Tax - The One Pager: German Federal Fiscal Court: Tenant electricity subject to VAT? Advantage or disadvantage for the landlord?

Is the provision of tenant electricity always subject to VAT?

The Federal Fiscal Court ruled that the letting of residential property and the supply of tenant electricity must be treated as separate supplies. The supply of tenant electricity is not merely an ancillary service to letting and can therefore not be considered as part of a VAT exempt letting of property. The reason for this is that the tenant usually has the choice of purchasing tenant electricity or electricity from other sources (e.g. from the local public utility company). Such choice is assumed where in particular the lease agreement and tenant electricity contract are concluded and terminated separately.

The tenant should have no right of choice in case the purchase of tenant electricity is conditional (e.g. for structural reasons or in case of a particularly short rental period).

What does that mean?

Tenant electricity must be treated as subject to VAT in the case of residential leases if the tenant has a choice as to whether to purchase tenant electricity.

For the landlord this means:

• Charging of VAT on the tenant’s electricity bill;
• Registration, calculation and advance payment of VAT; and
• Submission of an annual tax return (unless otherwise required).

In return, the landlord is entitled to deduct input tax (Vorsteuer). This applies to the VAT for the installation of the PV system, or other supplies made to the landlord in order for the landlord to be able to supply tenant electricity (e.g. additional installations of measuring points or maintenance work).

Key Take-Aways

Landlords of residential property must therefore generally treat tenant electricity as subject to VAT. Depending on the specific individual case, this can have advantages and disadvantages.

If the PV system is particularly low powered (less than 30 kilowatts), for example, its purchase is VAT free since 2023, meaning that input tax can insofar no longer be claimed.

In all other cases, it is now clear that tenant electricity generally entitles the landlord to deduct input tax; depending on the setup, the tax benefits of the input tax deduction can now be fully utilised even if there would otherwise be no entitlement.