Germany New federal instructions regarding input VAT deductions for research institutions - Unifying the patchwork

In the past tax authorities of the various German states treated research institutions differently with regard to their status as VAT taxable persons and their right to recover input VAT. The German Federal Ministry of Finance has now issued a Circular whereby a uniform approach should be applied going forward.

On 27 January 2023 the German Federal Ministry of Finance issued a circular to ensure that a uniform approach is applied by tax authorities in all German states with respect to the qualification of research institutions. Such institutions must be regarded as businesses under German VAT law, with a right to recover input VAT on related costs. The differentiation between “university research” institutions and non-research institutions will be abandoned in favour of equal treatment for all research institutions. If the research is intended to be used to generate sustainable income, the research institution will be classified as VAT taxable under German VAT law. All earlier research activities carried out will retroactively qualify as taxable and input VAT recovery will also be granted by the tax authorities. Other activities such as teaching, which are completely unrelated to research will not qualify as taxable. A proportionate input VAT recovery will apply for mixed activities, for which the relevant calculation method is provided by the German Federal Ministry of Finance.

Key takeaway

This new unified approach to classifying research institutions as taxable under German VAT law also means that input VAT deductions can be reclaimed. For research institutions this unified approach means that they are entitled to reclaim significant amounts of input VAT incurred in the past. Therefore, it is of the utmost importance for those institutions to keep VAT assessments open.