VAT Option for Commercial Letting in Germany: Guide 2026
Anyone letting a shop unit, a practice suite or a warehouse in Germany usually invoices the rent without VAT – and may be giving away a five-figure sum in the process. Letting is exempt, and whoever supplies exempt services cannot recover the VAT charged on purchase, conversion and refurbishment. German VAT law offers a way out: the option to tax. It comes with hard conditions attached and binds the landlord for ten years. This guide shows when it pays off and where it gets expensive.
Why exempt commercial rent can be costly
The letting and leasing of land and buildings is exempt from VAT (§ 4 no. 12 sentence 1 letter a UStG, the German VAT Act). That sounds good, but it has a flip side: a business making exempt supplies is excluded from deducting the input VAT on what it buys for those supplies (§ 15 para. 2 sentence 1 no. 1 UStG). The VAT on contractor invoices, architects' fees, building materials and fittings therefore stays with the landlord for good.
For a flat that is simply the normal case and cannot be changed. For commercial space, by contrast, the other side of the lease is usually a business that charges VAT itself – and for which a rent plus VAT is economically neutral, because it reclaims the VAT immediately as input tax. That is exactly the constellation the option is built for.
The option under § 9 UStG: two conditions
The law allows an otherwise exempt supply to be treated as taxable voluntarily. For letting, two conditions have to come together.
First, the supply must be made "to another business for that business" (§ 9 para. 1 UStG). A private tenant is therefore out from the start – even if the space is used as a hobby workshop.
Second – and this is the real hurdle – for the letting of land and buildings the waiver is "only permissible to the extent that the recipient uses, or intends to use, the property exclusively for supplies that do not exclude the input VAT deduction" (§ 9 para. 2 sentence 1 UStG). The tenant must therefore be fully entitled to deduct input VAT. And: "The business has to prove that the conditions are met" (§ 9 para. 2 sentence 2 UStG) – the burden of proof lies with the landlord, not the tenant.
The words "to the extent that" are more than grammar: they allow the option to be limited to the part of the property that meets the condition. In a mixed-use building the retail unit on the ground floor can be opted in while the flats above stay exempt.
Which tenants make the option work
| The tenant uses the space for … | Option possible? | Reason |
|---|---|---|
| Trade business, retail, restaurant, a tax adviser's office | Yes | Output supplies are taxable, input VAT deduction is not excluded |
| Doctor's practice, physiotherapy, alternative practitioner | No | Medical treatment is exempt (§ 4 no. 14 letter a UStG) and excludes input VAT deduction |
| Insurance broker, insurance and building society agents | No | These supplies are exempt (§ 4 no. 11 UStG) |
| A tenant treated as a small business (Kleinunternehmer) | No | Their supplies are exempt (§ 19 para. 1 sentence 1 UStG), so input VAT deduction is excluded |
| Residential use, including staff housing or a home office without business status | No | No supply to another business for that business |
The borderline case is a tenant with mixed output supplies – a bank with a small taxable division, say. The law requires exclusive use for supplies that do not block input VAT recovery; anyone planning around this should have the actual ratio reviewed in advance.
Exception for older buildings: the strict condition in § 9 para. 2 UStG does not apply to older stock. It is not applicable where a building serves purposes other than residential or non-business ones and was completed before 1 January 1998, provided construction began before 11 November 1993 (§ 27 para. 2 no. 3 UStG). For residential purposes the cut-off dates are 1 April 1985 and 1 June 1984 respectively (§ 27 para. 2 no. 1 UStG). For such properties the option is available even if the tenant is not fully entitled to deduct input VAT – a detail regularly overlooked in older commercial buildings.
What the option is actually worth
The effect shows up most clearly in the year of a major building project. A worked example for a 200 m² shop unit let to a retailer:
| Item | without option | with option |
|---|---|---|
| Conversion cost, net | 150,000 € | 150,000 € |
| VAT on that amount | 28,500 € | 28,500 € |
| recovered as input VAT | 0 € | 28,500 € |
| Actual building cost for the landlord | 178,500 € | 150,000 € |
| Monthly rent | 2,000 € | 2,000 € plus 380 € VAT |
| Net rental income per year | 24,000 € | 24,000 € |
The rent itself does not change economically for either side: the landlord pays over the 380 €, the retailer deducts it. The whole difference lies in the 28,500 € that stay with the landlord in one case and not in the other. The rate applied is 19% of the taxable amount (§ 12 para. 1 UStG).
