What is the difference between Vorsteuer (input tax) and Umsatzsteuer (VAT)?
What is the Kleinunternehmerregelung (small business regulation)?
What is the difference between Istversteuerung (actual taxation) and Sollversteuerung (debit taxation)?
Get the answers in this guide to VAT in Germany. We’re the market leader in helping international entrepreneurs in Germany.
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All goods and services supplied by a business in Germany for consideration are subject to VAT. 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 UStG (VAT Act).
The statutory VAT rate in Germany is currently 19%. Certain transactions are subject to a reduced VAT rate of 7%. We’ll explain the types of transactions that qualify for the reduced rate below in a later section.
Businesses with a revenue of more than €22,000 in the previous financial year are liable for VAT. This obligation is called Umsatzsteuerpflichtig in German. Below this limit, no VAT is charged. This limit has been increased as of 1 January 2020. For the 2019 tax year, the old limit of €17,500 still applies.
If you trade with businesses from other EU countries, you need a VAT number. An invoice must always include the VAT number of the invoicing party and the recipient.
In principle, all these terms refer to a sales tax. Vorsteuer (input tax) is the Umsatzsteuer (VAT) charged to a business. Colloquially, Umsatzsteuer is often referred to as Mehrwertsteuer (value-added tax).
Businesses sell and purchase goods and services. In Germany, VAT on goods and services purchased by a business can be deducted as Vorsteuer (input tax) from the business’s VAT liability. The input tax deduction is called Vorsteuerabzug.
Firstly, the invoices you issue (either original or electronic) must comply with the legal requirements and contain all the mandatory information. A common problem, even for large, established businesses, is incorrect invoices from other invoicing parties. To avoid this pitfall, consider creating a checklist for screening all incoming invoices.
Electronic invoices must be in a tamper-proof format, most commonly PDF. Suppose you scan invoices as part of your digital accounting. In that case, you need to ensure the authenticity of the origin, the integrity of the content and the legibility of the invoice so that the tax authority will accept it.
If you are exempt from VAT as a Kleinunternehmer (small trader), you are generally not allowed to deduct input tax. Read more about this in the section on the Kleinunternehmerregelung below.
There are several special and exemption regulations on this issue (§ 4 para. 5 no. 3 EStG).
The timing of your VAT liability will depend on whether you opt for Sollversteuerung (target taxation) or Istversteuerung (actual taxation).
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, therefore, 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 Vorsteuer (input tax) directly.
In principle, debit taxation applies to all VAT payers. Actual taxation may be used by (§ 20 UStG):
If you wish to opt for actual taxation, you must submit an application to the tax office within the prescribed time limit and without any formalities.
The standard VAT rate is 19%. However, a reduced VAT rate of 7% (§ 12 UStG) applies in certain cases.
For example, the reduced tax rate of 7% applies here:
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:
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 (bookkeeping) process.
Barverkauf von Produkten
Cash sale of products
Kasse an Umsatzerlöse + an Umsatzsteuer
Cash to sales revenue + to VAT
Verkauf eines gebrauchten Dienstwagens gegen Überweisung
Sale of a used company car against transfer
Bank an Erlöse aus dem Abgang von Anlagevermögen + an Umsatzsteuer
Bank to proceeds from the disposal of fixed assets + to VAT
Erstattung / Gutschrift an Kunden aufgrund einer defekten Lieferung
Refund/credit note to customer due to defective delivery
Umsatzerlöse + Umsatzsteuer an Forderungen aus Lieferungen und Leistungen
Sales revenue + VAT on trade receivables
Amounts paid as durchlaufende Posten (transitory items) 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.
Under Section 4 of the UStG, revenue certain transactions are expressly exempted from VAT:
Section 24 of the VAT Act states that tax for agricultural and forestry businesses is calculated using flat-rate amounts (average rates). This is called Durchschnittssatzbesteuerung in Germany.
Is it legal to pay VAT in instalments? This question has been the subject of several court cases. Read the latest tax ruling on VAT instalment payments here.
If you make use of the Kleinunternehmerregelung, you must not invoice your customers for VAT or deduct input tax. Moreover, your invoices must include a note stating that you are not liable for VAT under § 19 UStG.
It’s good to know that even as a Kleinunternehmer (small trader), you can opt-in for VAT. This means you can voluntarily subject yourself to the same rules that apply to “larger” businesses. This begs the question: Isn’t it always worth applying the small business rule?
There are two reasons not to use this small business scheme:
Business owners must submit a Umsatzsteuervoranmeldung (advance VAT return). ‘Voranmeldung’ (advance return) means that this document is provisional. The actual final statement is only made with the Jahressteuererklärung (annual tax return).
Typically, even small businesses now use accounting software (or use the services of an accountant). These accounting programmes usually have an ELSTER function. You simply link it to your ELSTER account by entering your user name and the Elster key you have received.
Note: ELSTER stands for ‘Elektronische Steuererklärung’ (electronic tax return) and is the tax authorities’ portal for submitting all tax returns, including the VAT advance return.
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.
The statutory deadlines for filing the advance return depend on your VAT charge for the previous Geschäftsjahr (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.
If you do not have enough time to complete your advance return, you can apply for a Dauerfristverlängerung (permanent extension). 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 Sondervorauszahlung (special advance payment) is not lost but is deducted from your annual VAT return liability.
All entrepreneurs – including Kleinunternehmer (small traders), Existenzgründer (new businesses) and Jahreszahler (annual payers) – 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 VAT paid (the input tax) is deducted from the VAT received – and this is done conclusively for the entire financial year.
The result will be deducted from your advance VAT payments (plus, where applicable, the special advance payment for the permanent extension). 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.
Tip: All businesses should make provisions for VAT. Freiberufler, start-ups, Kleinunternehmer, and Jahreszahler, in particular, often get into trouble if they ignore the tax issue for a whole year and the tax office demands several thousand euros in arrears after they submit their Jahresumsatzsteuererklärung (annual VAT return).
The final payment is due one month after filing the return without having to make a separate request.
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 Säumniszuschlag (late payment surcharge).
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:
Here, you can find out more about the OSS procedure, which enables the simplified payment of VAT from intra-community transactions from other EU countries.
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:
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? If you keep your books digitally (as is common today), you will also meet the standards of the German principles of orderly bookkeeping and document archiving with digital systems (GoBD).
The auditors will also check the traceability of your business transactions: whether the incoming invoices are plausible and show the legal invoice components, what the background of any cash transactions may be and whether all receipts have been recorded. It also looks at any circumstances that are unusual in nature or amount. Suspicious circumstances include, for example, unusually large discrepancies between the advance VAT return and the annual return or cash payments for large invoice amounts.
If the external audit reveals irregularities and violations in your accounting, the tax office can estimate your VAT. The tax office has a lot of room for manoeuvre in this estimation, which is usually exploited. The result is an additional assessment, which can be ruinous for many businesses. You should, therefore, prevent this from happening by complying with the law. If this does happen, you should seek the advice of a lawyer experienced in tax law.