Section 25f of the German VAT Act: When Germany Denies Input VAT Deduction and Zero-Rating

Section 25f does not punish proximity to fraud. It punishes the inability to prove you checked.

Since 1 January 2020, German tax offices can deny a business its input VAT deduction and the zero-rating of intra-Community supplies if the business knew – or should have known – that someone, somewhere in its supply chain, was involved in VAT evasion. The provision is aimed at fraudsters. In practice, it reaches every trader who cannot demonstrate, years later, what was checked before the deal. This page explains what Section 25f of the Umsatzsteuergesetz (UStG, the German VAT Act) provides, where it comes from, what the tax office must prove – and where the limits of the rule lie. Limits that assessments routinely overstep.

What Section 25f provides: a four-station decision tree

Read as a decision tree, the provision has four stations – and each station offers a defence entry point.

Station 1: your own transaction. The rule attaches to a specific supply made or received by the business. Not to an industry. Not to a business model. One identifiable transaction.

Station 2: the fraud link in the chain. At a preceding or subsequent stage of the chain, another party must have been involved in VAT evasion, in obtaining an unjustified input VAT refund, or in “damaging the VAT revenue” within the meaning of certain German administrative-offence provisions. This last alternative is the soft flank of the statute: under the case law of the Court of Justice of the European Union, the mere non-payment of correctly declared VAT is not fraud – more on that below.

Station 3: the mental element. The business must have known, or should have known, of that involvement. This is Germany’s codification of the test the Court of Justice developed in Kittel and Recolta Recycling and limited in Mahagében and Dávid. What “should have known” actually requires, which checks are reasonable and who bears the burden of proof is the subject of our dedicated page on the Kittel test and the burden of proof.

Station 4: the consequences. If all conditions are met, the tax office denies: the zero-rating (exemption) of the intra-Community supply, the input VAT deduction from purchase invoices, the input VAT deduction on intra-Community acquisitions, and the input VAT deduction on reverse-charge supplies. A second paragraph additionally switches off the triangulation simplification for intra-Community chain transactions. The infographic on this page maps this tree – anyone holding an assessment can attack each station separately.

Where the rule comes from

Section 25f was introduced by Germany’s Annual Tax Act 2019 and applies to periods from 2020. It replaced the former Section 25d UStG – and that replacement matters. Section 25d was a liability rule: under narrow conditions, a customer could be held liable for VAT its supplier culpably failed to pay. Section 25f is a denial rule: the business loses its own rights, regardless of whether the state could recover its loss from the actual perpetrator. This shift from accessory liability to outright denial of rights is the doctrinal core of almost all academic criticism of the provision.

The explanatory memorandum to the bill makes two statements that carry real weight in defence work. First: the tax authority bears the objective burden of proof for the conditions of the provision. Second: the denial is meant to be capped at the amount of the tax loss actually caused in the chain. Both statements are in the parliamentary record – and both are routinely ignored in assessment practice. Reading the legislator’s reasoning next to the tax office’s reasoning often produces the defence strategy by itself.

Honesty requires naming the counter-authority: in October 2024, in UP CAFFE, the Court of Justice held that denial requires no specific national legal basis – the EU-law prohibition of abuse applies directly. That sharpens the situation, because since then the objection of a missing statutory basis alone wins little. But the same judgment also draws the limit, and the limit is the defence lever: the recharacterisation must not go beyond what is necessary – and the input VAT deduction of the company concerned remains intact.

How the tax administration applies it: the Ministry guidance of 15 June 2022

The German Federal Ministry of Finance set out the administrative position in a circular of 15 June 2022 and added a dedicated section to the VAT Application Decree, the administration’s internal handbook. Two points stand out.

First, the allocation of proof. The business must establish the material conditions of its deduction and zero-rating. The tax office must establish knowledge or constructive knowledge. That sounds balanced. In practice it tilts: the audit assembles indicia – a striking price, a new supplier, an unusual payment route, changing contact persons – and the business is then expected to show that it could not have recognised anything. German scholarship calls this a de facto reversal of the burden of proof: the counter-evidence usually succeeds only where the business had established control systems beforehand and documented its diligence. That is why we treat VAT compliance as evidence architecture, not as a binder of paperwork.

