Germany: VAT Rate Reduction

Yesterday (3 June 2020) the governing grand coalition between the Union and the Social Democratic Party in Germany have agreed an economic stimulus package of EUR 130 billion in their coalition committee in order to combat the economic downturn following the Coronavirus crisis. 

One of the measures includes a temporary general reduction of the standard VAT rate from 19 % to 16 % and of the reduced VAT rate from 7% to 5% for supplies taking place between 1 July and 31 December 2020. 

This would come on top of the reduction of the VAT rate from 19 % to 7 % on food served in restaurants etc for one year starting on 1 July, which was already approved by the German Parliament at the end of May.  

Although the general temporary reduction of the VAT rates announced yesterday is, on the face of it, only an agreement between the coalition parties, it is likely that it will become law. The grand coalition hold a healthy majority in the German Parliament. Also, due to the resentment a U-turn would trigger amongst the electorate, it would be difficult for parliament not to follow on and approve the measure.   

The freshly announced plans of the German government should be very closely monitored especially by companies restricted in their right to input VAT deduction when buying goods or services subject to German VAT. Where possible, completion or delivery dates should be shifted to fall on or after 1 July 2020 and before 1 January 2021. Equally, companies selling goods or services subject to German VAT on the basis of VAT inclusive prices should review their completion or delivery dates to salvage the possible profit to be made from the reduced VAT rate. Further, companies selling to German private consumers (distance sellers) can look forward to a windfall for their profits or more room for competitive pricing.