Further clarifications from German Federal Ministry of Finance regarding the turnover-based partial exemption method

Input VAT must always be apportioned where used both for supplies that entitle a business to deduct input VAT and for supplies that do not. According to the EU VAT Directive, a total turnover-based recovery ratio should be applied as a default position. However, Member States are permitted to deviate from this principle and Germany allows alternative apportionment methods. For Germany, an apportionment method based on total turnover can be disregarded if another method is available and provides more precise results. In the circular the BMF : 

• Provides that it is the responsibility of the business to choose more precise methods; 
• Outline the calculation method when a turnover based ratio is used; 
• Explain the consequences of a significant variation of the turnover when the latter is used to determine input VAT recovery; and 
• Outline the obligation for businesses to round up the recovery ratio to the second decimal when using a more precise partial exemption method.

Key takeaway

The current BMF circular finally puts some practical considerations regarding input tax apportionment into writing. Nevertheless, companies may still decide for themselves which apportionment method they wish to use, provided that the method chosen is more precise. The clarifications in the circular are especially relevant for companies that not only provide supplies for which input VAT can be deducted but at the same time provide tax-exempt financial, insurance or medical services.

Reference: Vorsteueraufteilung nach dem Verhältnis der Umsätze im Sinne von § 15 Abs. 4 Satz 3 UStG