Umsatzsteuer: Everything you need to know about VAT in Germany

Contents

• What is Umsatzsteuer (VAT)?
• Who has to pay VAT in Germany?
• Why do I need a USt-IdNr.?
• What is tax deductible?
• Target taxation vs. actual taxation
• What is reduced VAT in Germany?
• How is VAT calculated? 
• Bookkeeping & VAT
• Can I be exempt from paying VAT?
• What is ‘Durchschnittssatzbesteuerung’?
• Can VAT be paid in instalments?
• What is the Kleinunternehmerregelung?
• What is the advance return for VAT? 
• What is with the VAT return?
• Intra-Community transactions
• How do I avoid a VAT audit? 

 

Umsatzsteuer: What is VAT in Germany?

All goods and services supplied by a business in Germany for consideration are subject to VAT. The same applies to the import of goods into the country and the intra-community acquisition of goods and services. This is governed by §1 of the UStG (VAT Act).

The statutory VAT rate in Germany is currently 19%. Certain transactions are subject to a reduced VAT rate of 7%. We’ll explain the types of transactions that qualify for the reduced rate below in a later section.

Who has to pay VAT in Germany?

Businesses with a revenue of more than €22,000 in the previous financial year are liable for VAT. This obligation is called Umsatzsteuerpflichtig in German. Below this limit, no VAT is charged. This limit has been increased as of 1 January 2020. For the 2019 tax year, the old limit of €17,500 still applies.

USt-IdNr. Why do I need a VAT number?

If you trade with businesses from other EU countries, you need a VAT number. An invoice must always include the VAT number of the invoicing party and the recipient.

Umsatzsteuer, Mehrwertsteuer & Vorsteuer: What is what?

In principle, all these terms refer to a sales tax. Vorsteuer (input tax) is the Umsatzsteuer (VAT) charged to a business. Colloquially, Umsatzsteuer is often referred to as Mehrwertsteuer (value-added tax).

Vorsteuer: What do I need to know about input tax in Germany?

Vorsteuer: What is input tax?

Businesses sell and purchase goods and services. In Germany, VAT on goods and services purchased by a business can be deducted as Vorsteuer (input tax) from the business’s VAT liability. The input tax deduction is called Vorsteuerabzug.

Vorsteuerabzug: What are the requirements for using the input tax deduction?

Your invoices have to comply with the legal requirements

Firstly, the invoices you issue (either original or electronic) must comply with the legal requirements and contain all the mandatory information. A common problem, even for large, established businesses, is incorrect invoices from other invoicing parties. To avoid this pitfall, consider creating a checklist for screening all incoming invoices.

If you do not have an invoice, you must provide the following instead:

• Receipt for service/delivery or payment made (receipt, settlement credit note, if applicable settlement in the contract, in each case with the compulsory details of an invoice according to § 14 para. 4 UStG).
• Receipt for payment of import VAT
• Receipt of taxation of the intra-community acquisition by the invoice recipient
• Receipt of the use of the service for deduction turnover

 

Your e-invoices must be tamper-proof

Electronic invoices must be in a tamper-proof format, most commonly PDF. Suppose you scan invoices as part of your digital accounting. In that case, you need to ensure the authenticity of the origin, the integrity of the content and the legibility of the invoice so that the tax authority will accept it.

Kleinunternehmer: You can’t be a ‘small trader’ & therefore, exempt from VAT

If you are exempt from VAT as a Kleinunternehmer (small trader), you are generally not allowed to deduct input tax. Read more about this in the section on the Kleinunternehmerregelung below.

Vorsteuerabzug: Want to know more about the input tax deduction?

Read about the most common input tax deduction mistakes here.

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What is tax deductible?

There are several special and exemption regulations on this issue (§ 4 para. 5 no. 3 EStG).

Deductible

• Gifts worth up to €35
• Company cars for both private and business use (at least 10%), where the private use is subject to VAT

 

Not deductible

• Gifts worth over €35
• Guesthouses
• Hunting, fishing, yachts
• Expenditure on living expenses
• Expenses that fall under the Aufteilungsverbot (prohibition of apportionment) (§ 12 no. 1 EStG)

 

Sollversteuerung & Istversteuerung: What do I need to know about target & actual taxation?

