Exemption from paying tax advance

German legislation states that if construction activities are carried out in Germany, meaning any actions related to real estate, then the client must withhold payroll tax from the issued invoices, unless the issuer is registered with the German tax office and has obtained an exemption from paying the tax advance (the so-called Freistellungsbescheinigung). Such an exemption must be valid no later than at the time of invoice payment, meaning that work can commence and proceed in parallel with efforts to obtain the tax exemption.

Upon presenting a valid exemption to the client, they must pay the full invoice amount, meaning they cannot deduct the tax advance from the invoice. If the client has already deducted the tax advance from the invoice, a refund can be requested, but this is only possible after the end of the calendar year.

The exemption from withholding the tax advance should not only be held by the company itself but also by its further subcontractors, as the mentioned principle applies to the entire chain of suppliers and subcontractors. This means that both the company in question and all its potential subcontractors should be registered. If the subcontractors of a given company do not have an exemption from paying the tax advance, then according to German legislation, that company is required to withhold tax advances from those subcontractors' invoices, which must then be paid to the German tax office.

In the case of having a valid exemption from the tax advance, the client must pay the full invoice amount, meaning they cannot deduct the tax advance from the invoice amount.

An application for exemption from the tax advance should be made as soon as construction work begins in Germany. Such an exemption must be valid no later than at the time of invoice payment, meaning that work can commence and proceed in parallel with efforts to obtain the tax exemption.

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