Construction withholding tax: What does it mean for landlords and what needs to be considered?

The construction withholding tax is an important measure aimed at preventing tax evasion and illegal working practices in the construction industry. It was introduced to ensure that the tax burden is paid to the tax office, even in the case of construction services where no proper tax declaration is often made. The recipient of the service, e.g. you as the landlord who purchases the construction work, must therefore pay 15% of the invoice amount directly to the tax office in certain cases.

The term “construction withholding tax” is a little misleading, as the tax deduction is not made by the building contractor himself, but by the recipient of the service, who pays part of the tax on behalf of the contractor. This tax levy is therefore a kind of advance payment that serves as security for the tax office in the event that the contractor fails to meet its tax obligations.

When must construction withholding tax be paid to the tax office?

The tax deduction of 15% of the consideration generally applies to construction services provided to entrepreneurs within the meaning of the German Value Added Tax Act (UStG) in Germany. The recipient of the service must make the deduction for the contractor’s invoice and pay this amount to the tax office.

Construction services are basically all services that serve the (new) construction, repair, maintenance, modification or removal of buildings. This means that almost all construction work associated with a building is subject to construction withholding tax, regardless of whether it involves new buildings, renovations or maintenance work.

Are there exceptions so that no construction withholding tax is due?

There are some exceptions, according to which no construction withholding tax has to be paid to the tax office in certain cases.

1) Landlords who rent out no more than two apartments are exempt from the obligation to pay construction withholding tax. Dwellings in this sense regularly include

• apartments that are structurally separate, form self-contained living units and have independent access and
• the ancillary rooms required to run an independent household (kitchen, bathroom or shower, toilet) are available and
• the living space is at least 20 m².

2) If certain de minimis limits are not exceeded, there is no obligation to pay construction withholding tax. This is the case if the consideration for an individual building contractor in the calendar year is expected to be

• a maximum of EUR 15,000 (in the case of exclusive VAT-exempt letting) or
• a maximum of EUR 5,000 (in all other cases, e.g. for rentals subject to VAT).

3) The most common exception is the presentation of a valid exemption certificate by the contractor providing the services. It is important that

• the contractor applies for the certificate from the tax office and it is valid for the time of the (first) consideration and
• the certificate is usually valid for a certain period of time and has not already expired.
• Sometimes the exemption certificate is attached directly to the invoice.

How is the construction withholding tax to be declared and paid?

If none of the three exceptions apply, the recipient of the service must submit an electronic declaration to the responsible tax office of the contractor providing the service by the 10th of the month following the month in which the service was provided. The construction withholding tax must be paid by the recipient of the service for the invoice of the contractor providing the service.

What should I bear in mind when paying the invoice?

If construction withholding tax is to be withheld, the contractor providing the service issues a regular invoice. The recipient of the service then makes the payment less the construction withholding tax to the contractor and pays the construction withholding tax to the contractor’s tax office.

Example

• A landlord rents out 10 apartments and commissions a domestic building contractor to carry out renovation work on the apartments with a contract value of EUR 100,000 plus VAT. Performance and full payment are carried out in one calendar year.
• The contractor is unable to provide a certificate of exemption.
• The contractor issues an invoice for construction services in the amount of EUR 100,000 plus 19% VAT in the amount of EUR 19,000 for a total of EUR 119,000.
• The landlord transfers EUR 101,150 (EUR 119,000 less 15% construction withholding tax) to the building contractor.
• The landlord then transfers the withheld amount of EUR 17,850 to the contractor’s tax office responsible for income taxation.

Conclusion

In most cases, the submission of a valid exemption certificate by the contractor means that the recipient of the service is not obliged to deduct tax. This exemption certificate confirms that the building contractor fulfills its tax obligations in Germany. However, if you as the landlord are not presented with a valid exemption certificate by the building contractor for commissioned construction services and the other exemptions (de minimis limits or letting of no more than two apartments) are also not applicable, you as the service recipient must register and pay the construction withholding tax on time. Otherwise, you will be liable for the non-payment or underpayment of construction withholding tax.
If there are any uncertainties in this regard, we recommend an individual consultation so that the obligations to be fulfilled can be checked.