Dividing Input Tax by Buildings with Mixed Use

When building or purchasing a house, which is partially rented to private persons and partially to businesses, the input tax (prepaid VAT) must be reasonably split for deduction. But what is the appropriate splitting method is appropriate after the final tax assessment? This article reports on the judgment of Bundesfinanzhof (= Federal Tax Court, re V R 49/05 March 2, 2006, published August 30, 2006).


“Input tax” is nothing other than VAT – paid in advance. Input tax is the value added tax that one business charges to another (§15 I 1 no. 1 UStG). If your turnover is not subject to VAT, then you won’t be eligible for deducting input tax on this income (§15 IV 1 UStG). A typical example where your turnover is not be subject to VAT is rental income from non-commercial premises (private residence) pursuant to §4 no. 9 a UStG. Under §15 IV 2 UStG, a taxpayer is allowed to determine the rate of deductible input tax by any reasonable method.

The contractor, a BGB-Gesellschaft (a private partnership) built a house for both residential and commercial purposes. The costs for the business space qualified for input tax deduction while the costs for the residential apartments were not. A problem arises since the construction costs were for the whole building. Valued added tax law now requires that the eligibility is to be determined in an objective and reasonable relation. The BGB-Gesellschaft chose the square meters ratio method between commercial and residential use to determine eligible deduction. At first the tax office accepted this ratio.

However, after when the Finanzamt had subsequently audited the company, then chosen ratio rejected. The company argued that since the tax return had become final, the tax office is bound to the first ratio accepted. Controlling case law allows estimating the eligibility of deduction by the ratio of space to be rented for commercial or for private purposes.

All levels of tax court decided in favor of the company. Once a tax return become final, any reasonable determination of eligibility of deductible input tax can no longer be changed by the tax office. Even where the tax return is subject to subsequent auditing (§164 AO), the bind-ing character of the chosen and reasonable ratio remains untouched. When-ever someone fails to submit all receipts with the return, he or she runs the risk of subsequent auditing. The formal incontestability of the tax assessment is essential for the time when the measure of determining eligibility can’t be changed anymore.



Published on the old CMS:2007/04/10
Read on the old CMS till November 2008: 154 reads

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