he will deduct a tax of 15% from his remuneration. This must be done on the form ‘Anmeldung über den Steuerabzug bei Bauleistungen’ and provide the following information:

1. the name and address of the contractor

2. the date of the invoice, the amount on the invoice or the amount of remuneration transferred and the date of payment

3. the amount of tax withheld

4. the address of the service performed and the period for which it was performed

5. and the tax office to which the withheld tax was reported.

What conditions must the contractor meet in order to reclaim tax on construction services?

In order to receive a refund of German construction services tax, the entrepreneur must submit an application (Antrag auf Erstattung von Abzugsbeträgen (§ 48c Abs. 2 EStG) to the tax office responsible for him. The construction services tax will be charged to German entrepreneurs on account of the advance tax for the year in which the construction services were performed, and any overpayment will be refunded after the submission of the tax return for the year in question.

In the case of foreign entrepreneurs, the relevant tax office will reimburse the collected tax on construction services upon request. The condition is that a request is made to verify the existence of a tax liability in Germany for the calendar year and, if one exists, that a tax return is made and that no tax claims arise in Germany in the future. If a refund application is filed, the entrepreneur must prove that he is resident in the country by submitting a confirmation from the tax authority. The tax refund application must be submitted in accordance with an officially established model, at the latest by the end of the second calendar year after the assignment.