The New Principles for the Classification of Rental and Leasing Contracts in Germany

So far, the German tax authorities have based their decisions regarding leasing contracts on income tax rules and general VAT principles. If the lessee was entitled to dispose of the leased objects like an owner for income tax purposes it was assumed that simultaneously a supply of goods has occurred under VAT law. As a consequence, the normally autonomous VAT law was under the regulation of the income tax law. The ECJ decision in Mercedes-Benz-Financial Services Ltd (MBFS) changed this principle. For a certain time it was unclear how Germany would react to the ECJ decision. However, classifying lease contracts for VAT purposes under income tax law now is no longer applicable in Germany.

Meanwhile, Germany has amended the VAT guidelines and a supply of goods regarding lease contracts occurs under two conditions which are described below.

1. Transfer of ownership

The contract between the lessor and the lessee must contain a clause relating to the transfer of ownership of the leased assets. This could also be met where an agreement contains an option to purchase the leased assets.

2. Automatic transfer of ownership

The terms of the contract must clearly determine that the ownership of the goods is to be acquired automatically by the lessee if the performance of the contract proceeds normally. The conditions of the contract at the time of signing it are significant. In case of a non-binding option to purchase, the requirements are fulfilled if the exercise of the option is the only economically rational consequence for the lessee. There is no real economic alternative when at the time of the option the sum of instalments equals the fair value of the assets. At that moment, the lessee should not have to pay a considerable additional amount for the exercise of the option.

According to the German Ministry of Finance, the sum in question should not exceed 1% of the market value of the object.

For Germany, the ECJ decision in MBFS has led to a departure of the synchronisation between income tax and VAT in this respect. For VAT lease issues, the income tax principles are no longer relevant. Contracts can now be designed as a supply of goods or a supply of services for VAT purposes. This could be especially interesting in cross-border-leasing cases, namely, to transfer the place of supply to the desired country.

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