Input tax refund procedure for advance payment invoices

Input tax deduction from advance payment invoices

If an invoice is issued prior to the performance of the service (advance payment invoice), a tax amount shown separately in this invoice is already deductible as input tax as soon as the entrepreneur has received the invoice and payment has been made.

In the final invoice to be issued after the service has been performed, the advance payment and the tax amount attributable to it must be deducted. Input tax can then only be deducted from the remaining amount shown in the final invoice.

Application to the input tax refund procedure

These principles also apply to foreign entrepreneurs who apply for a refund of input tax under the input tax refund procedure. The application must contain certain prescribed details for each invoice.  The application must be submitted within 6 months (established in a third country) or 9 months (established in the rest of the Community) after the end of the calendar year in which the refund claim arose. In addition, the original invoices (third country) or electronic invoices (Community territory) must be enclosed with the application.

Since - as already explained - the input tax deduction in the case of a final invoice is limited to the VAT shown therein less the VAT contained in the advance payment invoices, the advance payment invoices must also be enclosed with the refund application. If the down payment invoices are missing, the refund application is generally deemed not to have been submitted in the amount of the input tax attributable to the down payment invoices.

Advance payment invoice and final invoice in the same remuneration period

The Federal Fiscal Court (BFH) now had to judge a case in which 

• down payment invoice
• Payment of the down payment invoice
• Performance of the service and
• final invoice 

all related to the same remuneration period. 

It ruled that, even if only the final invoice is submitted in such cases, the refund application is still deemed to have been submitted in full if the refund of the entire input VAT (i.e. including the input VAT from the advance payment invoices) has been applied for.

Principles of neutrality and proportionality

The BFH justifies this by stating that the right to deduct input VAT - and therefore also the right to a refund - is an integral part of the VAT mechanism and cannot, in principle, be restricted. Accordingly, the principles of neutrality and proportionality would require that the substantive requirements take precedence over the formal requirements. The refund application must also be considered complete with regard to the advance payment invoices.

This is not precluded by the fact that the Federal Central Tax Office (BZSt) may have to make enquiries in order to process the refund application. If the advance payment invoices are subsequently submitted as part of these queries - possibly only after the application deadline has expired - this is merely a supplement to the information already provided and not a new and possibly time-limited refund application. 

Practical consequences

The decision of the Federal Fiscal Court (BFH) is to be welcomed. It creates clarity for foreign entrepreneurs and simplifies the application process in this respect. Nevertheless, applicants should carefully check their input VAT refund applications for advance payment invoices and, if in doubt, list these separately.

 In our opinion, the ruling should also be applicable in cases in which the advance payment invoice was issued in the year prior to the refund application, but the payment - and therefore the material requirement for the input VAT deduction - is only made in the year of the refund application. 

However, as no explicit statements were made in this regard - due to the lack of relevance to the decision - it remains to be seen how the tax authorities will implement the ruling in practice.

BFH ruling from 12.12.2024, V R 6/23