Who must withhold: recipient, construction work, rate and de minimis thresholds

In 2026 a dentist has her practice refurbished and hires a drywall contractor for two phases from the outset. He invoices €3,570 in February and €2,380 in May, both including VAT. Neither invoice reaches €5,000 on its own, so she pays both in full. Together they come to €5,950, and no exemption certificate was presented. She should have withheld €892.50, and she is now liable for that amount.

What the construction withholding tax is for

The construction withholding tax, Bauabzugsteuer in German, is not a separate tax with its own rates. It is a security device: the client keeps back part of the invoice and passes it to the tax office of the construction business. There it is later credited against that business's own taxes. Economically the contractor pays; legally the client acts.

The procedure was introduced by the Act to Curb Illegal Activity in the Construction Industry of 30 August 2001, known as EIBE. It sits in sections 48 to 48d of the Income Tax Act (EStG). The Federal Central Tax Office puts the purpose briefly: tax claims arising from construction work are to be secured before the money leaves the client.

For the client this changes the perspective. Before every payment three questions need an answer: am I obliged to withhold at all? Has a valid exemption certificate been presented? Will the consideration for the year stay below the relevant threshold? Only once all three are settled is the amount to be paid out known.

For the construction business the withholding is above all a cash-flow issue. It receives only 85 percent of its invoice and has to wait for the credit. It is therefore in its own interest to apply for an exemption certificate and to hand it to every client without being asked. The second module explains in detail how that works.

Contractor and recipient

Section 48(1) sentence 1 EStG names two roles. The contractor (Leistender) is whoever performs construction work in Germany. The recipient (Leistungsempfänger) is whoever receives it, provided it is a business within the meaning of section 2 of the VAT Act or a legal person under public law. Only that recipient must withhold, and it does so on the contractor's account.

The VAT concept of a business is broad. The Federal Central Tax Office expressly lists small businesses under section 19 of the VAT Act, flat-rate farmers and foresters under section 24, and businesses making only exempt supplies among the possible recipients. Charging no VAT therefore does not by any means release a client from the withholding obligation.

Among exempt supplies, the letting and leasing of land, buildings and parts of buildings is named explicitly. Anyone holding a let property is a business in this sense. Doctors, insurance agents and associations running a commercial operation are included, just like the classic trade business that itself hires a subcontractor for part of a job.

A private individual renovating the house they live in is not covered. They are neither a business nor a legal person under public law. What matters, however, is the role in the specific order: if the same person has a let flat or their office refurbished, they act as a business, and the obligation to withhold can arise.

Legal persons under public law are mainly municipalities, districts, chambers and public-law institutions. On the wording of the statute they are obliged regardless of whether they act as a business in the particular case. A town renovating its town hall must therefore also check whether it has to withhold.

What counts as construction work

Under section 48(1) sentence 3 EStG, construction work means any work serving the erection, repair, maintenance, alteration or removal of structures. The list is deliberately wide. It covers new builds as well as repairs, conversions as well as demolition. What counts is the link to the structure, not the size of the order.

Typical cases are shell construction, roofing and facade work, drywall, screed, tiling, electrical and plumbing installation, heating systems and fitting windows. Demolition and dismantling are included as well, because removing a structure is expressly named. Someone who only delivers materials without installing them, by contrast, does not usually perform work on the structure.

The line between building work and pure planning or advisory services follows the same question: is something being erected, preserved, altered or removed on the structure itself? The details are set out in the Federal Finance Ministry circular of 19 July 2022, which the Federal Central Tax Office also cites.

Sentence 4 adds a special rule. Whoever invoices for work without having performed it is also treated as the contractor. That catches, for example, a general contractor who only coordinates and subcontracts all of the work. If it issues the invoice, it is the contractor towards its client, even though it has not lifted a finger on site.

The rule applies only to construction work in Germany. A German company having a warehouse built in Austria is outside section 48 EStG. Conversely, the contractor's residence plays no role: a Polish or Dutch firm building in Germany is subject to withholding in exactly the same way as a domestic one.

