Value-Added Tax in Germany

A short introduction to the VAT system in Germany with an illustrative example

Update: VAT rate reduction in Germany due to Covid-19

In order to support the domestic economy in Germany by increasing the growth of domestic demand, the general value-added tax (VAT rate) is reduced from formerly 19 percent to 16 percent, and the reduced VAT rate is reduced from 7 percent to 5 percent. This VAT reduction is valid from July 1, 2020, to December 31, 2020. Follow the link to learn WHAT COMPANIES DOING BUSINESS IN GERMANY NEED TO KNOW ABOUT THE VAT RATE REDUCTION!

 

The value-added tax commonly known as VAT (German: Umsatzsteuer, abbrev. USt) is a tax on goods and services collected in every European Union Member State, with every country having its own VAT rates. There are some exemptions for financial services, real estate, etc.

As a general rule companies having a registered domicile in Germany must register with the tax authorities for VAT purposes. Companies doing business in Germany with no domicile there may also have to register for VAT purposes.

The VAT is charged by businesses and paid by the customers. The standard VAT rate in Germany is currently 19%, for some services and goods, a reduced rate of 7% applies, such as movie tickets or newspapers. Depending on the turnover of the company the collected VAT has been paid to the tax offices on a monthly, quarterly or yearly basis.
The VAT paid by a company to other companies for supplies or services it receives is referred to as input tax (Vorsteuer). Companies can recover these input taxes. It is recovered by offsetting it against the collected VAT, or, if there is an excess, by claiming a repayment from the tax authorities. The net effect of this is that each supplier in the chain remits tax on the value-added, while ultimately the tax is paid by the end consumer.

We will illustrate this in a simple example, and use the sale of bicycles to show you how the offsetting process works.

A bicycle seller has sold 50 bikes in a month, for each bike he charged his customers EUR 500 including VAT. So the net price for each bicycle is EUR 420,17- this is the price without the 19% VAT. VAT for each of these bikes is EUR 79,83. So in total, he would have to pay EUR 3.991,50 of VAT collected from his customers to the financial authorities. This sounds like an awful lot of money, but to the happiness of our bicycle seller, the input tax will reduce this amount substantially. In the same month, the bicycle seller has bought 60 new bicycles form his supplier, at EUR 400 per bicycle. Again, the net price paid for each bicycle was EUR 336,13, an input tax of EUR 63,87 (again, 19%). This means our bicycle dealer has paid a total of EUR 3832,20 input tax. This sum is offset against the collected VAT. So in the end, only EUR 159,30 VAT has been paid to the financial authorities.

Companies whose turnover does not exceed the threshold of EUR 17.500 in the year of incorporation and EUR 50.000 in the following year are not subject to VAT. Meaning, they do not have to collect VAT.

As a prerequisite for the input tax deduction, all transactions have to be documented with proper invoices in which the price including VAT, the price excluding VAT and the VAT amount are shown separately.

 

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