Differences in the VAT assessment of “work supplies” in German VAT; supplies with installation under European Union and Spanish law (part 2)

This article is the second part of a collaborative blog series jointly authored by our colleague Rainald Vobbe alongside María Teresa Deltell and Carlos Gómez Barrero from Garrigues in Spain. After outlining the general framework and legal background in Part 1, this contribution takes a closer look at how German VAT law treats work supplies, including the distinction from assembly supplies and their respective implications.

As previously described, Germany has not explicitly transposed the EU regulation of Art. 36 VAT-Dir. into the German VAT Act (UStG). Instead, German law has a regulation of so-called work supplies.

A regulation on supplies with installation can only be found in the administrative guidelines (Sec. 3.12 para. 4 VAT Administrative guidelines “UStAE”).

A work supply is defined as processing or treatment of a third-party good if the supplier uses materials procured by himself (Sec. 3 para. 4 sentence 1 UStG). The German jurisdiction has required the involvement of a third-party good since 2013; this requirement was formally included in the Annual Tax Act 2024. Therefore, it is crucial to determine whether processing of a third-party item is involved or whether it is still an owned item. In addition, Sec. 3 para. 4 sentence 2 UStG stipulates that a work supply is also deemed to exist if the goods are firmly attached to the land. In this case, the foreign nature of the goods is not required. Typical cases are the construction of buildings, the installation of windows, doors, or elevators. It is not sufficient for the assembled good to be connected to the power grid.

Second, a work supply requires the processing of a third-party item by using at least one “main material” procured by the supplier. German law distinguishes between “main” and “ancillary” materials. To decide whether a certain material qualifies as a “main” or just as an “ancillary” material, the service must be assessed in the context of the overall service. The decisive factor is whether, in its entirety, the transaction is to be regarded as a supply of goods or as the provision of a service.

For example, a car repair under single usage of a pair of screws of his own does not qualify as a work supply. The screws are irrelevant in comparison to the personal effort of the supplier or his employees. Therefore, this service qualifies as a “work service” rather than a “work supply”. In contrast, the production of a piece of furniture by using own wood (besides the wood provided by the customer) rather qualifies as a supply of goods from an evaluative point of view.

The place of supply for the stationary work supply is the place where the installation takes place. In other words, the place where the items are assembled, founded or adjusted. On the other hand, a moving work supply exists if the item has already been fully assembled by the supplier and is only disassembled by the supplier for easier transport and then reassembled by the recipient. The distinction can cause difficulties. A pure reassembly at the recipient's premises is likely if the supplier has already carried out a test run with the goods and only a small amount of labour is required. On the other hand, a particularly high labour input, an insertion into existing systems and a first test run at the recipient's premises can indicate a stationary work supply. In the case of a moving work supply, the place of delivery – unless there are special regulations – is located at the place where the movement of the goods begins (Sec. 3 para. 6 UStG). The start of the movement of the goods also determines the time of performance.

The time of delivery depends on when the supplier has given the recipient the right to dispose of the finished work. This will generally be the case upon acceptance of the work (see also Sec. 640 of the German Civil Code) by the recipient. By contrast, the time of transport or dispatch of the materials used is not relevant.

Furthermore, the work supply according to Sec. 3 para. 4 UStG must be distinguished from the assembly supply. If the supplier merely works or processes his own materials on the recipient's premises and no fixed connection to a property is established, this is deemed to be an assembly supply. The distinction is particularly important for the tax liability. In principle, work supplies and assembly supplies are stationary supplies. The place of supply is therefore the place where the goods are located when the power of disposal is obtained. However, reverse charge only applies to the work supply. In the reverse-charge procedure, the recipient of the service is therefore liable for VAT in accordance with Sec. 13b para. 5 and para. 2 no. 1 UStG. This can be advantageous for the supplier, as they do not have to register for VAT purposes in Germany. The German legislator has only utilised the option granted by the EU for the reverse charge procedure regarding the work supply and not regarding all other assembly deliveries.

A further problem arises in the context of this distinction with regard to the machines and aids used for the treatment and processing of the goods. This may constitute an intra-community transfer. However, according to Art. 17 para. 2 of the VAT-Dir., a temporary transfer only exists if the goods are transported or dispatched for the purposes of an assembly delivery. According to German law, though, a temporary transfer is only deemed to have taken place if the use of the goods in the country of destination is only temporary or limited in time, in accordance with Sec. 1a.2 para. 9 UStAE. However, according to Sec. 1a.2 para. 10 UStAE, this only expressly applies to the work supply. There is no provision for assembly supplies under German law. This contradicts the EU regulation. Nevertheless, the fact that the regulation is based on Art. 36 of the VAT-Dir. speaks in favour of a broad interpretation of Art. 17 para. 2 of the VAT-Dir. to include both the work supply and the assembly supply. No distinction is made between the assembly supply and the work supply. Consequently, the provision on temporary transfers in Sec. 1a para. 2 UStG must be interpreted in accordance with EU law and also covers assembly supplies in addition to work supplies.

In the case of the Spanish company, which has individual parts from its own warehouse and parts purchased from third parties from other Member States delivered to Germany to assemble them there, this means that the place of delivery is in Germany. Nevertheless, the reverse charge procedure does not apply because it is not work supply, and the goods are not fixed to the ground. In this respect, the Spanish business remains liable for VAT and must therefore also register in Germany.

This article represents the second part of a collaborative blog series jointly authored by our colleague Rainald Vobbe alongside María Teresa Deltell and Carlos Gómez Barrero from Garrigues in Spain. This installment focuses on how German VAT law treats work supplies in cross-border business scenarios. For the broader context, see Part 1 of the series and look ahead to Part 3, which covers Supplies with Installation under Spanish VAT Law.