In practice, the settlement of operating expenses incurred repeatedly leads to problems, which are often due to VAT. In principle, the lessor may only pass on the expenses that he has incurred and that can be allocated. If the landlord opts for VAT, the operating expenses must therefore be passed on to the tenant as net amounts, as the VAT paid by the landlord can be deducted as input VAT and therefore does not represent a definitive cost factor. Since the services on which the operating expenses are based are ancillary services that are not independent of the main service “rental,” the operating expenses are passed on with 19% VAT, regardless of whether the corresponding input supply was subject to the standard VAT rate (e.g., for property tax or water). The VAT must be shown separately by the landlord when passing it on to the tenant.
If the landlord does not opt for VAT, the operating expenses are passed on as gross amounts, as the VAT paid represents definitive costs for the landlord. The landlord does not show the VAT separately when passing it on to the tenant.
Special case for leased special property
In its ruling of 15 January 2025 (XII ZR 29/24), the Federal Court of Justice dealt with the allocation of operating expenses for leased special property. The plaintiff rented premises for the operation of a hairdressing salon, a wellness institute, and for use in the retail sale of cosmetics and accessories, whereby the building was divided into apartment and partial ownership. The landlord opted for VAT, whereas the community of apartment owners (GdWE) did not opt for VAT. Since the GdWE did not opt for VAT, it was not entitled to deduct input VAT and passed on the costs to the co-owners “gross,” i.e., including input VAT, and without stating VAT separately. Due to the lack of a separate showing of VAT, the landlord was not entitled to deduct input VAT from the input services of the GdWE, so that the landlord incurred definitive costs in the amount of the gross amount. The operating expenses were passed on by the landlord in the gross amount plus 19% VAT. As a result, the landlord charged the tenant VAT on a basis that itself included VAT (VAT on VAT). The tenant filed a lawsuit against this and demanded that the landlord deduct the VAT included in the cost items. The appeal was rejected by the Federal Court of Justice on the grounds that passing on the costs as a gross amount plus VAT is in accordance with German VAT law, as the landlord is not entitled to deduct input VAT from the costs passed on by the GdWE.
In addition, the Federal Court of Justice held that the tenant was not entitled to demand that the landlord waive the VAT exemption. This applies all the more so in view of the relationship between the landlord and the GdWE. The tenant is therefore not entitled to demand that the landlord ensures that the GdWE waives the VAT exemption.
The settlement of operating expenses is a recurring source of dispute in practice. The ruling of the Federal Court of Justice provides clarity and legal certainty regarding the passing on of operating expenses. Landlords who are part of a community of apartment owners should review their operating expenses statements to ensure that VAT is handled correctly and to avoid any loss of margin.