The timing of your VAT liability will depend on whether you opt for Sollversteuerung (target taxation) or Istversteuerung (actual taxation).

Sollversteuerung vs. Istversteuerung: What are the differences between target taxation & actual taxation

Actual taxation is based on the cash principle. This means that VAT does not have to be paid to the tax authorities until the money has been received and the VAT has been collected.

In the case of target taxation, the invoice date applies. This means that the VAT must be paid to the tax authorities as soon as the invoice is issued, i.e. when the VAT claim accrues against the customer.

Actual taxation, therefore, gives you a liquidity advantage because you pay the VAT later than with target taxation. However, bear in mind that target taxation grants you the ability to deduct the Vorsteuer (input tax) directly.

Istversteuerung: Who can use the actual taxation?

In principle, debit taxation applies to all VAT payers. Actual taxation may be used by (§ 20 UStG):

• Freiberufler (liberal professionals), regardless of turnover
• Organisations that are exempt from the obligation to keep accounts
• Businesses with a maximum annual revenue of €500,000

If you wish to opt for actual taxation, you must submit an application to the tax office within the prescribed time limit and without any formalities.

 

Ermäßigte Umsatzsteuer: What is reduced VAT in Germany?

The standard VAT rate is 19%. However, a reduced VAT rate of 7% (§ 12 UStG) applies in certain cases.

For example, the reduced tax rate of 7% applies here:

• Food trade
• Trade in books, newspapers and magazines
• Technical dental services
• Tickets for theatres, concerts and museums
• Admission to film screenings, circus performances and zoos
• Granting, transferring and exercising rights under the Urheberrechtsgesetz (copyright act)
• Products and services from non-profit, charitable or church businesses and organisations

 

Umsatzsteuer: How is VAT calculated?

VAT is always added to your net revenue. Under the Umsatzsteuerrechtlich (VAT law), net revenue is the price or amount paid by the recipient of the invoice for a good or service minus VAT. To determine the VAT, it must either be added to a net amount or deducted from a gross amount. The calculation is shown in the following examples:

Example: How to calculate VAT from a gross amount

Bruttobetrag (119%) Gross amount (119%)	€2,000
Berechnung 19 % USt 19% VAT calculation	2,000 / 1.19
Nettobetrag (100 %) Net amount (100%)	€1,680.67
Umsatzsteuer (19 %) VAT (19%)	€319.33

Bruttobetrag (107 %) Gross amount (107%)	€2,000
Berechnung 7 % USt 7% VAT calculation	2,000 / 1.07
Nettobetrag (100 %) Net amount (100%)	€1,869.16
Umsatzsteuer (7 %) VAT (7%)	€130.84

Example: How to calculate reduced VAT from a gross amount

Nettobetrag (100 %) Net amount (100%)	€2,000
Berechnung 19 % USt 19% VAT calculation	2,000 * 1.19
Bruttobetrag (119 %) Gross amount (119%)	€2,380
Umsatzsteuer (19 %) VAT (19%)	€380

Nettobetrag (100 %) Net amount (100%)	€2,000
Berechnung 7 % USt 7% VAT calculation	2,000 * 1.07
Bruttobetrag (107 %) Gross amount (107%)	€2,140 €
Umsatzsteuer (7 %) VAT (7%)	€140

 

What do I need to know about bookkeeping & VAT?

Usually, your accounting software will do the VAT accounting in the background as you enter your transactions. However, it is useful to know and understand the correct accounting (bookkeeping) process.

What are the accounting records for VAT and input tax?

Example 1

Barverkauf von Produkten
Cash sale of products

Kasse an Umsatzerlöse + an Umsatzsteuer
Cash to sales revenue + to VAT

Example 2

Verkauf eines gebrauchten Dienstwagens gegen Überweisung
Sale of a used company car against transfer

Bank an Erlöse aus dem Abgang von Anlagevermögen + an Umsatzsteuer
Bank to proceeds from the disposal of fixed assets + to VAT

Example 3

Erstattung / Gutschrift an Kunden aufgrund einer defekten Lieferung
Refund/credit note to customer due to defective delivery

Umsatzerlöse + Umsatzsteuer an Forderungen aus Lieferungen und Leistungen
Sales revenue + VAT on trade receivables

Durchlaufender Posten: What are considered items in transit?

