Where a service is taxable: the place of supply under § 3a UStG

A management consultant based in Leipzig issues three invoices in March: €4,800 to an agency in Lyon, €1,200 to a private individual in Vienna and €2,500 to a company in Zurich. He adds 19 percent German VAT to all three, since after all he is based in Germany. That is right for only one of the invoices, and a single section of the Act decides which one.

First the place, then the rate

Under § 1(1) no. 1 UStG, VAT applies to supplies of goods and services that a business carries out within Germany for consideration in the course of its business. The word within Germany is the key. A service whose place lies abroad is outside the scope of German VAT, whatever rate would otherwise apply.

Skipping this order produces two mistakes at once. The business shows German VAT that does not arise on the transaction and still owes it under § 14c UStG until the invoice is corrected. And it overlooks that another country may impose an obligation nobody fulfils. The question of place therefore comes before every invoice.

This module deals only with services, which the German Act calls other supplies. Supplies of goods have their own place rules. Consulting, programming, advertising, hiring, repairs, seminars or catering, on the other hand, are typical services, and for them § 3a UStG answers the question of place.

The section follows a simple pattern. Subsections 1 and 2 contain two basic rules, one for consumers and one for business customers. Subsections 3 to 8 and §§ 3b and 3e take precedence over those basic rules. So you check the exceptions first and only then fall back on the relevant basic rule.

Business customers: the place from which the customer runs its business

For such recipients, § 3a(2) sentence 1 provides that the service is supplied where the recipient runs its business. What counts is the customer, not the supplier. A Leipzig consultant advising an agency in Lyon therefore supplies the service in France, and no German VAT arises on it.

If the service is provided to a fixed establishment of the customer, sentence 2 makes that establishment's location decisive instead. If the Leipzig consultant advises the Hamburg branch of a French group, the place is in Germany even though the group is headquartered in France. What matters is who actually receives and uses the service.

The rule requires the service to be received for the business. For legal persons with mixed activities the legislator makes an exception: services intended exclusively for the private needs of staff or of a shareholder do not fall under subsection 2. For those, the consumer rule applies instead.

In practice, the customer usually proves its status with its VAT identification number. Anyone supplying services to other EU countries should therefore ask for that number before the first invoice and keep a record of it. It is needed on the invoice anyway, as the section on invoices and reporting at the end of this module shows.

Consumers: the place from which the supplier runs its business

If the recipient is not a business within the meaning of subsection 2, § 3a(1) applies. The service is then supplied at the place from which the supplier runs its business. If a fixed establishment provides the service, its location counts. The private individual in Vienna therefore receives the Leipzig consultant's advice in Germany.

That is why, in the opening example, it is precisely the Vienna invoice that carries German VAT. For consumers in other Member States, the tax stays in the supplier's country as long as no exception applies. The private customer's home address plays no part in the basic rule.

The basic rule also works the other way round. An Italian craftsman working for a private individual in Munich supplies his service in Italy under this rule, provided no exception fits. With work on buildings, however, one regularly does fit, as the next section shows.

Land: the service follows the location of the property

§ 3a(3) no. 1 overrides both basic rules. A service connected with immovable property is supplied where the property is located. Whether the customer is a business or a consumer makes no difference. That makes this exception one of the most important in the whole section.

• services of the kind referred to in § 4 no. 12 UStG (letter a)
• services connected with the sale or acquisition of land (letter b)
• services for developing land or for preparing, coordinating or carrying out construction work (letter c)

The Act lists these cases as examples, not as an exhaustive list: it says expressly that they are included in particular. An architect from Salzburg designing a house in Passau therefore supplies the service in Germany. The same applies to a site manager coordinating the trades on a German building site.

For the supplier this means that, with property-related services, the question whether the customer is a business comes only after the question of place. It can still matter, because it decides in the next step who owes the tax. The second module deals with that question.

Events, restaurants and work on movable goods

Cultural, artistic, scientific, educational, sporting and entertainment services to consumers are supplied, under § 3a(3) no. 3, where they are actually performed. A musician from Prague playing to a private audience in Dresden supplies the service in Germany. If the performance is streamed, the recipient's place of residence counts instead.

