Annual Tax Act 2026 – new rules for VAT grouping starting from 2029

Background to the reform proposal concerning VAT grouping

Under the law as it currently stands, a VAT group comes about automatically when the criteria for inclusion have been met. This means VAT groups can come about or end in an unrecognised way, which often leads to elaborate tax adjustments.

Until now partnerships have only been included in the scope of VAT groups by way of case law (particularly by purposive interpretation), which is especially relevant to German limited partnerships with a limited liability company as the general partner (GmbH & Co. KG).

In past years, VAT grouping has repeatedly been the subject of proceedings before the European Court of Justice (ECJ). The interpretation of the criteria for inclusion also regularly leads to disputes with the tax authorities.

In light of this, there were increasing calls for reform from practitioners to create more legal certainty and clarity. The current draft reform has now taken up some of these demands.

Main changes from 1 January 2029 – declaration procedure introduced

Under the draft section 2c(1) of the VAT Act, in future a VAT group is only to come into effect once the controlling company has proactively declared this to the tax office. A further compulsory condition is that the controlled company is actually integrated into the business of the controlling company financially, organisationally and economically according to the overall picture of actual circumstances. This declaration thus becomes an additional condition. The goal of this is to avoid VAT groups existing without recognition and the work required to undo them. To ensure that the transition is smooth, the declaration can already be submitted by 1 July 2028.

Inclusion of partnerships

For the first time, partnerships are explicitly mentioned as potential controlled companies. In doing so, the legislature has taken account of ECJ and Federal Fiscal Court case law and increased legal certainty.

This means that in future the legal forms of partnerships under civil law [GbR], commercial partnerships [OHG] and limited partnerships [KG] can also be part of a VAT group – as long as they fulfil the criteria for inclusion.

Expanded notification and procedure requirements

In future, the tax office must be notified of changes within the VAT group – some of them must be communicated immediately. This particularly applies to:

• Changes to existing structures (such as when the conditions for inclusion are no longer met)
• Other controlled companies joining
• Dissolution of the VAT group (including partial) 

The details are laid down by the new section 1 of the VAT Application Directive [UstDV].

New adjustment, interest and liability rules

Draft subsections 2 to 5 of section 2c of the VAT Act lay down new rules for erroneously assumed VAT groups: 

• Limitation on the protection of confidence (section 176 of the Fiscal Code [Abgabenordnung–AO])
• Limited inclusion of assessment deadlines
• Introduction of special interest and adjustment mechanisms

The dissolution of the VAT group can be avoided under certain circumstances by all the parties submitting a joint (irrevocable) application provided this does not jeopardise tax revenue, for which the applicant (most likely the controlling company) is required to provide evidence.

Liability rules are also laid down, particularly for the controlling company with respect to the tax liabilities of the controlled companies.

Conclusion – more legal certainty with new room for structuring

The planned changes to VAT grouping are to be welcomed. The declaration procedure in particular will create more transparency and prevent the existence of unrecognised VAT groups.

At the same time this practically creates an option to set up a VAT group, which opens new opportunities for groups of companies to structure themselves.

The inclusion of partnerships is also positive, but does continue to require careful case-by-case checking. Differing corporate arrangements, such as voting rights and the powers of management, may lead to different results.

It must still be borne in mind that the declaration is only valid if the other substantive legal conditions are actually satisfied. Therefore, existing legal uncertainties have not been completely resolved. An advance ruling under section 89(2) of the Fiscal Code therefore still remains the safest option. 

Businesses should examine whether or to what extent they need to make adjustments to their VAT group and compliance processes.

It should be assumed that existing VAT groups must be proactively declared in order to keep them in effect beyond 1 January 2029. If no declaration is made, they will most likely legally come to an end.

It is not completely clear what scope the planned declaration procedure is actually supposed to take. The wording indicates that for periods starting from 1 January 2029 there is the option, both in setting up a VAT group and for including or excluding controlled companies, that the controlling company will in future be able to choose whether a VAT group regime should exist at all and, if it should, which controlled companies should be part of it (if the criteria are met) or no longer part of it. This could be helpful with regard to any potential risk of particular controlled companies becoming insolvent, which would affect the controlling company.

Further planned changes to the VAT Act (from 2027)

The draft bill also includes the following main changes that take effect on 1 January 2027:

• Certain deemed supplies (self-supplies) are to be limited to the private sphere (draft of subsections (1b) and (9a) of section 3)
• Clarification of local rules for certain digital services and intra-Community distance sales (draft of section 3f)
• Time limits on the rules governing consignment stock (draft of sections 6b and 28)

Outlook

The deadline for business associations to comment was 12 June 2026. It remains to be seen what changes will be made in the further legislative process. In particular, it is open whether the declaration procedure will remain in this form or whether it will be replaced by a compulsory application process with a binding assessment, as some practitioners are demanding. 

Practical note

Continually reviewing the conditions for VAT grouping will remain a key component of tax compliance in future. Businesses should therefore design their processes accordingly and review them regularly to minimise risks and use potential for structuring as well as they can.

If you have any more questions, our experts at the VAT subservice line will be ready to help. We’re looking forward to hearing from you!