Amounts paid as durchlaufende Posten (transitory items) are not part of the taxable remuneration. Such amounts are only temporarily received or paid, with the company only acting as a trustee for the tax authorities. The deduction of input tax ultimately makes no difference to the tax authorities.

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Can I be exempt from paying VAT in Germany?

Under Section 4 of the UStG, revenue certain transactions are expressly exempted from VAT:

• Export deliveries
• A host of banking transactions and financial services
• Building society, insurance agents and brokers
• Sale, rental and leasing of real estate
• Medical treatments and care facilities
• Theatre, orchestra, music ensembles and the like
• Youth welfare and non-statutory welfare services
• Teaching services (in certain cases)

• Sale of businesses as a whole (§ 1 UStG)

 

Durchschnittssatzbesteuerung: What does average-rate taxation mean?

Section 24 of the VAT Act states that tax for agricultural and forestry businesses is calculated using flat-rate amounts (average rates). This is called Durchschnittssatzbesteuerung in Germany.

Can VAT be paid in instalments?

Is it legal to pay VAT in instalments? This question has been the subject of several court cases. Read the latest tax ruling on VAT instalment payments here.

 

Kleinunternehmerregelung: What is the small business regulation?

If your revenue did not exceed €17,500 in the previous year and will not exceed €50,000 in the current year, you can use the Kleinunternehmerregelung (small business regulation) and not pay VAT. However, you still have to submit an annual VAT return to show that you have remained within these limits.

What must I do if I use the Kleinunternehmerregelung?

If you make use of the Kleinunternehmerregelung, you must not invoice your customers for VAT or deduct input tax. Moreover, your invoices must include a note stating that you are not liable for VAT under § 19 UStG.

When is opting to pay VAT a good idea?

It’s good to know that even as a Kleinunternehmer (small trader), you can opt-in for VAT. This means you can voluntarily subject yourself to the same rules that apply to “larger” businesses. This begs the question: Isn’t it always worth applying the small business rule?

There are two reasons not to use this small business scheme:

1. Your input tax is higher than your expected VAT liability. In this case, you would receive a tax refund from the tax office.
2. You want to bolster your image and don’t want to give your customers the impression (always clearly visible on invoices) that you ‘only’ run a small business.

 

Umsatzsteuervoranmeldung: What is the advance return for VAT?

Business owners must submit a Umsatzsteuervoranmeldung (advance VAT return). ‘Voranmeldung’ (advance return) means that this document is provisional. The actual final statement is only made with the Jahressteuererklärung (annual tax return).

Umsatzsteuervoranmeldung: How does the advance VAT return work?

Typically, even small businesses now use accounting software (or use the services of an accountant). These accounting programmes usually have an ELSTER function. You simply link it to your ELSTER account by entering your user name and the Elster key you have received.

Note: ELSTER stands for ‘Elektronische Steuererklärung’ (electronic tax return) and is the tax authorities’ portal for submitting all tax returns, including the VAT advance return.

You use your accounting software to record all your business costs and income. Frequent transactions and tax rates are often already stored in the software. At the end of an advance return period, you update your accounts in the software and submit your advance return electronically via ELSTER.

Deadlines for filing the advance returns

The statutory deadlines for filing the advance return depend on your VAT charge for the previous Geschäftsjahr (financial year):

VAT levy in the previous year	Advance VAT return cycle
< €1,000	N/A
€1,000 to €7,500	Quarterly advance return
more than €7,500	Monthly advance return

 

 

 

 

 

After the end of the assessment period, the tax office gives you ten days to submit the advance return. Monthly payers must, therefore, do so by the 10th of the following month and quarterly payers by the 10th of the first month of the following quarter. Newly established companies must submit monthly advance VAT returns for two years. Only then will the above criteria apply to them.

Note: You must submit an advance return by the statutory deadlines even if you have had no turnover or costs, for example, because your business has been temporarily suspended. In this case, simply submit a zero return.

Dauerfristverlängerung: What is a permanent extension?

If you do not have enough time to complete your advance return, you can apply for a Dauerfristverlängerung (permanent extension). You make a one-off special advance payment of 1/11th of the previous year’s VAT and have one month more to file the advance return. The Sondervorauszahlung (special advance payment) is not lost but is deducted from your annual VAT return liability.

Umsatzsteuererklärung: What do I need to know about the VAT return?