Second, the risk catalogue. The decree lists warning indicators – below-market prices, atypical settlement, unusual transport routes. Their correct legal classification is essential: these indicators trigger a duty to look closer. They are not proof of guilt. A red flag creates a duty to verify; it does not replace the authority’s duty to prove that the trader recognised, or should have recognised, the fraud connection.

No roadmap from the administration

Since 2022, the administration has not developed this line any further. The annual amendment to the VAT Application Decree of 19 December 2025 touched the Section 25f guidance only editorially – a corrected cross-reference, nothing more. The decree answers neither the Court of Justice’s burden-of-proof case law in Aquila and Global Ink Trade nor the 2025 decisions on cumulating denial and liability (KONREO) and on the free assessment of evidence (FLO VENEER). At the same time, the administration works with an unpublished internal guidance sheet – leading commentary demands its publication (Treiber). The underlying standard is simple: whoever enforces duties with financial consequences must make them knowable in advance.

The limits of the provision: four defence lines

Fighting VAT fraud is legitimate. Carousel schemes damage competition and public revenue, and nobody defends them. But a sharp rule needs sharp limits – and Section 25f has more of them than assessment practice concedes.

1. Non-payment is not fraud: the partially EU-law-incompatible reference

Section 25f attaches not only to tax evasion but, via a statutory cross-reference, also to the mere “damaging of VAT revenue” – the administrative offence of not paying correctly declared VAT. The Court of Justice held in HA.EN. that a taxable person who declares VAT correctly but cannot pay does not commit fraud; the supplier’s insolvency risk is, in principle, the state’s risk. German commentary has drawn the consequence that the cross-reference is incompatible with EU law to that extent: in pure non-payment scenarios, denial may be based neither on EU law nor on Section 25f. Assessments that boil down to a non-payment somewhere in the chain stand on fragile ground.

2. The wording ends earlier than the administration reads it

The trader’s own evasion is not covered – the statute speaks of preceding or subsequent stages of the chain. Export supplies to non-EU countries and import VAT are missing from the list of consequences. Under German methodology, an interpretation against the taxpayer beyond the statutory wording is impermissible even in tax law. In criminal proceedings, this wording limit hardens into a genuine “blocking effect” in favour of the accused – a topic with its own page: the criminal-law blocking effect of Section 25f.

3. Denial without a cap? Finanzamt M and multiple recovery

In Finanzamt M, the Court of Justice accepted that denial need not be capped at the amount of the tax loss and may occur several times along one chain. That sits in open tension with the German legislator’s own promise of a cap – and with the character of VAT as a tax on consumption, not a penalty. How a loss of €190,000 can turn into state revenue of €1,187,000 is calculated step by step on our page on multiple VAT assessments in one chain, together with the counter-arguments.

4. Zero-sum transactions: acquisitions and reverse charge

On intra-Community acquisitions and reverse-charge supplies, output tax and input tax deduction meet in the same hands – a zero-sum mechanism in which, as a rule, no separate tax loss can arise. Leading commentary therefore argues for a restrictive, EU-law-conform reading of the corresponding denial alternatives: applying them without any tax loss contradicts the neutrality principle. Businesses facing denial of deduction on reverse-charge or acquisition VAT should know this line of argument.

In legal policy, this criticism does not stand alone. The debate around Germany’s National Regulatory Control Council supports the call for restraint: Germany routinely over-implements EU requirements – the finding is known as “gold-plating” (Schmidt, BB 2026). It transfers directly to Section 25f: EU law demands the fight against fraud. It does not demand its over-extension.

Timing is everything: no retroactive bad faith

The decisive moment is the time of supply. A trader who learns of irregularities only later – for instance through an audit notice – does not retroactively lose a lawfully acquired deduction. This time-of-supply doctrine is settled in German case law and scholarship, and it is the strongest answer to the hindsight logic of audit practice: today’s knowledge does not create yesterday’s constructive knowledge.

What affected businesses should do now

A Section 25f assessment is not a verdict. It is an allegation with a duty to substantiate. The first steps: protect deadlines (the Einspruch – the administrative appeal – and the application for suspension of enforcement, known as Aussetzung der Vollziehung), demand access to the file and disclosure of the objective circumstances relied upon, and reconstruct the transaction record – contracts, orders, VAT ID verifications, transport documents, payment routes, internal approvals. In parallel, liquidity and personal liability belong on the table: enforcement and an asset freeze under Section 324 of the German Fiscal Code create economic facts long before anything is final. If an inspection, special VAT audit or dawn raid is already under way, the structure of the first 72 hours decides much of what follows.

