Insights
VAT
Fake invoices: No input tax deduction for the invoice recipient
If invoices show VAT even though no services have been provided, they are considered fake invoices. The VAT shown on such fake invoices must be paid by the issuer, while the invoice recipient is not entitled to an input tax deduction.
During a tax audit it was found that several limited partnerships (Kommanditgesellschaften) invoiced each other almost exclusively, without actually providing any services. The managing directors of the companies failed to provide any documents proving that the companies had rendered services, despite repeated requests. In the absence of such documents, the invoices issued by the companies were qualified as fake invoices. The tax office denied the input tax deduction claimed by the invoice recipients, while the issuing companies were assessed VAT by way of the invoice issuance.
Invoice recipient has no input tax deduction
If an invoice is issued and VAT is shown on it, while the issuer has not supplied a service to the recipient, the issuer owes this VAT, even though the recipient has no input tax deduction. This tax liability by reason of invoice issuance requires that an invoice be created which formally meets the requirements of the Value Added Tax Act (UStG). The purpose of this rule is to prevent an unjustified input tax deduction – a correct invoice is a prerequisite for the input tax deduction.
Documents that formally do not contain all the features of an invoice within the meaning of the VAT Act and are therefore incomplete do not trigger VAT by reason of invoice issuance: because they already lack the formal basis for an input tax deduction, abuse cannot be considered. If a deficient billing document is already formally not entitled to an input tax deduction, the corrective measure of a tax liability by reason of invoice issuance is unnecessary.
Decision of the Federal Fiscal Court (Bundesfinanzgericht, BFG)
Consequently, in cases of non‑performed services, once a formally complete invoice or receipt that creates a risk of an unjustified input tax deduction is present, a corresponding tax liability by reason of the invoice also arises. As the companies in the specific case had issued correct and complete invoices, they must also remit the VAT charged on those invoices.
Regarding the input tax deduction for the invoice recipients, the BFG states that no corresponding services were planned or provided. The sole purpose of the invoices was rather the assertion of an unjustified input tax deduction and the reduction of VAT pre‑payments. Therefore, the input tax deduction for the recipients was denied.
Conclusion
If a trader issues fake invoices that meet the formal requirements of an invoice but for which no service has been rendered, the trader is obliged to pay the VAT charged on the invoice. Because no services were provided, the invoice recipient cannot claim an input tax deduction.
Invoice recipient has no input tax deduction
If an invoice is issued and VAT is shown on it, while the issuer has not supplied a service to the recipient, the issuer owes this VAT, even though the recipient has no input tax deduction. This tax liability by reason of invoice issuance requires that an invoice be created which formally meets the requirements of the Value Added Tax Act (UStG). The purpose of this rule is to prevent an unjustified input tax deduction – a correct invoice is a prerequisite for the input tax deduction.
Documents that formally do not contain all the features of an invoice within the meaning of the VAT Act and are therefore incomplete do not trigger VAT by reason of invoice issuance: because they already lack the formal basis for an input tax deduction, abuse cannot be considered. If a deficient billing document is already formally not entitled to an input tax deduction, the corrective measure of a tax liability by reason of invoice issuance is unnecessary.
Decision of the Federal Fiscal Court (Bundesfinanzgericht, BFG)
Consequently, in cases of non‑performed services, once a formally complete invoice or receipt that creates a risk of an unjustified input tax deduction is present, a corresponding tax liability by reason of the invoice also arises. As the companies in the specific case had issued correct and complete invoices, they must also remit the VAT charged on those invoices.
Regarding the input tax deduction for the invoice recipients, the BFG states that no corresponding services were planned or provided. The sole purpose of the invoices was rather the assertion of an unjustified input tax deduction and the reduction of VAT pre‑payments. Therefore, the input tax deduction for the recipients was denied.
Conclusion
If a trader issues fake invoices that meet the formal requirements of an invoice but for which no service has been rendered, the trader is obliged to pay the VAT charged on the invoice. Because no services were provided, the invoice recipient cannot claim an input tax deduction.