Input Tax Deduction on Advance Payments – New Ruling by the Federal Fiscal Court dated December 4, 2025 (V R 38/23)

In its decision of December 4, 2025 (Case No. V R 38/23), the Federal Fiscal Court (BFH) provided important clarifications regarding the deduction of input tax on advance payments, which are of great practical significance, particularly for business owners and managing directors. The ruling specifies the conditions under which advance payments may be taken into account in the VAT return. This primarily concerns the tax treatment of advance payments and their input tax deduction, which often leads to uncertainty in practice.

Summary of the Ruling

The underlying case concerned the question of whether an input tax deduction based on a down payment is already possible at the time the down payment is made. The plaintiff had made a down payment for a delivery and attempted to claim the corresponding input tax deduction, even though the delivery itself did not take place until a later date.
The issue in dispute was: Is the input tax deduction already possible upon payment of the advance, or must it be deferred until the actual delivery of the goods or provision of the service?
The Federal Fiscal Court (BFH) ruled that the input tax deduction is already permissible when the advance payment is made, provided the business meets the requirements for the input tax deduction. The decisive factor is that, under the provisions of VAT law, the down payment constitutes an “advance payment” that is directly related to a subsequent delivery or service. However, the documents required for the input tax deduction, in particular a valid invoice, must also be available.

Key Points of the Ruling

The ruling provides key clarifications regarding the application of input tax credits for advance payments:

• Input Tax Credit Already Upon Advance Payment: The Federal Fiscal Court (BFH) clarifies that an input tax credit is not limited to the final delivery or service but may also be claimed at the time of making an advance payment, provided the other requirements are met.

• Invoicing: The key requirement for input tax deduction is a valid invoice. The business must have received an invoice for the down payment that contains all relevant information in accordance with Section 14 of the German Value Added Tax Act (UStG).

• Connection to the supply/service: Input tax deduction is only permissible if the down payment is clearly connected to a subsequent supply or service. A mere advance payment without a specific consideration would not justify the input tax deduction.

• No input tax deduction without a service rendered: Even if the input tax deduction is possible with the down payment, the ruling reiterates that a supply or service must actually take place in order to realize the sales tax. 

Practical Implications

The Federal Fiscal Court’s decision has significant implications for businesses, particularly in the construction industry and for larger investment projects where advance payments are common. Businesses can now claim input tax credits even before the final delivery or service is provided, which improves cash flow.
The ruling also represents a significant change for tax groups and parent companies. Existing rules regarding input tax deductions from advance payments should be reviewed. In particular, in cases where payments for goods or services are made within the context of a tax group relationship, the input tax deduction may be realized earlier than previously assumed.
However, companies must ensure that they correctly meet all formal requirements, particularly with regard to invoicing and providing evidence of the connection between the payment and a subsequent service. If these documents are missing, the input tax deduction cannot be claimed despite the advance payment having been made.

Conclusion

The Federal Fiscal Court’s (BFH) ruling of December 4, 2025, provides an important clarification regarding input tax deduction. Businesses can now claim an input tax deduction even when they merely make a down payment for a future delivery or service, provided they have received a valid invoice and the down payment is linked to a specific delivery or service.
For businesses and their tax planning, this means they will be able to improve their cash flow planning when handling down payments and advance payments in the future. It is advisable to review existing invoicing procedures and input tax deduction practices in light of this ruling to fully utilize tax benefits and minimize potential risks.
When dealing with down payments and advance payments, companies should take particular care to ensure that all legal requirements are correctly met in order to claim the input tax credit early and without complications.