Value added tax (VAT)
The VAT system was largely synchronised within the European Union at the completion of the European internal market, effective 1 January 1993 with the VAT System Regulation. At that time, customs and import VAT were also terminated in goods trade within the European Union.
German and therefore also European VAT is a net all-phase VAT system with pre-tax deduction.
In this system, each taxable turnover is taxed at each economic level, whereby the tax assessment basis for the VAT to be calculated and paid is the net amount, i.e. the sales price without VAT. The company may deduct VAT it paid itself as part of his purchasing of initial services required for production. The actual amount to be paid is calculated as a difference between the VAT paid to the company by its purchasers, and the VAT it has paid itself on initial services. Finally, only the end consumer is liable to pay VAT, while in the company sector, there is no economic burdening with VAT.
Exceptions to this rule, i.e. economic burdening in the company sector, can result regularly when in cases where the VAT regulations are not adhered to and thus the prior tax deduction system can fail and/or it can come from tax exemptions that the company would normally be entitled to.
Therefore, it is of great significance that VAT regulations are adhered to exactly in Germany, because errors in this area can fall directly as a burden on the company’s profit margin, and these additional expenses can only rarely be passed on to the customer.
A VAT obligated company is essentially anyone who practises a freelance industrial or professional activity and thus gains taxable turnovers in Germany.
This means that it is possible for a VAT obligation to arise in Germany – and with it the obligation to register for VAT – even without having a single fixed facility or place of business (e.g. bus trips through Germany, or one-off seminar events by foreign events managers). A German consignment warehouse or deliveries via the port in Hamburg may also lead to a VAT registration obligation for foreign companies in Germany. Also a foreign Amazon dealer with sales over the threshold for distance sales or an Amazon dealer using Amazon fulfilment services or having a German stock, must apply for a VAT registration in Germany.
Reporting and payment
Generally, VAT must be reported and paid quarterly to the tax office. If the annual VAT liability is over 7,500 Euro, the pre-reporting must be done monthly, and if it is less than 1,000 Euro, once a year is sufficient.
In the year of tax recording and the following year, the pre-reports must be made monthly and independently of the amount.
Additionally, an annual return must be submitted for each calendar year.
Tax rates for VAT
The regular tax rate in Germany is 19 percent.
There is also a reduced rate of 7 percent which is applied to the following goods and services, among others:
- Books, newspapers and other products of the graphics industry (however, not E-Books)
- Entry tickets for theatres, concerts and museums
- Short-term (i.e. less than six months) rental of residential and sleeping premises
Furthermore, there are other special tax rates for farmers at 5.50 percent and 10.70 percent. The VAT rates have developed as follows in Germany over recent years:
There are exemptions from VAT in Germany for the following goods and services, among others:
- Export deliveries to third party states (i.e. non-EU states)
- Union-internal deliveries to other EU states
- The granting and brokering of loans and other financial transactions
- Long-term (i.e. more than six months) rental of residiential and sleeping premises
- Medical treatment by doctors, dentists etc.
- Buying and selling of property
Pre-tax deduction is the application of the VAT paid by the company itself, and every company is entitled to it if it carries out his own turnover which is subject to VAT.
This deduction entitlement is then limited if the company makes its own partially tax-free turnover (–> partial limitation of the pre-tax deduction) or exclusively tax-free turnover (–> complete exclusion of the pre-tax deduction).
One very common reason for the failure of the pre-tax deduction is that the tax form regulations are not adhered to by companies who would essentially be entitled to a pre-tax deduction.
Reverse charge system
In Germany there is a reverse charge system for the provision of services for many B2B-type turnovers. This means that the tax liability in this case is transferred to the recipient of services and he is the one who is responsible for calculation, reporting and payment of the VAT.
Note that in Germany, unlike many other EU states, there is no reverse charge system in the area of goods delivery, i.e. in the case of delivery, it is always the delivering company who is liable for the tax.