Building withholding tax: Inactive foreign domestic company | Guidance

The effect of the ban in Section 48 Paragraph 4 No. 1 EStG also applies if the recipient of the Service within the meaning of Section 48 Paragraph 1 Clause 1 EStG makes payments to an inactive domestic foreign company.

Background: Payments for construction work for an inactive local company

It had to be decided whether the payments made by the local E-KG (property development company) to the British subcontractors were fully deductible as operating expenses or whether they would be reduced because the recipient was not named.

E-KG employed British subcontractors to complete several large projects and included payments to them as operating expenses for the year 2002 (approximately €950,000). British companies were economically inactive in mailboxes/domestic businesses. E reported and paid the construction withholding tax at the statutory rate (15%) for these payments in 2003.

An external auditor has concluded that payments to UK companies were made to local accounts. The designation request addressed to E in order to identify the persons actually receiving the payments did not lead to any result. In its 2002 Notice of Profit Assessment, the FA then reduced payments to subcontractors by 70% (€665,000) in accordance with Section 160(1) sentence 1 AO. FG was allowed to operate in the first legal action. The BFH overturned this ruling (for procedural reasons) and returned the case to the Lower Tax Court (BFH, Judgment 7 June 2018, IV R 11/16, BFH/NV 2018 p.156). Also in the second legal process, the lower tax court upheld the lawsuit in full.

The Lower Tax Court held that Section 160 (1) sentence 1 AO did not apply under Section 48 (4) No. 1 EStG, even if the British subcontractors were inactive domestic companies.

Resolution: Domicile Company as Contractor

The BFH dismissed the FA’s review as unfounded. A deduction for business expenses pursuant to Section 48 Section 4 No. 1 EStG is also not denied pursuant to Section 160 Section 1 Clause 1 AO if payments are made to inactive foreign domestic companies.

literal interpretation

The service provider within the meaning of Section 48 (1) EStG cannot be a person who – as provided in sentence 1 – provides construction work. Alternatively, as per the fiction in Section 48 (1) Sentence 4 EStG, a service provider is also someone who bills for a service without providing it. This means that the person who creates the invoice becomes the service provider, regardless of whether construction work is being carried out or not (fake economic performer). Accordingly, inactive foreign domestic companies and letterbox companies that do not carry out construction work themselves are also covered by the scope of Section 48(1) EStG. Furthermore, the wording of Section 48 (4) No. 1 of the EStG states (unconditionally) that it is a legal consequence that Section 160 (1) sentence 1 AO will not apply. Contain No restrictions, As stated in Article 160 Paragraph 1 Sentence 1 AO it shall not apply only to payments to a particular group of people.

Historical and teleological interpretation

This drafting result is confirmed by the historical and teleological interpretation of Article 48 of the EStG. The legislature was risk of tax losses With the participation of foreign domestic companies and the problem of refusal to deduct business expenses in accordance with Article 160 Paragraph 1 Sentence 1 AO. With the tax deduction, the legislator wanted to take action against inactive domestic and foreign companies and front companies, but at the same time exempt the service recipient from the “risk-liability” contained in Article 160 Paragraph 1 Sentence 1 AO and ensure that his business expenses are deducted.

Therefore, the purpose of withholding tax on construction is on the one hand Tax deduction at source To secure income tax/corporate tax for service provider and customer on the other hand Legal certainty of deducting business expenses It is granted, regardless of whether the payments are made to the economic service provider or to a foreign domestic company that is inactive as a fictitious service provider. No limitation may be inferred from the legal articles that a service provider within the meaning of Paragraph 48 (1) sentence 4 EStG can mean only general contractors or debt collection companies.

There is no violation of the principle of equality

The BFH’s interpretation of Article 48(4) No. 1 EStG does not violate Article 3(1) of the Statute. The Construction business customer franchise In contrast to service customers from other service sectors who, in the case of payments to inactive domestic companies, must count a refusal to deduct business expenses in accordance with Article 160 (1) sentence 1 AO not infringing the principle of equality. The unequal treatment is pursued under Article 48 of EStG The purpose of guidance objectively justified. The tax deduction procedure is aimed at curbing illegal activities in the construction industry. A special regulation of this sector was justified as a result of the grave violations that were found there. Therefore the BFH considers it to be so suitable, To increase the accuracy of the regulations by limiting them to the construction industry and complying with the specifications of the European Union Commission (Bundestag print 14/4658, p. 9).

Note: comply with administrative instructions

According to the BMF letter of July 19, 2022, BStBl I 2022 S.1229, Tz.23, 24, the tax deduction must be made by the recipient of the service regardless of whether the service provider is based in Germany or abroad. It is also not important whether the service provider primarily provides construction work. The service provider is also the person who bills the service without performing it themselves (Article 24).


The BFH is left open whether and to what extent Section 42 AO as well as Section 48 (4) No. 1 EStG applies. ZT argues that the application of § 48 Paragraph 4 No. 1 EStG is questionable from the point of view of misuse of the design if the recipient of construction services § 48 Paragraph 4 No. 1 EStG “Exploit” Contrary to Section 160 AO, fraudulently obtaining a discount in association with a local company that is officially acting as a subcontractor. In the case in question, there were no indications of this.

BFH Part June 9, 2022, IV R 4/20 Published September 15, 2022

All BFH decisions were posted on September 15, 2022 with short comments

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