The German legislature has created a procedure for securing tax claims arising from construction work to curb illegal activity in the construction industry. As of January 1, 2002. the recipient of the service (the customer) is required to pay tax on construction services, which is 15% of the value of the service provided. The principal does not have to take a tax deduction if the contractor’s salary does not exceed €5,000 in the current calendar year. Both German and foreign entrepreneurs are covered by this regulation. To avoid paying tax on construction services, you can apply for a so-called Freistellung, a special certificate authorizing exemption from tax on construction services. Such a certificate is issued by the competent tax office in Germany, which then transmits the data to the Central Federal Tax Office. The certificates are collected in a special database so that they can be searched and their validity can be checked (§ 48b(6) EStG). The contractor is always required to provide the principal with a legible copy of the Freistellungsbescheinigung. If he fails to do so, the assumption should be made that he does not have a valid certificate, and therefore the principal is obliged to deduct the construction services tax from his salary and pay it to the tax office with jurisdiction over the service provider.
The German tax authority has determined which contractors are required to withhold tax at a rate of 15% of the gross remuneration for construction work performed. Potentially these are:
– small entrepreneurs in accordance with Section 19 UStG,
– All companies for which construction work was performed,
– All legal entities under public law,
– farmers and foresters who pay a flat tax in accordance with Section 24 UStG and
– Entrepreneurs who make only tax-exempt transactions, e.g., renting and leasing land.