All entrepreneurs – including Kleinunternehmer (small traders), Existenzgründer (new businesses) and Jahreszahler (annual payers) – must submit a VAT return. According to § 149 (2) AO, this must be submitted by 31 July of the following year. If you have the VAT return prepared by a tax adviser, you have until the last day of February of the following year.

In the VAT return, the VAT paid (the input tax) is deducted from the VAT received – and this is done conclusively for the entire financial year.

Offsetting against advance payments

The result will be deducted from your advance VAT payments (plus, where applicable, the special advance payment for the permanent extension). If you have paid too much VAT in advance, the tax office will refund this amount. On the other hand, if you have paid too little VAT in advance, you’ll be charged the difference.

Tip: All businesses should make provisions for VAT. Freiberufler, start-ups, Kleinunternehmer, and Jahreszahler, in particular, often get into trouble if they ignore the tax issue for a whole year and the tax office demands several thousand euros in arrears after they submit their Jahresumsatzsteuererklärung (annual VAT return).

Abschlusszahlung: When is the final payment?

The final payment is due one month after filing the return without having to make a separate request.

Säumniszuschläge: How to avoid late payment penalties

If you miss a deadline for paying back taxes by more than three days (the so-called grace period), the tax office will charge you a Säumniszuschlag (late payment surcharge).

Intra-Community transactions

Under EU rules, VAT is due where the sale takes place. So if you export goods and services to EU countries, they are tax-free for the buyer. This means that you charge the buyer net without VAT. Conversely, you do not pay VAT on goods or services you buy from other European countries.

The following conditions must be met for transactions by businesses in EU countries to be tax-free:

• Both trading partners must have a VAT ID number, and both VAT ID numbers must be quoted on the invoice. If you are the invoicing party, you must obtain the VAT ID number of the invoice recipient before issuing the invoice.
• The invoice must be marked “tax-free intra-community delivery” – ideally in the language of the invoice recipient, but at least in English.
• In the case of goods deliveries, the tax office must be provided with a confirmation of receipt to prove that the goods have actually been delivered to another EU country or a third (non-EU) country.
• A Zusammenfassende Meldung (recapitulative statement) of your sales from other European countries must be submitted with the advance return. Reports on intra-community supplies of services must be submitted by the 25th day after the end of the quarter and reports on intra-community supplies of goods by the 25th day after the end of the month. You do not need to submit a return for reporting periods in which there were no intra-community transactions.

Here, you can find out more about the OSS procedure, which enables the simplified payment of VAT from intra-community transactions from other EU countries.

 

Umsatzsteuerprüfung: How do I avoid a VAT audit?

VAT audits are usually on-the-spot checks carried out when the tax authority suspects that your business is not operating in accordance with the rules. Here are some tips on how to avoid an audit.

Tactics to avoid a tax audit

If possible, you should avoid the following or be able to prove it in case of an audit:

• Exceptionally high input tax amounts
• Purchasing services that are atypical for your industry or company
• Invoices from issuers whose entrepreneurial status is not proven
• Purchase of a shell company or spin-off of a company
• Payment of a fee before the performance of the service (especially in the construction industry)
• Claiming tax exemptions for intra-Community supplies

What will be audited?

The tax office’s external auditors will examine your accounts and documentation closely. Have you fulfilled your bookkeeping obligations under § 246 AO and your record-keeping obligations under § 22 UStG? If you keep your books digitally (as is common today), you will also meet the standards of the German principles of orderly bookkeeping and document archiving with digital systems (GoBD).

The auditors will also check the traceability of your business transactions: whether the incoming invoices are plausible and show the legal invoice components, what the background of any cash transactions may be and whether all receipts have been recorded. It also looks at any circumstances that are unusual in nature or amount. Suspicious circumstances include, for example, unusually large discrepancies between the advance VAT return and the annual return or cash payments for large invoice amounts.

Umsatzsteuerschätzung: How will the VAT be estimated?

If the external audit reveals irregularities and violations in your accounting, the tax office can estimate your VAT. The tax office has a lot of room for manoeuvre in this estimation, which is usually exploited. The result is an additional assessment, which can be ruinous for many businesses. You should, therefore, prevent this from happening by complying with the law. If this does happen, you should seek the advice of a lawyer experienced in tax law.