Insights
VAT
Major repairs in a VAT‑exempt disposal of a building
To avoid disputes with the tax office over input tax that must be corrected, you should promptly document renovations in the building sector and clarify in advance whether they constitute a major repair.
If input tax (Vorsteuer) was claimed on the acquisition of an asset, it must be corrected when a change to the circumstances that were decisive at the time of the original input‑tax deduction occurs. The correction obligation applies mutatis mutandis to input‑tax amounts that relate to subsequent acquisition or production costs, expenses that must be capitalised, or, in the case of buildings, costs of major repairs. Because the VAT Act (UStG) lacks an exact definition of “major repair”, the courts regularly interpret this term.
Input‑tax correction and the concept of major repair are contentious
A company sold several residential units and rental apartments from its fixed assets without exercising the option to be subject to VAT. In the years before and in the year of the disposal, the company carried out structural measures such as roof renovations, modernisation of lift systems and replacement of windows and heating systems, claiming the input tax incurred. In the present case, the permissibility of an input‑tax correction and the definition of major repair were disputed.
Decision of the Federal Finance Court (Bundesfinanzgericht, BFG)
If the circumstances relating to a fixed‑asset property that were decisive for the original input‑tax deduction change, an input‑tax correction must be made. This also applies to input‑tax amounts that relate to major repairs of buildings.
For assessing whether a major repair exists, it solely depends on the measure being a non‑capitalisable expense that is both not incurred regularly and is material in size. Expenditures amounting to less than 2 % of the acquisition or production costs, or works whose investment volume per measure is below EUR 5,000, are exempt from correction. Expenditures below this de minimis threshold are not material and therefore not particularly extensive structurally.
External‑area measures of a property are also excluded from the concept of major repair, because the wording of the law requires a major repair to be a structural measure on a building. Buildings must be able to provide protection against weather influences, so a mere connection with the land is insufficient. Consequently, parking spaces, waste collection islands or carports do not fall within the definition.
Input‑tax correction and the concept of major repair are contentious
A company sold several residential units and rental apartments from its fixed assets without exercising the option to be subject to VAT. In the years before and in the year of the disposal, the company carried out structural measures such as roof renovations, modernisation of lift systems and replacement of windows and heating systems, claiming the input tax incurred. In the present case, the permissibility of an input‑tax correction and the definition of major repair were disputed.
Decision of the Federal Finance Court (Bundesfinanzgericht, BFG)
If the circumstances relating to a fixed‑asset property that were decisive for the original input‑tax deduction change, an input‑tax correction must be made. This also applies to input‑tax amounts that relate to major repairs of buildings.
For assessing whether a major repair exists, it solely depends on the measure being a non‑capitalisable expense that is both not incurred regularly and is material in size. Expenditures amounting to less than 2 % of the acquisition or production costs, or works whose investment volume per measure is below EUR 5,000, are exempt from correction. Expenditures below this de minimis threshold are not material and therefore not particularly extensive structurally.
External‑area measures of a property are also excluded from the concept of major repair, because the wording of the law requires a major repair to be a structural measure on a building. Buildings must be able to provide protection against weather influences, so a mere connection with the land is insufficient. Consequently, parking spaces, waste collection islands or carports do not fall within the definition.