Input tax deduction when founding a GmbH – Legal classification and current developments
The formation of a limited liability company (GmbH) remains a popular choice of legal form in the business context. Numerous tax issues arise in connection with the formation, which are of considerable importance both for the founding shareholders and the future company. A central point here is the input tax deduction in connection with preparatory and formation activities. The case law, in particular the ruling of the Federal Fiscal Court (BFH) of March 31, 2016 (Ref. V R 8/15), sets strict standards in this regard.
Requirements for input tax deduction in the context of forming a GmbH
According to § 15 of the Value Added Tax Act (UStG), the input tax deduction is generally tied to the status as an entrepreneur and to a service performed for the company. During the founding phase, the question repeatedly arises as to who is to be considered the recipient of the service for VAT purposes, when a legally independent company does not yet exist. In particular, it must be differentiated whether the costs arise in the founders’ own interest or can already be assigned to the future company (here: the GmbH).
Shareholders as recipients of services – delimitation issues
If a shareholder acts before the GmbH is entered in the Commercial Register, this pre-company itself still lacks legal capacity. Case law generally treats services rendered in connection with the formation of a not-yet-existing GmbH to its future shareholders as services to private individuals. As a result, input tax deduction at the shareholders’ level is regularly excluded, as they lack the status of entrepreneur and the direct connection to future taxable sales.
Formation costs and allocation to the later GmbH
As soon as the GmbH is entered in the Commercial Register, it can, under certain conditions, basically deduct input taxes on incoming services that were obtained in preparation for its business activities. However, the precondition is that these services actually benefit the GmbH and are paid for by it. If, however, the formation costs are borne by the shareholders out of their own interest without proper allocation and assumption by the GmbH, input tax deduction is excluded.
The decision of the Federal Fiscal Court (BFH) of March 31, 2016
In the cited ruling, the BFH clarified that a shareholder of the future GmbH is, in principle, not entitled to input tax deduction if they procure services before the company is founded. This is substantiated in particular by the fact that the shareholder himself does not act as an entrepreneur for the future turnover of the GmbH. Rather, only the future company can establish entrepreneur status and the economic connection to taxable outputs. Thus, the opinion of the Düsseldorf Fiscal Court (lower court) was confirmed.
Exceptions and special cases
Nevertheless, there are individual cases imaginable in which a different assessment may be considered, such as if, in a given case, an express assumption of services and reimbursement by the subsequent GmbH occurs or in the case of a pre-GmbH that is already engaged in business activities. These situations, however, must always be examined for their particularities.
Tax risks and structuring options in the context of formation
The handling of formation costs and the question of their allocation to the correct tax subject can have far-reaching financial consequences. In particular, with regard to financing and implementation of measures that take place even before the formal formation of a GmbH, the specifics of VAT law must be observed. Taxpayers and their advisors are well advised to critically examine the allocation of incoming services and to ensure proper documentation. When it comes to the later tax recognition of claims for input tax deduction by the tax authorities, the individual case is always decisive.
Significance for business practice
Especially against the background that the tax authorities and case law impose strict requirements on the conditions for input tax deduction in connection with company-related preliminary services, it is advisable to take a close look at contract design and payment flows. Nevertheless, every case must be assessed individually.
Conclusion
The topic of input tax deduction in the course of setting up a company shows numerous interfaces with tax and company law. Careful analysis and ongoing consideration of current case law are indispensable in order to identify and address potential risks for founders and companies.
For further questions regarding the tax treatment of formation costs and the implications under company law, the lawyers at MTR Legal will be pleased to assist you with their comprehensive expertise in commercial, company, and tax law.
