The German Federal Ministry of Finance issued two letters on 1 April 2026 clarifying VAT treatment for public sector entities, nonprofit organizations, and holding companies regarding input VAT deduction adjustments and internal supplies within VAT groups.
Input VAT Deduction Adjustments
The ministry confirmed that subsequent changes in the ratio of use of assets always constitute adjustments of initial input VAT deduction under section 15a of the German VAT Act, rather than taxable supplies carried out free of charge. This change particularly affects public sector entities transferring staff from commercial operations to sovereign activities, which will now generally fall outside the scope of VAT without requiring clear separation between commercial and sovereign spheres.
VAT Group Internal Supplies
The ministry extended Federal Fiscal Court jurisprudence by confirming that internal supplies within VAT groups are non-taxable when relating to non-economic activities. This applies to supplies from controlled companies to controlling companies for non-economic use, and crucially, supplies from controlling companies to the non-taxable sphere of controlled companies. The guidance covers sovereign activities for public entities, idealistic activities for nonprofits, and pure holding activities for holding companies.
Personnel costs and profit markups can now be transferred without VAT from controlled companies to parent companies' non-economic spheres, regardless of whether such supplies are provided for consideration or free of charge.
Context
These clarifications implement recent Federal Fiscal Court decisions and ECJ jurisprudence in case C-184/23 Finanzamt T II, creating significant operational flexibility for public sector entities and nonprofits in structuring VAT group arrangements while maintaining compliance with EU VAT principles on non-economic activities.
