Entrepreneurs who engage solicitors or advisers to claim damages may, in principle, deduct the VAT paid on these services as input tax. This was decided by the Federal Fiscal Court (BFH) in its judgement of 7 May 2026, thereby providing an important clarification for practical purposes (Ref. V R 15/24, published on 30 July 2026).
What was the case about?
A limited liability company (GmbH) had entered into an operating agreement to develop and operate a specific project. Before the company had even generated a single taxable turnover, the client terminated the agreement. The GmbH successfully brought a claim for damages, with the assistance of external advisers. The invoices from these advisers included VAT, which the GmbH claimed as input tax from the tax office.
The tax office refused to allow the deduction. It argued that the consultancy services were not sufficiently directly linked to the company’s business activities, as the company had, in fact, never actually commenced trading. The Berlin-Brandenburg Tax Court ruled in favour of the GmbH, and the tax office lodged an appeal.
What was the Federal Fiscal Court’s ruling?
The Federal Fiscal Court (BFH) dismissed the tax office’s appeal and upheld the right to deduct input VAT. The decisive factor in this was the following reasoning: the right to deduct input VAT arises as soon as a trader has a demonstrable intention to carry out taxable transactions. This entitlement remains valid even if the planned activity subsequently fails for reasons for which the trader is not responsible.
In the view of the Federal Fiscal Court (BFH), the costs of legal advice relating to the enforcement of a claim for damages are to be regarded as general business expenses. They are directly linked to the business activity originally planned and eligible for input tax deduction, because the claim for damages arises precisely from that activity.
The following principle applies: a business owner who receives a service in order to enforce a claim arising from a business activity may deduct the input tax on that service. This applies even if the planned activity was never actually carried out.
Background: The failed car toll scheme
Anyone looking closely will recognise a high-profile case in the facts of the matter: it concerns the aftermath of the failed German car toll scheme. After the European Court of Justice had declared the toll plans to be unlawful, the company concerned reached an agreement with the Federal Republic of Germany on compensation of 243 million euros. The Federal Fiscal Court (BFH) has now ruled in principle that the consultancy costs incurred in this connection are eligible for input tax deduction.
What does this mean for businesses in practice?
This ruling has implications that go beyond the individual case. It affects all businesses that are in the start-up or early stages, or that are planning projects which ultimately do not come to fruition. The ruling is particularly relevant in the following situations:
- A contract is terminated before business operations commence.
- A company must take legal action to claim damages because a client or contractual partner has breached their obligations.
- Legal or consultancy fees are incurred in connection with a business activity that was planned but never carried out.
In all these cases, the input VAT on consultancy invoices is, in principle, deductible, provided that the activity originally planned was aimed at taxable transactions. In individual cases, the precise tax treatment should be discussed with a tax adviser, as the specific circumstances may be decisive.
Source: Haufe: Tax
This article was created with the help of AI and has been editorially reviewed.
