Section 153(4) AO: Why VAT audits can also affect Insurance Premium Tax

Section 153(4) AO: New knock-on effects of tax audits

The DAC7 Implementation Act of 20 December 2022 added a new subsection 4 to section 153 AO. Although the provision entered into force on 1 January 2023, the transitional rule in Article 97, section 37(3) of the Introductory Act to the Fiscal Code (EGAO) means that it only applies in practice to tax periods for which an audit notice under section 193 AO was issued after 31 December 2024. Since the beginning of 2025, the provision has therefore shaped compliance practice following each new tax audit.

At first glance, the mechanism is straightforward: if tax audit findings are implemented in a tax assessment, a notice of determination under section 180(1), sentence 1, no. 2 AO or a partial final assessment under section 180(1a) AO that has become final and binding, and the underlying facts affect another tax return that was not audited, changing its tax bases, a statutory obligation to notify the tax authorities and correct that return arises. The taxpayer must notify the competent tax authority of the affected return and correct it without undue delay.

The key difference from section 153(1) AO concerns the taxpayer’s awareness: while the existing obligation to correct a return requires the taxpayer to subsequently recognise that it is incorrect, subsection 4 is triggered solely by the objective outcome of the tax audit. In practice, the provision therefore creates a duty to investigate. Once assessments implementing amended audit findings become final and binding, businesses should systematically review whether the same underlying facts affect other tax returns.

The scope expressly extends beyond the tax and period originally audited. According to the explanatory memorandum (Bundestag printed paper 20/3436, p. 87) and the prevailing view in tax literature, other taxes and subsequent periods may also be affected. However, the obligation applies only while the assessment limitation period for the tax to be corrected under section 169 AO remains open. In cases involving tax evasion, these knock-on effects can therefore extend to up to ten years.

Failure to comply with the obligation to correct a return can have significant consequences. Inaction may constitute tax evasion by omission (section 370(1) no. 2 AO) or grossly negligent tax understatement (section 378 AO). By contrast, according to existing tax authority guidance, an effectively implemented tax compliance management system that is actively maintained in day-to-day operations can provide important evidence against intent or gross negligence.

VAT and insurance premium tax: When one transaction affects two tax regimes

VAT and IPT are closely linked, with one generally applying instead of the other. Under section 4 no. 10(a) UStG, transactions falling within the scope of the German Insurance Tax Act are exempt from VAT. The same transaction can therefore be relevant to both tax regimes: as a VAT-exempt supply on the one hand and as consideration subject to IPT on the other. The German Federal Fiscal Court has expressly recognised the principle of avoiding a double charge to VAT and IPT.

This interaction is particularly relevant in practice for products and services whose tax treatment is not always clear-cut. 

These include, in particular:

• warranties or guarantees provided for a fee,
• retail service and protection packages,
• maintenance contracts,
• membership fees for clubs and associations,
• embedded insurance models in the platform economy.

Under section 153(4) AO, this gives rise to a typical risk scenario: if a VAT audit finds that a transaction previously treated as a VAT-taxable service actually constitutes an insurance relationship and is therefore exempt under section 4 no. 10(a) UStG, an obligation to correct IPT returns may also arise once the assessment becomes final and binding.

Conversely, a finding by the German Federal Central Tax Office (BZSt) that the German Insurance Tax Act does not apply may have VAT implications and require corresponding adjustments to VAT returns.

The involvement of different tax authorities creates additional challenges. While VAT audits are carried out by the tax authorities of the German federal states, IPT has been administered exclusively by the BZSt since 1 July 2010. There is no provision for an automated exchange of information between the two authorities. Responsibility for applying findings from one tax to the other therefore generally rests with the business.

A nuanced assessment is nevertheless required. The obligation to correct a return arises only if the audit finding and the other tax return relate to the same underlying facts. According to the prevailing view in tax literature, merely similar facts are not sufficient. The finding must also actually affect the tax bases reported in the other return, and the underlying audit finding must have become final and binding. There is currently no case law from Germany’s highest tax court specifically addressing these knock-on effects between VAT and IPT.

Practical scenarios and remaining areas of uncertainty

Two scenarios are particularly relevant in practice:

A VAT audit gives rise to IPT implications
A tax audit concludes that a product previously subject to the standard VAT rate actually constitutes an insurance relationship within the meaning of section 1(1) of the German Insurance Tax Act (VersStG). The transactions are therefore exempt from VAT under section 4 no. 10(a) UStG. At the same time, IPT filing and payment obligations towards the BZSt may arise.

IPT findings have knock-on effects for VAT
The BZSt concludes that no insurance relationship exists. In this case, additional VAT may become payable and the relevant returns must be adjusted. Conversely, entitlement to deduct input VAT that was previously denied may also arise.

In particular, the scope of the term “underlying facts” remains unclear. The prevailing view is that it covers only identical facts, rather than every comparable scenario. The relationship between section 153(4) AO and section 153(1) AO is also unresolved. There are strong arguments that subsection 4, as the more specific provision, takes precedence within its scope. To date, there is neither a ruling from Germany’s highest tax court nor updated guidance in the Application Decree to the Fiscal Code (AEAO) or a specific circular from the German Federal Ministry of Finance (BMF). Pending further clarification, a careful case-by-case assessment supported by clear documentation is recommended.

Conclusion and recommended action: Look beyond the immediate audit findings

For businesses where VAT and IPT overlap, section 153(4) AO adds a new compliance requirement that needs to be actively managed. The following steps are particularly recommended in practice:

• Once the relevant assessments become final and binding, systematically review audit findings for potential implications for other taxes and periods.
• Clearly define responsibilities across the relevant tax functions, particularly VAT, IPT, corporate income taxes and payroll taxes.
• Maintain structured documentation of products and contractual models with potential VAT and IPT overlaps, so that it is clear whether the relevant underlying facts are identical.
• Address potential knock-on effects for other taxes while audits are still ongoing and, where appropriate, reflect them in closing meetings or audit reports.
• Ensure that an effective tax compliance management system explicitly covers the identification, assessment and documentation of these risks.

We would be happy to help you assess the potential implications of tax audit findings for other taxes and periods and establish appropriate compliance processes. This is particularly relevant for businesses offering warranty products, protection packages, service contracts, membership models or embedded insurance solutions. Please get in touch if you have any questions.