VAT Option

The VAT option (also known as the sales tax option) refers to the right of a landlord or seller of real estate to voluntarily subject a service that is generally exempt from tax to sales tax. This is particularly relevant when leasing commercial real estate: Since leasing is generally exempt from sales tax under Section 4(12) of the German Sales Tax Act (UStG), the landlord can only claim input tax credits for construction and modernization costs if they opt for sales tax. However, this option is binding on both parties and has far-reaching tax consequences.

Requirements for the Option

The option to apply sales tax is only possible if the tenant (or buyer) is themselves entitled to input tax deduction-that is, if they are a business subject to sales tax. For example, if an owner leases office space to a limited liability company (GmbH) that generates taxable revenue, they may opt in. The option is not available when leasing to doctors, insurance companies, banks, or private tenants, as they are not entitled to input tax deduction or are only partially entitled to it.

Formally, the option must be declared to the tax office-in practice, this is done by including the relevant information in the advance VAT return and the annual tax return. There is no separate application form; the actual exercise of the option by showing the sales tax on the invoice is considered an implied declaration of the option. We nevertheless recommend documenting the decision in writing and seeking tax law advice.

Advantages and Risks of the Option

The main advantage lies in the input tax deduction: Those who exercise the option can reclaim from the tax office the VAT incurred in connection with the property on construction costs, renovations, and ongoing operating expenses. This can amount to significant sums for larger commercial properties. Example: A renovation of office space with net costs of 400,000 euros generates 76,000 euros in input tax, which is refunded in the case of an optioned lease.

The risk: If the tenant changes and the new tenant is not eligible for input tax deduction, the option is forfeited-resulting in an input tax adjustment spanning up to ten years (Section 15a of the German Value-Added Tax Act). This adjustment can be very costly. Specifically: If there is a change of tenant in the fifth year of the ten-year adjustment period, 50 percent of the originally refunded input tax must be repaid. For €76,000 in refunded input tax, that would amount to €38,000 in tax to be repaid-plus interest.

Option When Selling Real Estate

When selling a property, the seller may also opt for VAT under certain conditions (Section 9 UStG). This requires that the property be transferred to a business owner for business purposes. The advantage: VAT-optimized transaction structures can avoid input tax adjustments if the buyer also opts to sublease the property. In such cases, the purchase is treated as a sale of a business as a whole (Section 1(1a) UStG), which completely avoids VAT and also reduces real estate transfer tax in certain scenarios.

Such arrangements are complex and require that both parties be registered for sales tax and that the property be continued in an identical manner. They should always be coordinated with a tax advisor specializing in real estate tax law, as errors in this area create significant risks of back payments.

Practical Tip for Property Owners in Nuremberg and Franconia

In Nuremberg and the metropolitan region, mixed-use properties-ground floor commercial, upper floors residential-are widespread. Extreme caution is advised here: The sales tax option can only be declared for the commercial portion, not for the residential units. An incorrect allocation can lead to back taxes and penalty interest.

Particularly in Nuremberg’s downtown areas and along the shopping districts-such as Karolinenstraße, Gostenhof, or the Aufseßplatz neighborhood-there are retail units with apartments above them that must be carefully separated for tax purposes. We recommend consulting with a tax advisor specializing in real estate before any purchase or lease option for a commercial property in the region.

Frequently Asked Questions

Does the VAT option have to be reported to the tax office?

Yes, the option must be declared in writing by the landlord and must be reflected accordingly in the advance VAT returns or the annual tax return. An informal letter to the tax office is not sufficient-the tax implications must be consistently implemented.

Can the option be revoked?

Revocation of the option is possible under strict conditions, but typically results in an input tax adjustment. As a rule, the option is binding in the long term, which is why a careful preliminary review is essential.

What happens if commercial space is vacant?

If the commercial space covered by the option is vacant, the tax consequences are complex: The vacancy must be justified promptly with a documented intention to re-lease the space under the option; otherwise, input tax reductions may apply. Here, too, tax law guidance is strongly recommended.

Does the option also apply to residential space under certain circumstances?

No. Residential property is strictly exempt from sales tax-an option is legally excluded here. Even for short-term rentals via platforms such as Airbnb, the general rule of sales tax exemption generally applies, provided that no commercial lodging is involved. The distinction between private room rentals and the commercial lodging industry must be examined under tax law on a case-by-case basis.

What role does the VAT option play in real estate purchases by companies?

When a company purchases commercial real estate, the option to apply VAT upon sale can have significant implications for the structuring of the transaction. If both the seller and the buyer opt for VAT and the property qualifies as a business sale in its entirety (Section 1(1a) of the German VAT Act), no VAT is levied on the purchase price-with the advantage that neither the seller nor the buyer faces a liquidity spike due to advance VAT payments. This arrangement is common practice in commercial real estate transactions but must be coordinated in advance by both parties with their respective tax advisors.

Input Tax Adjustment under Section 15a of the German Value-Added Tax Act (UStG): The Underestimated Risk

The ten-year adjustment obligation under Section 15a of the German Value-Added Tax Act (UStG) is one of the greatest tax risks for owners of commercial properties subject to the VAT option. If the intended use or tenant structure changes within ten years of the property’s initial use-for example, because the commercial space is now leased to a doctor who is not eligible for input tax deduction-a pro-rata amount of the originally refunded input tax must be repaid for each remaining adjustment period. For owners in Nuremberg with mixed-use urban buildings-for example, a pharmacy on the ground floor (partially eligible for input tax deduction) and a medical center on the upper floor (not eligible for input tax deduction)-ongoing monitoring of the tenant structure with regard to input tax adjustments is absolutely essential. We recommend actively reviewing this risk whenever there is a change of tenant in an opted-in unit.

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