Especially at the beginning of self-employment, many entrepreneurs ask themselves whether they want to use the “Kleinunternehmerregelung” (which translates roughly to small business regulation) to avoid a lot of the bureaucracy that comes with having a business in Germany.
This decision can’t be flippant, as once it’s made, it sticks for five years. Take the time to figure out whether the application of the Kleinunternehmerregelung is worthwhile for you. To help you do a necessary cost-benefit analysis, we’ve put together this article so you can learn about the regulation, its advantages and how to apply for it.
- What is the Kleinunternehmerregelung?
- What are Umsatzsteuer & Vorsteuer?
- How can I apply for the Kleinunternehmerregelung?
- What are the profit & turnover limits?
- What are the advantages?
- What are the disadvantages?
- How much tax will I have to pay?
- What should my invoice include?
- Other features
- How can I stop being a Kleinunternehmen?
- Kleinunternehmer vs. Kleingewerbe
- Want to know more about accounting?
For newly established businesses, it can be difficult to establish themselves in the market and find a secure source of income. For these cases and also for small businesses that do not exceed a certain turnover limit, the government created the Kleinunternehmerregelung. This can make the day-to-day business of sole proprietorships (freelancers, Freiberufler, Kaufleute), GbRs or small UGs much easier, by waiving VAT. That is, it gives businesses with low turnover the right to be treated to a certain point as non-entrepreneurs.
As an entrepreneur, you are free to choose whether or not to make use of the Kleinunternehmerregelung. However, if you reject this, you are bound to the standard VAT obligations for five years. Needless to say, it’s important to weigh up whether it makes sense for your business.
As a rule, sales to customers have to include Umsatzsteuer (VAT). Every business collects VAT on behalf of the Finanzamt (tax office) and then pays it to them after the Umsatzsteuervoranmeldung (advance VAT return). Let’s unpack how VAT works below.
- VAT is a consumption tax
- With every transaction, VAT is collected from the customer by the entrepreneur.
- This VAT must be passed on by the business to the tax office.
The business can deduct the VAT that it has already paid to the tax office from the VAT debt calculated each month (“payment burden”). This is called Vorsteuer (input tax).
An entrepreneur – let’s call him Alex – issues an invoice for the amount of €1,000 and charges 19% VAT. The result is that the customer pays €1,190. Meanwhile, Alex pays an invoice from a company called Big Trees for €357; the net amount is €300, and the remaining €57 is the VAT portion.
How must the payment burden to the tax office be calculated? Let’s break it down:
- Alex has collected €190 in VAT.
- Alex can claim €57 of VAT from Big Tree’s invoice as input tax.
- The input tax reduces the tax payable: 190 – 57 = €133 remaining tax payable.
- Alex must pay €133 to the tax office.
How much VAT is due for which product?
For each price of a product or service, you have to determine the appropriate VAT rate. To do this, use this formula:
Turnover * VAT rate = VAT
The standard VAT rate is 19%. But, for some goods and services, a reduced tax rate of 7% applies as per §12 UStG. The main things that have a reduced VAT rate include:
- Newspapers and magazines
- Public transport
- Transfer of copyrights
- Accommodation in hotels, hostels or campsites
- Tickets for theatres, concerts or museums
- Agricultural products: 10.7%
Forestry products: 5.5%
VAT doesn’t apply to the following groups of goods and services:
- Sea and air transport
- Foreign deliveries
- Credit brokering
Each invoice must include the appropriate VAT rates and amounts for the goods and/or services ordered.
Kleinunternehmen can be exempt from VAT regulations
Section 19(1) of the UStG (VAT Act) establishes that businesses with a low turnover can be exempt from VAT regulations. That is, the Kleinunternehmerregelung – the regulation that entitles Kleinunternehmen to sell their goods or services free from VAT.
Can I deduct anything if I use Kleinunternehmerregelung?
The bad news is: you can’t deduct anything if you’ve opted to use the Kleinunternehmerregelung. But, the good news is: a chunk of the bureaucratic work gets cut out of your business administration workload:
- No monthly or quarterly advance VAT return
- No distinction between gross and net contributions
- No determination of the VAT rate (0%, 7% or 19%)
Is my business eligible?
To use the Kleinunternehmerregelung you have to, naturally, be a Kleinunternehmen. This usually depends on a business’s turnover. That is, your business is klein (small) by the measure of its lower revenue.
Since 1 January 2020, the turnover limits have increased. Enterprises with an annual turnover of up to €22,000 (previously capped at €17,500) can apply to the tax office for a Kleinunternehmen classification as per § 19 UStG.