The withholding: 15 percent of the consideration

Under section 48(1) sentence 1 EStG the withholding is 15 percent of the consideration. Paragraph 3 defines the consideration expressly as the fee plus VAT. Anyone who applies the rate to the net amount withholds too little and is liable for the shortfall. VAT therefore belongs in the base.

The withholding attaches to the consideration, meaning what is actually paid. When an interim invoice is settled, the tax is withheld from that instalment, and the final payment is treated the same way. The filing deadline is also set by the month of payment, not by the date of the invoice.

The amount withheld is not a reduction of the invoice. The contractor remains entitled to the full fee, but part of it reaches it by way of its own tax office. That is what the phrase on the contractor's account means. The client must therefore also tell the contractor how much it withheld and where it paid it.

The de minimis thresholds and how they add up

Section 48(2) sentence 1 EStG waives the withholding if the consideration in the current calendar year is not expected to exceed a set amount. As a rule that is €5,000. The higher threshold of €15,000 applies only to recipients making exclusively exempt supplies under section 4 no. 12 sentence 1 of the VAT Act, which in essence means exempt letting.

The word exclusively is meant literally. If a letting company makes even one taxable supply besides, for instance by letting a commercial unit with VAT, it falls back to the €5,000 threshold. Health professionals whose supplies are exempt for other reasons do not reach the higher threshold either, because they do not let property.

Both amounts are exemption limits, not allowances. Once the limit is exceeded, it is not just the excess that is affected but the whole payment that triggers the withholding. A client expecting €5,950 over the year must withhold 15 percent of every payment, not just of €950. A consideration exactly at the limit does not exceed it.

Sentence 2 requires that construction work performed, and expected to be performed, for the same recipient be added together when determining the amount. Several small invoices under one order are therefore not each measured against the threshold. Splitting an order so that every invoice stays below €5,000 achieves nothing.

The word expected calls for a forecast at the outset and at each payment. A client that signs a maintenance contract for €4,000 at the start of the year may initially pay in full. If an additional order in the autumn lifts the total above the threshold, it must reassess the position and withhold from the payments that follow.

A reliable forecast requires bookkeeping that tracks construction work separately by contractor and calendar year. Anyone who merely posts invoices sees the total only once it has long been exceeded. A simple list of the contracted firms, with amounts paid and amounts still expected, updated before each payment, works well in practice.

The exception for small landlords

Section 48(1) sentence 2 EStG contains a second exception built quite differently. Where the recipient lets flats, the obligation does not apply to construction work on those flats if it lets no more than two of them. This is not a monetary limit: even a roof renovation costing €40,000 then remains free of withholding.

The exception is, however, tied to the flats themselves. The wording refers to construction work for these flats. If the same landlord has its shop unit or its own office refurbished, the exception does not apply. The general rules then return, with the €5,000 threshold and the option of an exemption certificate.

A landlord letting three or more flats cannot rely on sentence 2. It keeps the de minimis threshold, the higher one of €15,000 where its letting is exclusively exempt. The construction withholding tax calculator checks these three exceptions one after another and shows which of them removes the obligation in the specific case.

The check before every payment

The rules so far produce a fixed sequence. It starts with the client, moves on to the nature of the work and ends with the exceptions. Running through it before every payment to a construction firm avoids both the needless deduction that annoys the contractor and the omitted one for which the client itself is liable.

• Am I a business within the meaning of section 2 of the VAT Act or a legal person under public law, and am I acting as such in this order?
• Does the work paid for serve the erection, repair, maintenance, alteration or removal of a structure in Germany?
• Do I let no more than two flats, and does the work concern exactly those flats?
• Has the contractor presented an exemption certificate that is valid on the day of payment?
• Is this contractor's consideration from me in the calendar year expected to exceed €5,000 or, for exclusively exempt letting, €15,000?

If the first or second answer is no, there is no withholding. The same applies if the third or fourth is answered yes. Only if the fifth question is answered yes must 15 percent of the payment be withheld. The exemption certificate is the only route that works regardless of the amount and the type of client.

The sequence is worth recording in writing, for instance as a note in the supplier file of the construction firm. If the payment is examined years later, the note shows why the withholding was omitted or made. The second module shows which documents belong with it, and the third what has to happen after the withholding.