Transfer of emission allowances – application of the reverse charge mechanism

The German Federal Ministry of Finance recently published a circular detailing the application of the reverse charge mechanism for the transfer of emission allowances. For any transfers of emission allowances after 31 December 2022 the recipient of the service is liable for VAT if the recipient is a business.

The German legislator recently extended the reverse charge procedure to the transfer of emission allowances. For any transfers of emission allowances after 31 December 2022 the recipient of the service is liable for VAT if the recipient is a business. The German Federal Ministry of Finance now clarifies some issues regarding advance payments that took place before 1 January 2023 and regarding which the services were rendered before this date. The clarifications are applicable to all transactions after 31 December 2022.

Advance payments before 1 January 2023 and services provided after 1 January 2023

• Correction of the advance payment invoice showing VAT in the advance notification period in which the service is actually performed.
• Exception: tax is due on the amount due minus the remuneration received from the supplier before 1 January 2023.
• Prerequisite: advance payments have been correctly declared by the supplier in VAT returns.

Payment of advance-payment invoice (with VAT shown) after 1 January 2023

• Supplier must correct the advance payment invoice showing VAT.

Service provided before 1 January 2023 – invoiced after 31 December 2022

• Reverse charge mechanism does not apply, i.e., no correction of invoice.

Correction (after 31 December 2022) of a down payment invoice issued and paid before 1 January 2023

• If the amount of the down payment was incorrect, the non-objection rule is also applicable if the conditions are met, i.e., under certain conditions no invoice correction needs to be carried out.

If no correction of the invoice is carried out, the issuer of the invoice is liable for the VAT shown in accordance with section 14c para. 1 sentence 1, sentence 2 German VAT Act.

Key takeaway

The VAT handling of advance payments in the area of emissions trading is made clear in this German Federal Ministry of Finance circular. Businesses that deal in emission certifications ought to confirm if they need to make any adjustments to their invoices especially in relation to advance payments. If amendments are necessary, the business has to act in order to escape the legal ramifications of a tax debt as invoice issuer.