VAT in Germany explained: Rates, rules and reporting obligations

 

VAT in Germany

All goods and services supplied by a business in Germany for consideration are subject to value-added tax (VAT)💬Mehrwertsteuer (MwSt) or Umsatzsteuer (USt). 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 German VAT Act.

The standard VAT rate in Germany is 19 %. Certain transactions qualify for a reduced rate of 7%. We explain these reduced-rate categories in a later section of this guide.

Mehrwertsteuer vs. Umsatzsteuer — when to use which

In everyday German, both terms refer to the same tax, but they are used in different contexts:

• Umsatzsteuer (USt) is the official legal term used in laws, tax returns, accounting, invoices issued to businesses and formal communication with authorities.
  → Think: B2B sales, administrative, accounting contexts.
• Mehrwertsteuer (MwSt) is the common everyday term used in consumer-facing contexts such as retail, price tags, advertising or customer communication.
  → Think: B2C sales, what you see on receipts and price tags in (online) shops.

Who has to pay VAT in Germany?

All businesses with an annual revenue of more than €22,000 in the previous financial year are liable for VAT.  Below this limit, no VAT is charged—if the business chooses to make use of the small business regulation.

VAT ID number

If you trade with businesses from other EU countries, you need a VAT ID number 💬Umsatzsteuer-Identifikationsnummer or USt-IdNr. Every invoice must include the VAT number of the invoicing party and the recipient. Read more about here.

 

Input tax in Germany

In Germany, VAT on goods and services purchased by a business can be deducted as input tax 💬Vorsteuer from the business’s VAT liability. The input VAT deduction is called 💬Vorsteuerabzug. Read about how input VAT deduction works.

 

When is VAT 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

 

Non-deductible

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

 

Target & actual taxation

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

• 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 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 input tax directly.

Actual taxation

In principle, debit taxation applies to all VAT payers. Actual taxation may be used by:

• 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 want to opt for actual taxation, your business must submit an application to the tax office within the prescribed time limit and without any formalities.

 

Reduced VAT

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

• Food
• 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 copyright act
• Products and services from non-profit, charitable or church businesses and organisations

 

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: VAT from gross amount

19 % VAT

Gross amount (119 %)	€2,000
Subtracting 19 % VAT	2,000 / 1.19
Net amount (100 %)	€1,680.67
VAT	€319.33

7 % VAT

Gross amount (107 %)	€2,000
Subtracting 7 % VAT	2,000 / 1.07
Net amount (100 %)	€1,869.16
VAT	€130.84

Example: VAT from net amount

19 % VAT

Net amount (100 %)	€2,000
Adding 19 % VAT	2,000 * 1.19
Gross amount (119 %)	€2,380
VAT	€380

7 % VAT

Net amount (100 %)	€2,000
Adding 7 % VAT	2,000 * 1.07
Gross amount (107 %)	€2,140 €
VAT	€140

 

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 process.

What are the accounting records for VAT and input tax?

Example 1: Cash sale of products
Cash to sales revenue + to VAT

Example 2: Sale of a used company car via money transfer
Bank to proceeds from the disposal of fixed assets to VAT

Example 3: Refund/credit note to customer due to defective delivery
Sales revenue + VAT on trade receivables

Transitory items

Amounts paid as transitory items 💬durchlaufender Posten 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.

VAT exemptions in Germany

Under Section 4 of the UStG, 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)

 

Average-rate taxation

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

 

Small business regulation

Smaller businesses can be excluded from VAT. If your revenue did not exceed €22,000 in the previous financial year and will not exceed €50,000 in the current year, you can apply for the small business regulation 💬Kleinunternehmerregelung. However, you still have to submit an annual VAT return to show that your turnover has not exceeded the limits.

If you choose to use the small business regulation, you must not invoice VAT nor deduct input tax. Plus, your invoices must include a legal note stating that you are not liable for VAT under § 19 UStG.

📌The small business regulation comes with upsides and downsides. Please consider this decision carefully because you can only opt out of the small business regulation every 5 years.

 

Advance return for VAT

Businesses who are not using the small business rule owners submit an advance VAT return 💬Umsatzsteuervoranmeldung, a provisional document. The actual final statement is only made with the annual tax return.

Typically, even small businesses now use accounting software or app. Make sure your chosen app has an electronic tax return function can be synced with the Federal tax tool ELSTER.

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 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.

Permanent extension

If you do not have enough time to complete your advance return, you can apply for a permanent extension 💬Dauerfristverlängerung. 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 special advance payment is not lost but is deducted from your annual VAT return liability.

 

VAT return

All entrepreneurs including small businesses, new businesses and others who just pay VAT annually 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 the input tax is deducted from the VAT received.

Offsetting against advance payments

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.

📌 All businesses should make reserves for VAT. Freiberufler, start-ups, small business, and annual payers, in  often get into trouble if they ignore possible back taxes and are unable to pay on time or at all.

Final payment

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

Late payment surcharges

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 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 put 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.

Read more details in our guide.

 

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.

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 and GOBD?

• Traceability of your business transactions
• Incoming invoices
• Invoice components
• Record of receipts
• Any unusual amounts or circumstances, e.g. unusually large discrepancies between the advance VAT return and the annual return

 

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 fair bit of leeway when it comes to its estimation—usually to the detriment of your business.

The result is an additional audit, which can be ruinous for many businesses. Complying with the law is your best defense. However, if you are being audited seek legal advice.