Are you a freelancer or a small business owner in Germany? Understanding the Value Added Tax (VAT) system is essential to successfully navigate the tax landscape and ensure your business's financial health. As a fiscal advisor with expertise in German taxation, I'm here to provide you with a simplified guide to Germany's VAT system, tailored to the needs of freelancers and small business owners.

What is VAT?

Value Added Tax, or Mehrwertsteuer (MwSt) in German, is a consumption tax levied on the value added to goods and services at each stage of production or distribution. It's a vital part of the German tax system, and your familiarity with it is crucial for the financial well-being of your freelance or small business venture.

Who Needs to Register for VAT?

As a freelancer or small business owner, you may wonder if you need to register for VAT. Well, it depends on your annual turnover. If your income is projected to be less than €22,000, you're classified as a small business (Kleinunternehmer) and are exempt from VAT. However, if you expect to earn more than this threshold, you'll need to register for VAT and charge it on your invoices. Expecting to exceed €50,000 turnover in the current calendar year, you'll also need to register for VAT.

Germany VAT Law

Germany’s VAT framework originates from the EU VAT Directive and was codified in the Value Added Tax Act (Umsatzsteuergesetz (UStG)) along with the VAT Implementation Regulation (Umsatzsteuer-Durchführungsverordnung (UStDV)). UStG has evolved over the years to adapt to changing economic circumstances. While the German Federal Parliament implements tax law, its administration falls under the jurisdiction of the 16 federal states (Bundesländer). The standard German VAT rate is determined by the German state. In case of any conflict between German VAT law and EU VAT Directives, the EU rules prevail.

German VAT Registration

To get registered, companies must fill out an application form, attach a registration certificate, and provide details about the directors, the company's structure, its activities, and anticipated turnover.

Once the registration process for German VAT is finished, the company receives a VAT number, comprising 11 characters: the country code "DE" followed by 9 digits. The last two digits serve for control purposes. German companies are assigned two such numbers – the general tax number and the EU VAT number, which is used for transactions within the European Union.

It's essential to note that the registration rules that apply to German companies extend to non-German companies involved in taxable supplies within the country. Unfortunately, the small entrepreneurs' exemption doesn't apply to non-resident taxpayers.

German VAT Compliance

Ensuring compliance with German VAT regulations involves adhering to detailed rules for recording and processing transactions for VAT purposes. These include guidelines on invoice requirements, when to issue a German tax invoice, handling foreign currency transactions, managing credit notes and corrections, maintaining proper accounting records, submitting VAT returns and adhering to monthly or quarterly deadlines.

Keeping accurate records of all your income and expenses is not just important – it's a legal requirement. This can be done by hiring an accountant or using accounting software. Remember to keep all your receipts and invoices, as they are your proof of income and expenditures.

To streamline the process of filing VAT returns, businesses in Germany are required to utilize the Elster Online platform, the electronic filing system administered by the German tax authorities. This user-friendly system facilitates the timely submission of tax returns, ensuring businesses can meet their obligations and stay in good standing with the tax office.

It's crucial to emphasize the significance of submitting VAT returns promptly to sidestep penalties and foster a positive relationship with tax authorities.

Taxpayers must file monthly VAT returns during the first and second year of registration unless the competent tax office communicates the change to a different reporting period.

The deadlines for VAT return submissions hinge on the net VAT due by the company in the previous calendar year. Companies with net VAT due below €7,500 must submit quarterly preliminary returns. Additionally, an annual VAT return must be filed by the end of May the following year. Those companies with net VAT due below €1,000 are only obliged to file an annual return.

When submitting VAT returns, businesses need to consider the tax period for which the payment is being made. The deadline for submission is the 10th day of the month following the specified period. Adhering to these deadlines is imperative for ensuring compliance and avoiding penalties.

German VAT Rates

The standard VAT rate in Germany is 19%. However, there's also a reduced rate of 7% applied to specific items such as food, books, hotel accommodation, cultural services, and other goods and services. Some services, like banking, health, and social work, are exempt from VAT.

Standard VAT Rate: 19%. At the core of Germany's VAT system is the standard rate of 19%, applicable to a wide range of taxable goods and services. Whether it's clothing, gasoline, pharmaceutical products, or alcoholic beverages, the standard rate forms the foundation of Germany's VAT structure.

For businesses operating in Germany, it is paramount to recognize that if a product or service doesn't fall under the reduced rate or an exemption, it automatically becomes subject to the standard rate of 19%. This awareness is crucial for accurate transactional accounting and seamless tax filings.

Reduced VAT Rate: 7%. Differing from the standard rate, the reduced VAT rate of 7% targets specific goods and services. This category includes most food products, plants and animals, books and newspapers, works of art, and entrance fees to cultural sites. The reduced rate is strategically designed to enhance the affordability and accessibility of essential items and cultural experiences.

Zero VAT Rate: 0%. For certain goods and services like basic food items, medical and healthcare services, and cultural experiences, a zero-rate value added tax of 0% is applied. While zero-rated goods and services are treated as exempt from VAT, suppliers can still reclaim the VAT they paid on inputs.

Understanding the nuances of reduced and zero rates and their application is pivotal for businesses dealing with these specific goods and services. This knowledge directly influences pricing strategies and ensures compliance with tax obligations.

German Intrastat and EC Sales Lists

If the company moves goods across the German national border to or from other EU countries, there may be a requirement to complete monthly Intrastat reporting. Intrastat does not apply if the goods are coming in from outside of Europe (‘imports’) or being sent out of the EU (‘exports’).

Each movement of goods across the German national border to another EU country must be listed.

This shipment lists should include the trade classification, value, quantity, weight, commodity code and country of arrival or dispatch.

Intrastat returns only need to be completed once the reporting thresholds are exceeded.

The threshold for German Intrastat arrivals is €800,000 and for dispatches is €500,000.

Filings are generally undertaken at the same time as the VAT return, at the 10th of the month following the movements, and are sent to the appropriate statistical office.

There may be minor infringement penalties for late filings.

In conclusion, understanding Germany's VAT system is essential for freelancers and small business owners. While navigating VAT regulations may seem complex, with the right knowledge and guidance, you can manage your tax responsibilities effectively and ensure your business operates smoothly. Remember, staying informed and seeking professional advice is your key to success when it comes to VAT in Germany.