In a letter dated October 1, 2020, the German Federal Ministry of Finance (‘BMF’) clarified that a work supply requires that an object not owned by the supplier is treated or processed. The BMF supplemented the VAT Application Decree accordingly.
Hence, a work supply is only given, if the manufacturer of the work processes or treats a not owned object for the work and uses materials procured by himself for this purpose, which are not only minor ingredients or other incidental objects. It is not sufficient if the entrepreneur providing the service only processes or treats his own objects.
However, it is still sufficient for the classification as work supplies, if the supplier attaches own objects firmly to immovable property.
Assembly / installation supplies
If the supplier installs or assembles an object without a fixed connection to immovable property and only works or processes own objects in the process, an assembly supply may be present.
Of particular importance is the distinction in connection with the tax liability of the recipient of the service in case of work supplies by foreign entrepreneurs (reverse charge).
Both work supplies and assembly supplies are stationary supplies, where the place of supply is where the object is located at the time of the transfer of the power of disposal. If this place is in Germany, the supply is in scope of German VAT. In contrast to assembly supplies, however, it is not the foreign supplier who is liable for VAT in the case of work supplies, but the recipient of the supply. In consequence, the foreign supplier is not obliged to register for VAT purposes in Germany.
Supplies with transport or dispatch
Supplies with transport or dispatch (‘moving supplies’) are to be distinguished from work and assembly supplies. The place of supply for moving supplies of goods is generally where the transport or dispatch of the goods begins. In case of cross-border supplies within the EU, there is insofar a VAT-exempt intra-Community supply of goods in the country of departure and an intra-Community acquisition of the recipient in the country of destination of the goods. Also, in these cases, the entrepreneur delivering from abroad does not have to register for VAT purposes in Germany. In the opinion of the German tax authorities a prerequisite of a moving supply is that the nature of the goods does not change after the start of transport or dispatch. In this respect, the tax authorities consider whether the object has a different marketability after installation or assembly. This should not be the case, for example, if the ready-to-operate object is first disassembled into individual parts only for the purpose of a better and easier transport and then reassembled at the place of destination.
In the opinion of the tax authorities, there are no work supplies, but other services in the form of a work services (no supply of goods) if the service provider does not use any materials procured by himself or only minor ingredients or other incidental items. The reverse charge mechanism also applies to these services if supplied cross border, so that in general the German recipient of the service is liable for VAT.
Already with decision of 22 August 2013 (V R 37/10) the German Federal Court of Finance decided that work supplies require that the entrepreneur not only provides the recipient with the power of disposal over the object, but also additional processes or treats a third-party object. The decision was published in the German Federal Tax Gazette (BStBl 2014 II p. 128).
Nevertheless, the BMF allows to treat supplies in accordance with the previous version of the VAT Application Decree for VAT incurred until 31 December 2020 deviant to the abovementioned decision of the German Federal Fiscal Court of Finance and the principles laid down in the letter of 1 October 2020.
Especially foreign suppliers of machinery or equipment and their domestic customers should check whether work, assembly or movable supplies of goods or work services are provided in order to ensure the correct VAT treatment, also regarding registration obligation and input VAT deduction. It can be assumed that the distinction between work supplies and assembly supplies in particular will become more important in future tax audits.