To do this, you must forecast your turnover. Whatever you do, don’t overestimate your expected turnover. If your forecast is too high, you’ll have to pay more tax than necessary upfront, making your business less liquid. On the flip side, if you lowball your estimate, you have to pay VAT retroactively.
Do I need to do anything special to apply?
There are no special prerequisites to use use the Kleinunternehmerregelung – except, of course, the turnover limits. However, if you are still in the early stages of your business, your turnover will probably be below these caps anyway.
Where do I register for the Kleinunternehmerregelung?
To make use of the Kleinunternehmerregelung, tick it in line 7.3 of the tax registration questionnaire that you have to complete for the Finanzamt (tax office) after you do your Gewerbeanmeldung (trade registration). This is all you need to do to register to apply for the Kleinunternehmen (small business) status and thus use the Kleinunternehmerregelung. Registration works the same for all legal forms.
For new businesses:
- In the year of application, the expected total turnover may not exceed €22,000.
- In the following year, the cap is €50,000.
For already established businesses:
- In the previous year of application, the total turnover may not exceed €22,000 (actual turnover).
- In the current year, the turnover may not exceed €50,000 (planned turnover).
Please note: If you did not start your business in January, the projected turnover must be extrapolated to the full year (12 months). And if you exceed your permitted turnover as a small business in the current year (€22,000 or €50,000), standard taxation applies from 1 January of the following year.
What happens if I exceed the turnover limit?
As soon as you exceed the turnover and profit in the previous year (see table), you can no longer use the Kleinunternehmerregelung in the following year. From then on, you will be treated like an entrepreneur for tax purposes and must report VAT on your products or services.
Is there any way I can deduct VAT?
If you no longer use the Kleinunternehmerregelung for yourself and therefore have to charge your customers VAT, you can also deduct Vorsteuer (input tax). As long as you make use of the Kleinunternehmerregelung, you’re exempt from paying VAT and therefore not entitled to deduct input tax.
How many employees may I employ?
Even as a Kleinunternehmen, you can employ staff. However, it may be difficult to afford the costs of one employee given the turnover limits for this type of enterprise. After all, each employee must be paid not only the minimum wage but also sick pay and holiday days. Seriously calculate if you can afford the costs before you hire someone. If your turnover is too low, the tax office could accuse you of hobbyism (activity without the intention of making a profit), and then it will be difficult to get any tax benefits at all.
For the most part, Kleinunternehmen can skip most of the VAT-related administrative work. Plus, if your business isn’t entered in the Handelsregister (commercial register), it can also use the simplified accounting method known as EÜR. Also, you don’t have to worry about distinguishing between gross and net amounts.
The Kleinunternehmerregelung eliminates many of the bureaucratic tasks of the standard VAT taxation – only the annual VAT return is required. Nevertheless, you can’t slack off when it comes to bookkeeping because a surprise audit by the tax office can happen at any time.
The following work is not required:
- Determining the appropriate VAT rate for the delivery (0%, 7% or 19% depending on the product/service).
- Invoicing customers incl. the appropriate tax rate and VAT amount
- Receipt of the invoiced VAT
- Calculation of the input tax portion with cash receipts, incoming invoices and purchase receipts
- Compliance with the UStG’s invoicing regulations on the possible endangerment of customers’ input tax deduction
- Monthly sending of an electronic advance VAT return to the tax office (determination of the payment burden: VAT receipts minus input tax already paid)
- Transfer of the payment burden calculated from the advance VAT return to the tax office.
- Transfer of the remaining payment burden, if any, after the annual VAT return.
What you do have to do as a Kleinunternehmen is:
- The Jahres-Umsatzsteuererklärung (annual VAT return) – in which it’s enough to declare the taxable turnover of the last two years.
Example: You became self-employed at the beginning of the year. Your investments in the first year amount to €15,000 gross. The invoice with and without the use of the Kleinunternehmerregelung would therefore look as follows:
|With the Kleinunternehmerregelung||Without the Kleinunternehmerregelung|
|VAT (€15,000 x 19%)||€0||€2,850|
|minus input tax refund||€0||– €950|
|VAT payment burden||€0||€1.900|
This is an example of how in some cases it can be worthwhile to apply for the Kleinunternehmerregelung as in this instance you’d save €1,900.
Another example: A Kleinunternehmen called Albatross sells its self-manufactured tables to private individuals for 119 € including 19 % VAT. The cost of the materials is €50. While the company Bluebird, who is liable for VAT, also sells tables for the same price and with the same cost of materials:
- Albatross earns €69 at the bottom line.
- Bluebird is left with only €50, since €19 (= 19%) of the income must be paid to the tax office.
- A earns €19 more from the table than B thanks to the small business status.