On the income tax side this has a second, often overlooked consequence: deductible input VAT does not form part of the acquisition or production cost of the asset (§ 9b para. 1 EStG). Opting in therefore reduces the basis for the building depreciation (AfA) by exactly that amount – the refund arrives at once, the annual write-off is correspondingly smaller. For the question of which costs are immediately deductible and which fall into the acquisition-related production costs and their 15 % threshold, net amounts are what counts anyway.
The ten-year lock-in: § 15a UStG
Input VAT recovery is not a final gift but a forecast. If the circumstances relevant to it change, the deduction has to be adjusted pro rata. For movable assets that window runs five years from first use; for land and buildings including their essential components a period of ten years takes the place of five (§ 15a para. 1 UStG). One tenth of the input VAT is applied for each year of change (§ 15a para. 5 UStG).
In the example above that means 2,850 € per year is at stake. If the shop unit is let to a doctor's practice after four years, the option ends – and 17,100 € has to be repaid for the remaining six years.
A sale counts as a change too. If the property is disposed of before the adjustment period expires and that supply has to be assessed differently from the original use, this likewise counts as a change of circumstances (§ 15a para. 8 UStG). An exempt sale in year seven can therefore retroactively cost part of the input VAT from the conversion. Anyone planning an exit within the ten years should build that into the property cash flow calculation rather than treat it as a residual risk.
Two simplifications take the sting out of small amounts. No adjustment is made where the input VAT attributable to the acquisition or production cost does not exceed 1,000 € (§ 44 para. 1 UStDV, the VAT Implementing Regulation). And where circumstances changed by less than ten percentage points in a calendar year, the adjustment for that year is likewise dropped – unless the amount to be adjusted exceeds 1,000 € (§ 44 para. 2 UStDV). If the amount stays below 6,000 €, it is dealt with in the annual assessment rather than in the advance return (§ 44 para. 3 UStDV).
If input VAT later flows back out or in, that matters for income tax as well: additional amounts from an adjustment count as income, reduced amounts as deductible expenses, while the acquisition or production cost remains untouched (§ 9b para. 2 EStG).
Who cannot opt at all: small businesses
A frequently overlooked bar sits in the small business scheme. It applies where total turnover did not exceed 25,000 € in the previous calendar year and does not exceed 100,000 € in the current one (§ 19 para. 1 sentence 1 UStG). In those cases the provision on waiving exemptions expressly does not apply (§ 19 para. 1 sentence 2 UStG). A landlord treated as a small business therefore cannot opt at all – and consequently recovers no input VAT.
The way out is to renounce the small business scheme itself. That has to be declared to the tax office and binds for at least five calendar years (§ 19 para. 3 UStG). So anyone planning to refurbish a shop unit and opt in has to take this step beforehand, not afterwards.
Space that is taxable by law anyway
Not every letting is exempt in the first place. Expressly excluded from the exemption are the letting of living and sleeping rooms held for the short-term accommodation of guests, the letting of parking spaces for vehicles, short-term letting at camp sites and the letting of operating equipment installed in a building (§ 4 no. 12 sentence 2 UStG).
That is more relevant in practice than it sounds: anyone letting a garage or a parking space separately from the dwelling is making a taxable supply – with no option needed. The same goes for a holiday flat. And a gantry crane installed in a hall and let with it is operating equipment to that extent. How such items are cleanly separated from recoverable service charges is covered in the article on non-recoverable service charges.
Checklist before you decide
- Clarify tenant status: is the tenant a business, and does it use the space exclusively for supplies that do not exclude input VAT recovery?
- Secure the evidence: the burden of proof lies with the landlord – the lease needs a clause with confirmation and a duty to notify any change of use.
- Check the construction year: for older stock the transitional rule can remove the strict tenant condition.
- Check your own status: anyone treated as a small business has to opt out of that scheme first – with a five-year commitment.
- Model ten years: are a change of tenant, a change of use or a sale within the adjustment period realistic? Then price in the repayment risk.
- Consider a partial option: in mixed-use buildings the option can be limited to individual units.
Commercial space and its numbers in one place
RenoDiary keeps track, per property and per unit, of what was invested, which invoices belong to it and how rent and cash flow develop – the basis for judging a ten-year commitment at all. GDPR-compliant, without spreadsheet chaos.
