What is VAT?

VAT stands for “value-added tax”—or Mehrwertsteuer in German, though it’s more common to call it sales tax, or Umsatzsteuer.   This is a form of excise tax, meaning that it’s added to the price of goods, products, and services, and then passed on to the tax office.   Companies can offset this against their VAT liability as so-called input tax (Umsatzsteuerschuld).   This means that you can reclaim the taxes you owe the tax office by deducting your input tax.

 

The terms value-added tax, sales tax, and input tax therefore refer to the same type of tax, just from different perspectives.   Ultimately, it’s the end consumer who bears the actual tax burden, with companies or freelancers acting as collection agents.

 

There are three different types of VAT:

1.  VAT charged on goods and services related to consumption.
2.  VAT charged on products.
3.  VAT charged on income.

 

How does VAT work?

To explain how VAT works, let's look at an example.

Let's say you're going to buy some new shoes. You go out shopping and find the perfect pair at a nearby store.

Now, let's go back a few months. Retailers must buy shoes directly from the manufacturer before they reach the store. For the sake of argument, let's assume they cost €50 net (before tax) plus 19% VAT (€9.50). That means the retailer paid a total of €59.50 for the shoes. Now, instead of keeping all the money, manufacturers pass on the 9.50 euros in VAT they receive from retailers to the tax office.

 

So, the retailer is now selling the shoes for 100 euros plus 19% VAT (19 euros), for a total of 119 euros. Right now, they pay 9.50 euros in VAT to the manufacturer, but when you buy the shoes, they receive 19 euros in VAT.

 

Now interesting: The deduction system allows retailers to deduct the VAT they pay to manufacturers from the VAT they receive from you (€19-€9.50=€9.50). (Sales tax - Input tax= tax payable) This means that the retailer must transfer €9.50 to the tax office on the next VAT declaration.

 

VAT scope and tax rate

In general, the following supplies will be taxed in Germany:

The enterprise/entrepreneur will provide all forms of goods and services within the scope of its business with German consideration.

Import goods in Germany from a third country (non-EU member state) and clear customs in Germany or in Germany, access to goods within the Community.

Rate	Type	Which goods or services
19%	Standard	All other taxable goods and services
7%	Reduced	Some foodstuffs; water supplies (excluding bottled water); medical equipment for disabled persons; some domestic passenger transport; intra-community and international passenger transport for certain road, rail and inland waterway transportation; books (excluding books whose content is harmful to minors); e-books; audiobooks; newspapers and periodicals (except those containing content harmful to minors and/or more than 50% advertising); admission to cultural events; writers and composers; some agricultural inputs; hotel accommodation (only short-term accommodation); certain admission to sports events; social services; medical and dental care; firewood; some timber for industrial use; take away food; cut flowers and plants for decorative use and food production; taxation of some gold coins and jewellery
0%	Zero	Intra-community and international transport (excluding road and rail and some inland waterways transport)

 

In Germany, a 19 percent value-added tax is charged on almost all goods and services. The 7 percent reduction applies to goods and services with basic needs.

It is not always entirely clear how decisions about "basic needs" are met - for example, milk is taxed at 7 per cent, compared with 19 per cent for soy or lactose-free milk. A complete list of all items eligible for a 7% reduction can be found in Umsatzsteuergesetz(§12 UStG).

 

Exemption status

The VAT exemption also has some provisions. It will distinguish between VAT exemptions with input VAT recovery, such as the export from Germany to a third country or another EU Member State or the supply of goods in the community, and VAT exemptions without input VAT deduction, such as the provision of leased real property or financial services (with/without the option of taxation).

 

The supply of goods is generally taxed at the place where the actual shipment begins. It is necessary to consider the specific rules of the place of supply and the place where VAT is levied, for example in the case of imports (if the supplier owes VAT on imports to Germany due to agreed conditions).

If a business/entrepreneur (taxpayer) sells goods to a customer registered in another EU member state for VAT purposes, and the sale involves the transfer of those goods from Germany (supplier or customer) to that EU member state, then the taxpayer is not charged VAT and can treat the supply as a zero rate for intra-EU transport. Suppliers must obtain their own and foreign customers' VAT identification numbers and quote on invoices. The supplier shall also declare the supply in the Community in a timely manner in the relevant German declaration form and obtain evidence of the shipment of the goods from Germany.

If a taxpayer sells goods to a customer who is not registered for VAT in another EU member state, and the sale involves the supplier shipping those goods out of Germany, the supplier will have to collect VAT from Germany.

If the taxpayer exports to customers outside the EU (entrepreneurs or private individuals) and the supplier arranges the transport of the goods, the supplier is not required to charge VAT.

 

As a general rule, with exceptions, services provided to entrepreneurs/taxpayers for business purposes (so-called B2B services) are provided where the recipient of the service is established. In the b2c case, for example, it depends on the type of supply and residence of the customer.

 

VAT registration and simplification

For foreign enterprises trading in Germany, the VAT registration threshold is zero for VAT /GST/ tax registered in their home country. Eu VAT registered companies sell goods to German consumers via the Internet, and the VAT registration threshold (remote sales) is €100,000 per year.

 

If the entrepreneur is dealing in taxable supplies in Germany, he or she needs to inform the German tax authority of the date on which the taxable activity begins; Businesses will be given a local tax registration number (the so-called Steuernummer).

If the taxpayer performs/receives intra-Community supplies in Germany, the German tax authorities will normally need to be informed of the date of commencement of such activities and the taxpayer will also be given a German VAT identification number (so-called Umsatzsteuer-Identifikationsnummer).

The same registration rules that apply to German entities also apply to non-German entities that provide taxable supplies in Germany.