For business customers, no. 5 governs admission to such events, for example trade fairs and exhibitions. The admission right and the services connected with it are supplied where the event actually takes place. If the ticket only gives access to virtual participation, the basic rule of subsection 2 applies again.

Restaurant services, meaning food and drink served for consumption on the premises, are supplied under no. 3a letter a where the business actually provides them. This applies to every guest, business or not. Only catering on board ships, aircraft and trains during transport within the Community follows other rules.

Work on movable tangible goods and their valuation for consumers are also supplied, under letter b, where the work is actually carried out. If a workshop in Aachen repairs a Belgian private customer's bicycle, the service is taxable in Germany. For a business customer, the customer's seat would remain decisive.

No. 2 concerns the short-term hire of a means of transport, such as a car or a boat. It is supplied where the vehicle is actually put at the recipient's disposal. Hire is short-term if it runs without interruption up to a statutory length, which is longer for vessels than for other means of transport.

Consumers in a third country: the list in subsection 4

For a number of services, § 3a(4) moves the place to the consumer if the consumer lives or is based in a third-country territory. The service is then supplied at that residence or seat and is not taxable in Germany. For consumers inside the Union, the basic rule of subsection 1 still applies.

• granting and exercising patents, copyrights and trademarks (no. 1)
• advertising and public relations, including by advertising agencies (no. 2)
• services of lawyers, tax advisers, auditors, engineers, interpreters and similar advice (no. 3)
• data processing and the supply of information (nos. 4 and 5)
• banking, financial and insurance transactions (no. 6)
• supply of staff (no. 7)
• hire of movable goods, other than means of transport (no. 10)

In the opening example, subsection 4 does not help with the Vienna customer, because Austria belongs to the Union. Had the Leipzig consultant advised a private individual living in Zurich, the place of the advice would lie in Switzerland under no. 3. The invoice could then carry no German VAT at all.

Electronic services to consumers and the 10,000 euro threshold

Telecommunications, radio and television broadcasting and electronically supplied services to consumers are supplied, under § 3a(5) sentence 1, at the recipient's residence, habitual abode or seat. A business selling to private customers all over Europe therefore supplies, in principle, in each of their countries.

Sentence 3 creates relief for small suppliers. The shift does not apply if the supplier is established in only one Member State and a certain total of consideration exceeds the threshold of 10,000 euros neither in the previous nor in the current calendar year. The place then stays with the supplier.

That total includes the consideration for such services to consumers in other Member States and intra-Community distance sales under § 3c(1) sentences 2 and 3. Sales to customers in the supplier's own country do not count. Anyone who also ships goods to private customers in other countries uses up the threshold faster.

The test looks at two years. If the threshold was already exceeded in the previous year, the shift applies from the first euro of the current year. If it is exceeded only in the current year, the condition is no longer met from that moment on. Anyone close to the limit should track the total continuously.

Under sentences 4 and 5, the supplier can waive the relief and declare to the tax office that it will tax the services in the customer's country straight away. The waiver binds it for at least two calendar years. That can make sense if turnover is about to reach the limit in any case.

The OSS procedure: a place abroad, one return at home

If the place of a service to consumers lies in another Member State, the supplier owes the tax there. It would have to register in each of those states. § 18j UStG opens a special taxation procedure for this, known in practice as the One-Stop-Shop, which bundles the returns into one.

A business established in Germany can notify its participation, under § 18j(2), only in Germany. If it does not meet the conditions, the Federal Central Tax Office establishes this and refuses participation. If it does take part, it declares the tax of all the countries concerned in a single return.

Under subsection 4, the return is due within one month after the end of each tax period. The business calculates the tax itself. The tax is payable on the last day of the month following the tax period. A business that repeatedly fails to meet its obligations is excluded from the procedure under subsection 6.

What the place of supply means for invoices and reporting

If the place of a service to a business customer lies in another Member State, the customer usually owes the tax there. The supplier then issues an invoice without German VAT, stating that the recipient is liable for the tax and giving both identification numbers. Such services also appear in the recapitulative statement.

The course on the annual VAT return and the recapitulative statement sets out the deadlines and contents of that invoice and of the statement. Here the link is enough: placing a service abroad under subsection 2 brings both obligations. The opposite direction, a foreign business supplying a German customer, is the subject of the second module.