Try it for freeWhat the courts have decided
The statute leaves two practical questions open, and the Federal Fiscal Court (Bundesfinanzhof, BFH) has answered them: how far a partial option can be drawn spatially, and whether administrative guidance actually binds the court when a case is disputed.
BFH, judgment of 24 April 2014 – V R 27/13
The waiver under § 9 (2) UStG need not cover the whole property: it can also be limited to individual areas of a let property, provided those partial areas are clearly identifiable – for example shop units or individual offices in a mixed-use building. This requires an objectively verifiable, structural basis for the split; areas within a single room generally do not qualify on their own. For the landlord of a mixed-use building this means the partial option follows spatially distinct units, not an estimated percentage of use.
BFH, judgment of 1 March 2018 – V R 35/17
Where a landlord lets to a farmer who taxes turnover at a flat rate under § 24 (1) UStG, the landlord cannot opt for taxation – the BFH expressly rejected the tax administration's own guidance in the VAT application decree in force at the time. In practice, the judgment shows the table above is not exhaustive: anyone relying on an exception in administrative guidance for a borderline case should check first whether more recent case law has overtaken it.
Frequently asked questions
Does the option have to be applied for at the tax office?
For letting, the law prescribes no particular form. It sets out a formal requirement only for supplies of land and buildings: there, the waiver has to be declared in the notarised contract (§ 9 para. 3 sentence 2 UStG). For letting, the option is exercised in practice by treating the supply as taxable – that is, by invoicing and declaring the rent with VAT shown openly.
Can I opt for part of a building only?
Yes. The waiver is permissible "to the extent that" the conditions are met. In a mixed-use property the commercial unit can be opted in while the flats stay exempt. The input VAT deduction is then apportioned accordingly.
What happens if the tenant changes?
If the new tenant does not meet the conditions, the option ends for that space. For the remaining years of the ten-year period the input VAT deduction has to be adjusted pro rata. That is why every opted lease should contain a duty to notify any change of use.
Is the option worth it without a major building project?
Without meaningful input VAT, what remains is mainly extra work: advance returns, invoices showing VAT and a ten-year watch. The leverage arises where large investments are due – purchase plus conversion, refurbishment, extension. In ongoing letting without investment the benefit is often small.
Sources
- § 4 no. 12 UStG (exemption for letting; exceptions for accommodation, parking spaces, operating equipment), § 4 no. 11 and no. 14 UStG — Gesetze im Internet (retrieved on 18 August 2026)
- § 9 UStG (waiver of exemptions, burden of proof, form for supplies of land) — Gesetze im Internet (retrieved on 18 August 2026)
- § 12 UStG (tax rate) — Gesetze im Internet (retrieved on 18 August 2026)
- § 15 UStG (input VAT deduction and its exclusion for exempt supplies) — Gesetze im Internet (retrieved on 18 August 2026)
- § 15a UStG (adjustment of input VAT, ten-year period, disposal) — Gesetze im Internet (retrieved on 18 August 2026)
- § 19 UStG (small business scheme, exclusion of the option, renunciation with five-year commitment) — Gesetze im Internet (retrieved on 18 August 2026)
- § 27 para. 2 UStG (transitional rule for older buildings) — Gesetze im Internet (retrieved on 18 August 2026)
- § 44 UStDV (simplifications for the adjustment) — Gesetze im Internet (retrieved on 18 August 2026)
- § 9b EStG (treatment of input VAT within acquisition or production cost) — Gesetze im Internet (retrieved on 18 August 2026)
- § 6 para. 1 no. 1a EStG (acquisition-related production costs, measured excluding VAT) — Gesetze im Internet (retrieved on 18 August 2026)
- BFH, judgment of 24 April 2014 – V R 27/13 (partial option for clearly identifiable areas) — Bundesfinanzhof (retrieved on 25 August 2026)
- BFH, judgment of 1 March 2018 – V R 35/17 (no waiver when letting to a flat-rate farmer) — Bundesfinanzhof (retrieved on 25 August 2026)
This article provides general orientation and does not replace individual tax or legal advice within the meaning of § 3 StBerG. Whether an option is permissible and commercially sensible in a specific case depends on the tenant structure, the building's history and the investment plan – your contracts and advice from an authorised professional are what count.