If an entrepreneur uses an item supplied, imported or acquired within the Community for his business, or uses another service for which he has made a claim both for transactions that entitle the taxpayer to deduct input tax and for transactions that exclude the deduction of input tax in accordance with Section 15 (2) and (3) of the German VAT Act (UStG), the taxpayer must divide the input tax incurred into a deductible and a non-deductible portion. According to Union law law, the allocation must in principle be based on a turnover key relating to the entirety of the transactions carried out by the trader (Articles 173 (1) and 174 of the VAT Directive, “pro rata rate”). However, according to Art. 173 (2) of the VAT Directive, the member states may deviate from this principle. The German legislator has made use of this possibility with § 15 (4) sentence 3 of the German VAT Act (UStG) in the form of the priority of “other economic allocations” over an of “other economic allocations” over an allocation according to turnover.
Source: bundesfinanzministerium.de