The Kleinunternehmen status works well in this situation because Albatrose can also offer its goods more cheaply to private customers due to the omission of VAT. However, even though this can be a big plus it has to outweigh the possible downsides for your business.
The Kleinunternehmerregelung has many advantages, but, as with most things in life, there’s a catch: You can’t deduct input tax from VAT, as this is not levied in the first place. In the end, buying things from other businesses are more expensive than it could be otherwise.
This is a big downside for companies that operate in the B2B sector. Your customers cannot claim input tax from your invoice because none is declared. In the end, your customers may prefer to buy from another company.
Before applying for the Kleinunternehmerregelung, be sure to crunch the numbers. If your input tax refund exceeds the VAT, don’t apply for it. This is often the case when you make larger investments as a founder, especially at the beginning of your business.
Example: Business ABC has bought a shelf in its office. The invoice is €100 plus 19% VAT. So it pays €119 for the shelf. Since ABC is a Kleinunternehmen, it can’t get the €19 of VAT it paid refunded by the tax office because it doesn’t submit Umsatzsteuervoranmeldung (advance VAT returns).
Also, VAT can be levied retroactively if the annual turnover is significantly higher than the turnover limit. If this happens, the Kleinunternehmerregelung becomes invalid, and regular taxation is levied in the following years. In other words, you have to pay the regular amount of VAT.
Also, bear in mind that you must state your Kleinunternehmen status in your invoices (see below). Customers and business partners must be informed that you are making use of the tax advantages. Such a notice may make you appear less professional and deter potential customers.
Gemäß § 19 UStG wird keine Umsatzsteuer berechnet.
(As per § 19 UStG, no VAT is charged)
Alternatively, you can use modified wording; however, the mention of § 19 UStG must be unambiguous in it. Possible alternative formulations are:
Kein Ausweis von Umsatzsteuer, da Kleinunternehmer gemäß § 19 UStG.
(No display of VAT, as the Kleinunternehmer per § 19 UStG.)
Als Kleinunternehmer im Sinne von § 19 Abs. 1 UStG wird keine Umsatzsteuer berechnet.
(As a small entrepreneur within the meaning of § 19 (1) UStG, no VAT is charged.)
Gemäß § 19 UStG enthält der Rechnungsbetrag keine Umsatzsteuer.
(Per § 19 UStG, the invoice amount does not include VAT.)
For businesses buying a high volume of goods, obviously, the Kleinunternehmerregelung is not an optimal choice. For example, if you are a retailer, you regularly buy goods, but you are not allowed to reclaim the VAT included on the invoice from the tax office.
Lastly, think about how the decision will affect your business in the long term. That is, the Kleinunternehmerregelung allows you to save taxes initially, but in the long run – especially if your business grows – it can have a big downside.
Since the Kleinunternehmerregelung doesn’t affect the determination of profits or other types of tax, you fundamentally pay the same taxes as all other businesses. The tax rate for Kleinunternehmen differs only in terms of Gewerbesteuer (trade tax):
- Einkommensteuer (income tax): Kleinunternehmen must also pay tax on their profits. Income tax is assessed on the profit (income – expenditure). Furthermore, the basic tax-free amount of €9,408 for single persons and €18,816 for married persons and persons in a registered civil partnership applies (as of 2020).
- Gewerbesteuer (trade tax): Partnerships and sole proprietors are entitled to a tax allowance of €24,500. Since the Kleinunternehmerregelung applies up to a maximum turnover of €22,000, you don’t need to worry about this tax.
- Umsatzsteuer (VAT): As you do not have any VAT revenue as a Kleinunternehmen, you can skip the monthly or quarterly advance VAT returns. Nevertheless, many tax offices still require an annual VAT return (Germany <3 paperwork!). However, you only have to declare that you have not collected any VAT.
First and foremost, although you can’t include VAT on your invoice, there are still VAT regulations that apply. That is, you may only list the gross price of the product or service in your outgoing invoices (the invoices that are sent to your customers after the purchase) without VAT rates or VAT. This price listing prevents a recipient of the invoice who is entitled to deduct input tax from making deductions with your invoice.
The following mandatory information must be included on your invoice:
- Your name and address
- Tax number
- Name and address of the customer
- Date of invoice or issue
- Invoice number
- Date of service or delivery (this can be replaced by stating that the invoice date and the date of service/delivery are identical).
- Type and quantity of the product or service (usual trade description)
- Price (without VAT)
- Note that as per § 19 para. 1 UStG no VAT was charged
Furthermore, you should also remember that even as a Kleinunternehmen you are obliged to issue invoices within six months in compliance with § 14 Paragraph 2 Sentence 1 UStG if you provide a service to another business.
