Definition and legal classification of the exemption certificate
Ein Exemption certificate is an official administrative act in German tax law, issued to a natural or legal person by a competent tax authority or other public body, certifying exemption from a tax obligation or withholding obligation. The exemption certificate is often used in connection with tax withholding on investment income, construction withholding tax, or for corporations. Through the exemption certificate, the affected person or institution is exempted from the obligation to withhold and pay taxes, or is otherwise relieved.
Areas of application for the exemption certificate
Capital gains tax and exemption order
In the context of income tax, capital gains such as interest or dividends are subject to capital gains tax as a final withholding tax. Private individuals can, with an exemption order instruct their bank to exempt capital income up to the saver’s allowance from tax. For corporations, foundations, other institutions, and in special cases, the tax office instead issues an exemption certificate to document the tax relief.
§ 48b EStG – Construction withholding tax
In the construction industry, § 48b of the Income Tax Act (EStG) governs the exemption certificate for construction services. According to § 48 EStG, clients are generally required to withhold 15 percent of the invoice amount as so-called construction withholding tax and pay it to the tax office. However, if the client has a valid exemption certificate from the tax authority in favor of the contractor, this withholding obligation lapses. The entitlement to issue such a certificate, as well as its requirements and contents, are set out in § 48b EStG.
Other cases of exemption
Exemption certificates are also issued in the context of corporation tax (for example, for charitable organizations according to § 5 para. 1 no. 9 KStG) to confirm a tax exemption or tax benefit. In addition, there are situations in VAT law where exemption certificates are relevant, especially regarding tax exemption for intra-community supplies.
Issuance and requirements
Application and review procedure
The issuance of an exemption certificate takes place exclusively on application by the taxable person or institution to the competent tax authority. In the application procedure, the authority examines in particular:
- The personal and substantive requirements for exemption,
- Tax declaration obligations and cooperation obligations,
- The presence of tax arrears,
- The reliability and fiscal integrity of the applicant.
In the construction industry (§ 48b EStG), for example, it must be demonstrated that there are no outstanding tax liabilities and that the applicant has properly fulfilled their tax obligations in the past.
Validity period and revocation
Exemption certificates are usually issued for a limited period, typically for one to three years. The tax authority can revoke or restrict the exemption certificate, for example, if irregularities, tax evasion, or loss of requirements become known later.
Electronic transmission
In the digital age, exemption certificates are often transmitted electronically, particularly between companies and tax authorities, to accelerate processes and prevent misuse.
Significance and consequences in tax law
Effect vis-à-vis third parties
An exemption certificate serves as proof to third parties (e.g., banks, construction clients) that, in relation to a specific situation, there is no obligation to withhold or deduct taxes. Third parties who rely on a valid exemption certificate are generally released from liability for unpaid taxes (§ 48 EStG).
Liability and abuse prevention
Preventing abuse is a key concern of the legislator. Improper use or subsequent changes in circumstances (e.g., tax offences) can lead to the revocation of the certificate and retroactive liability. Clients and paying agents should therefore verify the validity and authenticity of the exemption certificate.
Legal remedies
An applicant can file an appeal against a negative exemption certificate or its revocation within one month of notification. In case the preliminary review is unsuccessful, an action may be filed with the competent tax court.
Differences from similar terms
- Exemption order: Used by private investors to make interest or dividend income tax-free up to the saver’s allowance.
- Certificate of non-objection: Used in tax law for real estate transactions, but is not equivalent to an exemption certificate.
- Certificate pursuant to § 13b UStG: Pertains to the reverse charge mechanism for certain services, but structurally differs from the exemption certificate.
Summary
The exemption certificate is a central instrument for tax relief and the simplification of administrative processes in tax law. It provides legal certainty, protects against unnecessary tax withholdings, and regulates responsibilities between service providers, recipients, and tax authorities. Its form, requirements, and effects are clearly regulated by law and are subject to the control of the tax administration.
Legal basis (extract)
- Income Tax Act (EStG), in particular § 44a, § 48, § 48b
- Corporation Tax Act (KStG), in particular § 5
- Value Added Tax Act (UStG), in particular § 4 ff.
Further information
Further information can be found in the application decrees to the Income Tax Act as well as the published state decrees and administrative regulations. For current changes and details, it is advisable to consult the relevant publications of the tax authorities.
Frequently asked questions
When and under what conditions is an exemption certificate issued?
The exemption certificate is issued by the competent tax authority upon application by a corporation, such as an association, foundation, or non-profit GmbH, if, after examining the statutes and actual management, it is established that the statutory requirements of non-profit status within the meaning of §§ 51 et seq. of the Fiscal Code (AO) are met. For the issuance, it is usually required to regularly submit an activity report, annual accounts, and, where applicable, additional documents to verify the statutory and actual pursuit of tax-privileged purposes. The period for which the exemption certificate is issued depends on how often the tax office reviews compliance, typically every three years. Only once the certificate is issued can tax benefits, such as the issuance of donation confirmations (donation receipts), be claimed.
What are the legal consequences of holding an exemption certificate?
The exemption certificate is the official confirmation that an organization was non-profit, charitable, or religious during the audited period and is therefore exempt from corporation tax, trade tax, as well as, in certain cases, value added tax under § 3 no. 6 GewStG and § 5 para. 1 no. 9 KStG. Furthermore, the exemption certificate entitles the organization to issue donation confirmations to donors, allowing them to deduct their donations for tax purposes. Without a valid exemption certificate, tax benefits cannot be claimed, which can have significant tax and civil law consequences, in particular back taxes and claims for damages.
How can an appeal be made against a rejected or revoked exemption certificate?
If an application for an exemption certificate is rejected or a previously issued certificate is revoked, the corporation generally has the right to legal recourse. As a first step, an objection can be filed against the negative administrative act within one month after notification in accordance with § 347 AO. If the objection is not upheld, it is possible to bring an action before the tax court. During the objection or legal proceedings, suspension of enforcement can be applied for under certain conditions. During the legal remedy procedure, the authority is required to review the decision again, taking into account all relevant facts and legal provisions.
Which obligations continue to exist after receiving the exemption certificate?
After the exemption certificate has been issued, the corporation is obliged to ensure its non-profit activities on an ongoing basis and regularly provide proof thereof. This includes, in particular, proper bookkeeping and cash management, submission of annual activity reports, income and expenditure accounts, and, if requested by the tax office, additional documents. Any changes to the statutes or actual management that could affect non-profit status must be reported immediately to the competent tax office. Violations of these obligations may result in retroactive revocation of non-profit status and the exemption certificate, which may lead to tax reassessments.
To what extent is the exemption certificate relevant for charitable donations?
An exemption certificate is the basis for the authorization to issue donation confirmations (donation receipts), which entitle donors to make their donations tax-deductible with the tax authorities. Only with a valid exemption certificate that has not expired at the time of the donation do recipients of donations fulfil the material requirements for issuing such certificates under § 50 EStDV. If an association is subsequently classified as not charitable, the authorization to issue donation confirmations lapses retroactively. This can have civil law consequences for donors as well as tax consequences for the corporation.
What is the significance of actual management for the validity of the exemption certificate?
The actual management of an organization must continue to comply with non-profit regulations. It is not sufficient for the statutes alone to formally meet the requirements of non-profit status; what matters is that the association, foundation, or other corporation uses its funds exclusively and directly for the statutory tax-privileged purposes. Deviations between actual management and the statutes can lead to revocation of the exemption certificate, even after it has been granted, and cause retroactive tax disadvantages. The tax office can check compliance with the requirements of the Fiscal Code at any time – even without prior notice.