 

There are some simplification rules to avoid VAT registration in Germany:

1. Reverse charging: Reverse charging mechanism for several goods or services applies to B2B business in Germany. In this case, the consignee of the goods (not the supplier) is liable for VAT.
2. Intra-community triangulation on commodity supply
3. OSS as a special tax/filing program for remote sales (B2C) within the community

 

As of July 1, 2021, One-Stop service (OSS) programs are available. OSS covers all services to EU consumers (B2C), as well as remote sales/supply of goods within the Community (B2C) to private buyers in the EU.

The OSS simplifies the VAT obligations of sellers of goods and services to private consumers across the EU because it allows them to:

All intra-EU remote sales of goods and the supply of business-to-consumer services are registered for VAT electronically in one EU Member State, thereby avoiding registration for VAT in more than one EU Member State;

Declare and pay VAT on all these goods and services in one electronic quarterly return;

Cooperate with the tax authorities of your own country or just one EU member state and use your own language, even if their sales are cross-border.

 

German VAT returns

Any company registered with the German tax authorities as a non-resident VAT trader must report taxable transactions through periodic filings (called returns).

Like all EU member states, Germany's VAT reporting calendar is calculated on an annual basis. This requires annual returns. In addition, quarterly VAT refunds are required if sales are between €1,000 and €7,500 per year. If you exceed this amount, you will need to submit it once a month. The exception is for newly registered companies, which must submit applications every month for two years.

Any German monthly or quarterly VAT declaration is due on the 10th of the month following the end of the period. Applications may be delayed by up to a month, but this requires cash in advance. The German annual VAT return summarizes all transactions for the year and is due on 31 May of the following year.

 

How does Germany recoup VAT credits?

If VAT input is greater than output (the VAT produced is greater than the VAT collected), a German VAT credit is generated. In theory, this is due to the return of VAT by registered enterprises. In the German VAT return, there is a check box to claim a refund, which should be refunded within three months. However, this may trigger a VAT audit by the tax authority. Otherwise, the credit will be rolled over to the next application.

 

Reporting requirements and penalty system

Entrepreneurs paying German VAT must file an annual VAT return each calendar year. In addition, most registered businesses must file (preliminary) VAT returns either monthly or quarterly (depending on the amount of VAT payable) during the year.

If an entrepreneur supplies goods from Germany to a VAT registered business in another EU Member State, the European Bill of Sales form (Summary statement) needs to be completed correctly electronically.

 

Intra-community reports are statistical records of intra-Community trade in goods (not services). VAT registered entrepreneurs who send and/or transport goods to EU Member States with a value exceeding a certain threshold (currently EUR 500,000 for exports and EUR 800,000 for imports) must submit monthly supplementary returns.

There is no penalty for not registering VAT on time. However, your business may incur late payment penalties, late filing penalties and interest (generally 0.5% per month after a 15-month grace period if you are charged with tax fraud; But currently lawmakers are discussing) about any unpaid VAT.

 

In Germany, in addition to the above penalties, there are penalties that apply to compliance failures, such as undisclosed activities or invoice custody obligations and defects or omissions in European sales notes.

German tax law does not involve any reasonable excuse, but exceptions can be made for penalties, which can be avoided by application if personal circumstances lead to a fine.

 

Tax authorities may add a late fee on the basis of the late fee declared in the VAT return. If VAT is not paid by the end of the due date, a late fee of 1% of the rounded amount of the late fee is generally payable for each month or part of the late fee. In some cases, mitigation may be applied for.

Where a tax return is filed late or fails to be filed, the tax authorities may impose a fine of late payment on top of the amount of tax payable. The penalty is capped at 10% of assessed VAT/inaccurate input VAT, up to a maximum of €25,000.

 

The amount of interest paid due to tax evasion is based on the amount evaded. The amount is multiplied by an interest rate of 0.5 percent per month (currently 6 percent per year) set by the General Finance Act (AO) on tax evasion. On the other hand, the flow of benefits ends in tax evasion. Tax fraud, also known as tax evasion, is a criminal offence in Germany and is regulated by the German Fiscal Code. Penalties for tax evasion depend on several factors and must be assessed on a case-by-case basis.

 

Invoice

According to the German VAT Act, there are formal invoice requirements. If the invoices do not meet all the necessary requirements, or if some instructions are incorrect, these invoices can be amended in different ways, such as by cancelling and reissuing (through what is known as a credit note), or by using an attached file and referencing the original invoice separately. In addition, due to European and German jurisdiction, tax authorities allow retroactive invoice corrections in certain circumstances to obtain input VAT that was not in full when the correct invoice was issued.

Electronic submission of invoices (e.g. by E-mail, computer fax) can usually obtain input VAT refunds under certain conditions.

Letters of credit - as well as invoice modifications - can be issued and it is possible to claim VAT already paid from the tax authority.

 

It is possible to pass self-invoicing provided that the entrepreneur has the consent of the business customer before doing so that the recipient will invoice the supplier, known as self-invoicing (for example, in practice usually consignment inventory cases).

Date of issue and storage of German invoice

German VAT invoices must be issued no later than 6 months after taxable supply. Invoices must be kept for 8 years. Germany, like all EU member states, now allows the use of electronic invoices under certain conditions.

 

German invoice requirement

The invoice must contain at least the following basic information:

 

Release date

 A unique, continuous number

Supplier VAT number

Detailed address of supplier and customer

A detailed description of the goods or services provided

Details of quantity of goods, if applicable

If the date of delivery differs from the invoice date, indicate the date of delivery

Net taxable value of supply

Applicable VAT rates and VAT amounts

Details of support for zero VAT - export, reverse charge or in-community supply

Total invoice.