Keeping a record of earnings
Although Kleinunternehmen have a little less accounting than other businesses bookkeeping is still a must. Section 65 of the UStDV (VAT implementing regulation) says they have to do the following:
- Values of the consideration received for the supplies and other services performed by them.
- Other services within the meaning of § 3 Para. 9a No. 2 UStG
Make sure you comply with the statutory retention periods for your records, as well as for all other business documents. The record retention period in Germany is ten years. The period begins at the end of the year in which the invoice was issued.
Low-value assets (GWG)
When determining profit, always take into account your business expenses at their gross prices (including VAT). And, observe the net value limit of €800 (as of 2018). This means you can claim purchases worth up to €952 (€800 + 19% VAT) for tax purposes in the first year. These acquisitions are considered low-value assets.
Using part of the revenue for private use
As a rule, private use of your business’s revenue (e.g. using the business telephone or company car for personal reasons) isn’t taken into account when determining the amount of annual turnover.
But! If you were subject to standard taxation in the previous year and claimed input tax on the acquisition of the respective asset you’re using for additional non-business-related reasons, you must take the percentage of the personal use into account. This can get tricky, so be sure to discuss the ins and outs of it with your tax adviser.
If you switch to standard taxation and still have inventory left over from your time as a Kleinunternehmen, you must in principle claim input tax retrospectively (§ 15a para. 2 UStG). However, this only applies if the input tax portion of an individual asset exceeds €1,000 (§ 44 para. 1 UStDV). As always, it’s best to clarify things with your tax adviser.
Both voluntary and involuntary use of the Kleinunternehmerregelung is possible. Involuntary revocation occurs when the actual turnover is exceeded. However, the voluntary switch to standard taxation is possible at the turn of each year.
But, there’s a catch: You’re bound by this decision for the next five years. This is what you have to do to make the change successfully:
- The tax office should be informed of the change via a short (physical) letter.
- You may have to apply for a VAT-ID number in time for the change. You will need this if you receive or deliver goods from other EU countries or generally do business with companies abroad.
- The most important customers should be informed about the change.
If orders and invoices occur close to the date of the bill of exchange, please note that the decisive date is the date on which the service was rendered or the goods were delivered. If this date is later than the bill date, VAT must be added to the invoice item, otherwise not.
Example of a change in taxation: A good or service is delivered or provided in 2020, the invoice is written in 2020, but payment is not made until 2021. In this case, the invoice may not contain/show VAT because the good/service was delivered/provided in 2020 when the entrepreneur was still using the Kleinunternehmerregelung.
Although the terms are often used interchangeably, there is a clear distinction between Kleinunternehmer and Kleingewerbe.
Kleinunternehmer can be Gewerbetreibende (traders), kaufmännische Betriebe (commercial/registered merchant enterprises) or also Freiberufler (liberal professionals). The prerequisite is the above-mentioned turnover limit. The legal basis for this is the UStG (VAT Act).
das Unternehmen nach Art und Umfang einen in kaufmännischer Weise eingerichteten Geschäftsbetrieb nicht erfordert.
which translates to:
the nature and extent of the business do not require a merchant-like business structure.
In other words, this means that the business is not classified by the Finanzamt as a Kaufleute – i.e., Kaufmann or Kauffrau – which roughly translates to “registered merchants”. If you have your self-employment activity is classified as “gewerblich” and not “freiberuflich” then the tax offer will decide whether the business is a “kaufmänisch” or is, in fact, “kleingewerblich”. That is, does the business have the characteristics of a Kaufleute or a Kleingewerbe? (The decision is usually based on the size of the business.) Similar to the Kleinunternehmer there is bureaucratic relief (mostly in the form of simplified bookkeeping) that comes with this legal status, but it’s a different thing from the Kleingewerbe and has its own set of legal regulations that are not VAT focussed.
The Kleinunternehmerregelung has its advantages and disadvantages. As an entrepreneur, you are free to decide whether you want to benefit from simplified VAT and accept the disadvantage of not being able to deduct input tax. Bear in mind that if you don’t opt into the Kleinunternehmerregelung, you are locked into that decision – and the standard tax rate – for five years.
The following table summarises for whom the Kleinunternehmerregelung can be worthwhile:
|Type of business||Is the Kleinunternehmerregelung worthwhile?||Reason |
|Self-employed professional |
|No||In the long run, the aim is to generate higher income. The Kleinunternehmerregelung doesn’t align with this goal.|
|B2B businesses |
|No||You have to waive input tax deductions which may put off a lot of potential customers. |
|Retail businesses||Yes||No VAT means lower end-customer prices giving your business a competitive edge.|