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Input Tax Deduction on Advance Payments: No Explicit "Advance Payment" Note Required on the Invoice

Tim Zumbach, Carola Springfeld
19/05/2026
News
Under Section 15(1), Sentence 1, No. 1 of the German Value-Added Tax Act (UStG), businesses may claim input tax on advance payment invoices as soon as they have a valid invoice and the payment has been made. In practice, however, it is often unclear under what conditions an invoice qualifies as an advance payment invoice. In its ruling of December 4, 2025 (V R 38/23), the Federal Fiscal Court (BFH) has now clarified the conditions under which input tax deduction from advance payment invoices is permissible – and when it is not.

1. Background

According to Section 15(1), Sentence 1, No. 1, Sentence 3 of the German Value-Added Tax Act (UStG), two conditions must be met for the deduction of input tax from advance payment invoices: First, a business must have a valid invoice in accordance with Section 14(4) UStG that contains all mandatory invoice details. Second, payment must have been made prior to the performance of the service.

In practice, however, it is often disputed when an invoice is to be regarded as an advance payment invoice at all, or to what extent this must be evident from the invoice details. In this context, it is also questionable whether the input tax deduction is to be granted even if the expected service (for example, in cases of fraud) ultimately fails to materialize.

The Federal Fiscal Court (BFH) addressed this issue in its ruling of December 4, 2025 (V R 38/23) in a case involving organized investment fraud with photovoltaic systems.

 

2. Case in Question

In the case in question, the plaintiff had participated in an investment model involving the purchase and leasing of photovoltaic systems. The model provided that G would sell photovoltaic systems to customers, including the plaintiff, and that the respective customers would subsequently lease them to third parties.

The plaintiff made two advance payments to G for the delivery of a photovoltaic system. For this, the plaintiff received two invoices from G: Invoice No. 255 contained the note “Advance payment” and was paid by the plaintiff on January 12, 2011. The plaintiff subsequently also received a delivery note for this invoice, according to which the delivery had been made directly to the plaintiff’s end customer on January 19, 2011. Invoice No. 256 did not contain a corresponding note regarding advance payment and was paid by the plaintiff in December 2011.

In fact, however, the photovoltaic system was never delivered, as this was a case of organized system fraud. After the tax office responsible for the plaintiff completely denied the input tax deduction for both invoices, the Munich Fiscal Court granted the plaintiff the input tax deduction for Invoice No. 255, as it contained the term “advance payment.” For invoice No. 256, however, the Tax Court also denied the input tax deduction, as this was not an advance payment invoice.

 

3. Key Findings of the Federal Fiscal Court (BFH)

In the appeal proceedings, the BFH ruled that the plaintiff had correctly claimed the input tax deduction from both invoices and made several key statements in this regard:

An advance payment invoice entitling the taxpayer to input tax deduction exists even if, without an explicit reference such as “advance payment” or “prepayment,” it is apparent for other reasons that it is issued for a service yet to be rendered. A specific reference on the invoice is not required for the input tax deduction under either national sales tax law or the VAT System Directive. The sole decisive factor is whether the overall nature of the invoice indicates that it pertains to a service yet to be rendered. The Finance Court had wrongly denied this with respect to Invoice No. 256; the Federal Fiscal Court (BFH) set aside the judgment in this regard and remanded the case to the Finance Court.

In the second instance, the Finance Court will have to examine two specific points regarding Invoice No. 256: First, it is questionable whether, from the plaintiff’s perspective, the delivery of the photovoltaic system was still sufficiently certain at the time of payment in December 2011, since otherwise a claim based on the protection of legitimate expectations would be precluded. Second, it must be clarified whether Invoice No. 256 can at all permit an input tax deduction for an advance payment made prior to the performance of a service. The right to input tax deduction from an advance payment requires that the invoice recipient, at the time of payment, assumes that they are paying for a service to be performed in the future. If the facts indicate that the plaintiff assumed at the time of payment that the delivery had already taken place, the input tax deduction based on an advance payment would be precluded.

 

4. Practical Recommendation

In its ruling, the Federal Fiscal Court (BFH) clarified that invoices for advance payments do not need to be explicitly marked as such. It is sufficient if the advance payment nature is evident from the overall circumstances. However, businesses should carefully document that they assumed, at the time of payment, that a service was still pending. Conversely, if there is an advance invoice for which the invoice recipient does not initially pay, and payment is made only later, it must be examined whether, due to the intervening circumstances, the input tax deduction is still to be granted in accordance with advance payment principles, or whether the invoice recipient already assumed at that later point in time that the service had already been rendered.