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Value Added Tax in Germany

Value Added Tax (VAT) is a broad-based consumption tax levied on the sale of all supplies of goods and services in Germany. VAT is paid every time a customer buys a taxable good or service from a VAT-registered business. Suppliers essentially act as VAT collection agents.

The VAT system in Germany is based on the EU VAT Directive and was implemented into German law through the Value Added Tax Act of 1980 (Umsatzsteuergesetz (UStG)). The 16 German states administer the tax system in Germany.

To whom and what does the Value-added Tax apply?

Value Added Tax applies to you if you, as a business entity or individually, carry out any economic activity in any place in Germany. There is no VAT registration threshold in Germany, meaning, when you begin an activity in Germany, you must notify the German VAT authority that you are liable for registration. There are two distinct types of tax numbers used in Germany:

1. a general tax number (Steuernummer) and

2. a VAT Identification Number (Ust-IdNr).

Your general tax number is registered at the local tax office that is responsible for your tax affairs. The tax authorities use this number for internal management and coordination purposes. Your tax number must be used on all preliminary VAT returns, annual VAT returns, and all correspondence with local tax authorities. Once you have received a general tax number, you can apply for a VAT Identification Number through the Federal Office of Finance in Saarlouis. You VAT Identification Number is used for intra-Community transactions.

Germany does allow group registration for subsidiaries that are financially, economically, and organizationally integrated into a parent entity. In order to register as a group, the parent entity may be any type of legal entity, including a corporation, a general partnership, or a sole entrepreneur, but the subsidiary must be a corporation.

If these requirements are met, the subsidiaries and the parent are automatically treated as a group for VAT purposes and the subsidiary is no longer considered an entrepreneur or separate taxable person/business. As a result, intra-group transactions are outside the scope of VAT and no VAT is charged. Furthermore, the subsidiary is no longer required to file separate VAT returns and its transactions are reported through the parent’s VAT return. This only applies to domestic transactions between the group entities (that is, business within the scope of German VAT). In addition, the effects of the VAT grouping are limited to Germany. VAT grouping does not apply to certain intra-Community compliance obligations. Each subsidiary must have its own separate VAT Identification Number and must file its own European Sales List, if it carries out intra-Community supplies.

Non-established businesses are not required to register for German VAT if all of their supplies are covered by the reverse-charge procedure (under which the recipient of the supply must self-assess VAT). A non-established business is a business that has no fixed establishment (place of business) in Germany. The reverse-charge procedure applies to most transactions. It does not apply to supplies of goods located in Germany (except supplies of installed goods) or to supplies of goods or services made to private persons. In principle, if the reverse charge does not apply, a non-established business must register for German VAT.

VAT applies to the following transactions:

• the supply of goods or services made in Germany by a taxable person;

• the intra-Community acquisition of goods from another EU Member State by a taxable person;

• reverse-charge supplies, including supplies of services and supplies of goods with installation services;

• the self-supply of goods and services by a taxable person; and

• the importation of goods from outside the EU, regardless of the status of the importer.

Under the VAT Package Amendments, from January 1, 2020 on, services rendered to foreign businesses are taxable in their home country rather than Germany.

How do I comply with VAT?

Registration

There is no registration threshold in Germany, therefore, all taxable persons and businesses who carry out business transactions must register for VAT in Germany. It generally takes 4-6 weeks to receive your general tax number from the appropriate local tax authority. After you receive your general tax number, you will receive your VAT Identification Number from the Federal Central Tax Office (Bundeszentralamt für Steuern). You usually must go through the appropriate local tax authority to get a general tax number but some states now allow this process to be completed online. There is no late registration penalty, however, there are penalties for late tax filings and late payments.

VAT Rates

There are currently two VAT rates in Germany.

• a standard rate, currently 19% and

• a reduced rate, currently 7%.

The standard rate applies to all goods and services, unless they are specifically classified as a reduced rate or exempt item.

Examples of reduced rate goods and services are:

• food;

• books and newspapers;

• cultural services;

• passenger transport, with the exception of transport by ship;

• hotels and lodging; and

• agricultural products.

Examples of exempt goods and services include:

• land and buildings;

• financial transactions;

• insurance;

• medical services; and

• education.

You may be permitted to reclaim the VAT you incur through your own business purchases and expenses, i.e., the VAT you pay when purchasing supplies for your business.

You can only reclaim VAT for purchases you made for your business, they cannot be for personal purchases. In Germany a 10% rule will apply to determine whether VAT can be reclaimed, that is, if the asset is used for more than 10% business purposes, VAT can be reclaimed. Examples of items you cannot reclaim VAT for include: business gifts (when the value is over €35) and your employees’ home phone or private cell phone bills. You can reclaim VAT for the following:

• advertising

• books

• hotel or lodging;

• restaurant meals for travelling employees (business trip);

• 100% purchase, lease or hire of cars by corporations, partnerships or sole proprietors (with VAT chargeable on employee private use); and

• transport services

• Office Supplies and equipment

• Marketing and promotional materials

• Professional fees (e.g. accountant, lawyer)

• Software and subscriptions used for business

VAT Returns and Payment

In general, VAT returns are filed quarterly, but monthly returns must be filed if VAT owed for the previous year exceeds €7,500 and during the first two years after VAT registration. Preliminary VAT returns must be filed online.

Invoicing and Keeping Records

Generally, you must provide taxable persons and legal entities with VAT invoices within 6 months of the goods or services being rendered. Invoices for intra-Community supplies and services subject to reverse charge rendered by by taxable persons who are resident to the EU must be issued within 15 days following the month in which the supplies or services are rendered. Invoices are not always required for supplies to private persons. For example, if the total amount of the supply is less than €250, a receipt can be issued instead of an invoice. Invoices must be kept for at least 10 years. Online invoicing is permitted.

What are the Penalties for Noncompliance?

Late VAT payments are subject to a penalty that is calculated based on the default interest rate set by the European Central Bank (ECB) plus an additional 2% points. A late VAT return filing is subject to a penalty of up to 10% of the assessed tax amount up to a maximum of €50,000. An enforcement fine of up to €25,000 may be imposed in addition to the penalty.

EU VAT Directive

Value Added Tax Act of 1980 (Umsatzsteuergesetz (UStG)

Federal Central Tax Office

Online VAT Filing