The decisive question is not “Are we clean?” It is “Can we prove it?” A business that asks this question for the first time in appeal proceedings defends with its hands tied. A business that answered it beforehand has shifted the position.

Source box

Case law (CJEU): - CJEU, judgment of 6 July 2006 – C-439/04 and C-440/04, Kittel and Recolta Recycling, ECLI:EU:C:2006:446, paras 56 et seq. - CJEU, judgment of 21 June 2012 – C-80/11 and C-142/11, Mahagében and Dávid, ECLI:EU:C:2012:373, paras 53–61. - CJEU, judgment of 18 December 2014 – C-131/13, C-163/13 and C-164/13, Schoenimport “Italmoda” Mariano Previti and Others, ECLI:EU:C:2014:2455. - CJEU, judgment of 15 September 2022 – C-227/21, HA.EN., ECLI:EU:C:2022:687, paras 33, 43 et seq. - CJEU, judgment of 24 November 2022 – C-596/21, Finanzamt M, ECLI:EU:C:2022:921. - CJEU, judgment of 1 December 2022 – C-512/21, Aquila Part Prod Com, ECLI:EU:C:2022:950. - CJEU, judgment of 11 January 2024 – C-537/22, Global Ink Trade, ECLI:EU:C:2024:6 (the administration’s evidential duties: establish, prove, demonstrate). - CJEU, judgment of 4 October 2024 – C-171/23, UP CAFFE, ECLI:EU:C:2024:840, paras 37, 40, 42 (no specific national legal basis required; limit: no recharacterisation beyond what is necessary, input VAT deduction of the company concerned remains). - CJEU, judgment of 10 July 2025 – C-276/24, KONREO, ECLI:EU:C:2025:554 (cumulation of denial and joint and several liability accepted; limit: proportionality in the individual case). - CJEU, judgment of 13 November 2025 – C-639/24, FLO VENEER, ECLI:EU:C:2025:888 (no exhaustive list of evidence; authorities must assess all evidence submitted).

Case law (Germany): - Federal Fiscal Court (BFH), decision of 20 October 2021 – XI R 19/20, UR 2022, 420, with case note Grommes (no general duty to investigate suppliers; duty to obtain information only where there are indications of irregularities).

Statutes and materials: - Section 25f UStG (German VAT Act); former Section 25d UStG; Section 26a(1) UStG; Sections 6a, 15 UStG; Sections 370, 71 AO (German Fiscal Code). - Government bill (Annual Tax Act 2019), Bundestag printed paper BT-Drs. 19/13436 (burden of proof: p. 161). - German Federal Ministry of Finance, circular of 15 June 2022 – III C 5 - S 7429-b/21/10003 :001, Federal Tax Gazette (BStBl) I 2022, 1001; VAT Application Decree sec. 25f.1. - German Federal Ministry of Finance, circular of 19 December 2025 (annual amendment to the VAT Application Decree 2025; sec. 25f.1: editorial cross-reference correction only).

Literature (German-language): - Reiß, UR 2020, 408 (411 et seq., 413 et seq., 415 et seq.). - Spilker, UR 2023, 589 (590, 591, 594). - Grommes, UR 2021, 461 (465); Grommes, UR 2022, 420 (429 et seq.). - Monfort, case note on CJEU C-227/21 (HA.EN.), UR 2022, 809 (811 et seq.). - Vobbe/Pötters, UR 2023, 777 (783). - Treiber, in: Sölch/Ringleb, UStG, 106th supplement, March 2026, Section 25f paras 73, 75 (unpublished Ministry guidance sheet; call for publication of the administrative standards). - Schmidt, Der NKR-Jahresbericht 2025 und das Steuerrecht, BB 2026, 279 (part I) and 343 (part II) (gold-plating finding: routine over-implementation of EU requirements). - Lenaerts, The Role of the Court of Justice in Enhancing Tax Fairness in the EU, EC Tax Review 2025, 78 (80 et seq.) (denial acknowledged as a “radical measure – one might even call it a sanction”). - Bick, TCMS als systematischer Vorsatzausschluss bei innergemeinschaftlichen Lieferungen, 2026, pp. 24–30.

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