Input VAT deduction in Germany simply explained

What is the input VAT deduction?

When your company purchases goods or services from other businesses, you pay VAT on those purchases. This VAT is called input tax. At the same time, your company charges VAT to its customers when issuing invoices.

The input VAT deduction allows you to offset the VAT paid on business expenses against the VAT you owe to the tax office. Only the difference — the net amount — is paid to the tax authorities.

In practical terms, this means that businesses can purchase goods and services without bearing the VAT cost, as long as the purchases are exclusively business-related. Private expenses are not eligible for an input VAT deduction.

How to calculate the input VAT deduction

Your VAT payable or VAT credit is calculated by comparing the VAT you collect from your customers with the VAT you have paid on business expenses.

A positive result means you have a remaining VAT liability that you must pay to the tax office.

A negative result means you have paid more input tax than you collected in VAT. This creates a VAT credit, and you will receive a refund from the tax authority.

Requirements for claiming the input VAT deduction

The input VAT deduction is regulated by the VAT Act. The tax office will only accept your deduction if certain conditions are met:

• You do not use the small business regulation and therefore charge VAT on your invoices.
• The input tax you deduct comes from incoming invoices and/or credit notes issued to your business.
• The invoices you use for deduction meet the legal minimum requirements (complete mandatory invoice details depending on the invoice amount).
• You properly store the original invoices and can provide them to the tax authorities on request.

Which invoices are eligible for deduction?

Not every invoice automatically qualifies for input VAT deduction. The VAT rules define which types of transactions are eligible. For example, imagine you run a small shop selling fresh fruit and vegetables:

• VAT on supplies and services (e.g. payments received for goods supplied to a local restaurant).
• VAT under the reverse charge mechanism (e.g. invoices for rented equipment from another EU country where no VAT is shown on the invoice).
• VAT on goods removed from a VAT warehouse.
• Import VAT on goods from non-EU countries (e.g. payment for a shipment of mangoes from South America).
• VAT on intra-EU acquisitions (e.g. payment for goods delivered from another EU country).

All invoices used for deduction must contain the legally required basic information.

How the input VAT deduction works

In principle, the right to deduct input VAT arises on the date the goods or services are supplied. The actual payment date is usually not relevant.

The main exception applies to advance payments and down payments. In these cases, the input VAT becomes deductible on the date of payment. Whether you use the cash accounting method or the accrual method does not change the basic rule for when input VAT can be deducted.

Input VAT deduction in the advance VAT return

If you file regular advance VAT returns (monthly or quarterly), you must enter the relevant amounts for the input VAT deduction in the correct fields. Typically, the following values are reported:

• VAT paid on supplies and services received from other businesses.
• Input VAT on intra-EU acquisitions of goods.
• Import VAT paid on goods from non-EU countries.
• Input VAT from reverse charge transactions where your business is the service recipient.
• Input VAT at flat rates (e.g. for agricultural and forestry businesses, if applicable).
• Adjustments to input VAT (e.g. corrections due to changes in use).
• Input VAT for intra-EU supplies of vehicles, if relevant.

You declare your turnover as net amounts (without VAT), while the tax office only wants the sum of the VAT amounts for input VAT and output VAT in the return.

If you only file an annual VAT return, you claim your input VAT deduction there instead of in advance returns.

Non-deductible invoices and expenses

As a general rule, expenses that serve your business activity are input VAT deductible. However, there are important exceptions. Certain business expenses are not eligible for deduction, including:

• Benefits to persons who are not employed by the company.
• Private perks for business owners.
• Expenses related to improper or illegal activities.

Examples of non-deductible business expenses

• Gifts with a total value of more than €35 per recipient per year (if not intended for employees).
• Business meals that exceed the portion considered reasonable and allowable.
• Expenses for hospitality venues owned by the business and not intended for employees.
• Costs for hunting, fishing, sailing, motor yachts and similar entertainment activities.
• Additional meal expenses that exceed statutory flat rates.
• Commute expenses that exceed statutory flat-rate limits.
• Home office expenses if the home office is not the centre of business activity.
• Expenses related to personal lifestyle, such as private rent, clothing or personal subscriptions.
• Compensation payments to external shareholders.
• Regulatory fines or penalties.
• Interest on tax evasion for unpaid taxes.
• Bribes or illegal payments.
• Surcharges for unrecorded business transactions.

Common mistakes with input VAT deduction

New entrepreneurs often struggle with the input VAT rules, especially when it comes to invoices and documentation. Many mistakes can be avoided by closely following the formal requirements.

Invoices that do not meet legal requirements

Many order confirmations, receipts or tickets do not meet the legal standards for a VAT-compliant invoice. This is common with purchases from abroad or subscription-based services.

In many cases, you can request a proper invoice afterwards. Typical examples where a corrected or detailed invoice is often needed include:

• Airline tickets
• Delivery notes or receipts for goods
• Monthly licences for tools and software

Only invoices that contain all mandatory information can be used to claim input VAT. Incomplete documents may lead to the tax office rejecting your deduction.

Office rent is not deductible

A rental agreement is not an invoice, so office or shop rent cannot be claimed as input VAT. To make it deductible, your landlord must issue a proper VAT-compliant invoice.

Incorrect invoice address

Contracts signed in the founder’s personal name before forming the company — such as mobile phone contract—produce invoices that qualify as private expenses, not business expenses. Update these contracts to the company name to make the invoices deductible.

Poor invoice legibility

Invoices printed on thermal paper often fade and become unreadable. Always scan and store a digital copy so the tax office can verify the document.

Ambiguous service descriptions

Vague or incomplete service descriptions can lead to a rejected deduction. Ensure all invoices contain clear, specific descriptions of goods or services.

Missing tax number or VAT ID

Invoices over €250 must include the issuer’s tax number or VAT ID. For invoices from EU companies, the VAT ID is mandatory. Always check invoices for completeness and request a corrected version when needed.

Incorrect posting of input tax

Misposted business transactions can block your deduction. Always record incoming invoices in the input tax account, not in the VAT (payables) account.

A qualified tax adviser can help ensure that your input VAT registration and deductions are handled correctly.