Reduced VAT For Germany's Hotels Under Threat

by Ulrika Lomas, Tax-News.com, Brussels

26 November 2009

The German government’s proposed reduction of the value-added tax (VAT) rate within the hotel industry has deeply divided members of both coalition parties. Indeed, the proposal has sparked outrage from the German Länder or states.

Despite a very public revolt against the government’s proposed VAT initiative, led by several German states, notably in the North of the country, Bayern’s Prime Minister and leader of the Christian Social Union, Horst Seehofer, has endeavoured to quash any unwelcome opposition and has pledged to flex his political muscle in the upper house of parliament if necessary.

Adamant that the reduced VAT rate of 7% (instead of 19%) is to be introduced in Germany, in a bid to boost tourism, Seehofer has emphasized that this fiscal measure is already contained in the country’s new growth acceleration law (das Wachstumsbeschleunigungsgesetz), due to enter into force on January 1, 2010. Consequently, Seehofer has threatened to reject the law, unless it is adopted in its entirety.

Nevertheless, given the dire state of the finances of the German Länder, Schleswig-Holstein’s Free Democratic Party (FDP) leader, Jürgen Koppelin, indicated that the Kiel CDU/FDP coalition would not vote in favour of the law, unless the government first agreed to increase its contribution to the cost of the tax cuts. Koppelin also demanded clarification regarding the precise application of the reduced VAT measure.

Without approval from Schleswig-Holstein, the coalition will not have the overall majority needed in parliament to adopt the measure, which is expected to cost in the region of EUR1bn per year. In addition, many hotels have already demonstrated a reluctance to lower their prices in return for the reduced rate.

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