Value Added Tax (VAT)
Value-added tax (VAT) is a consumption tax on the exchange of goods and services. Companies are obliged to add VAT to their prices and to invoice their customers accordingly.
Value-added Tax within Germany
VAT is a consumption tax, which is ultimately borne by the final consumer of a product or service. It is charged as a percentage of the price. At present, the normal rate in Germany is 19 percent. A reduced rate of seven percent applies to certain consumer goods and everyday services (such as food, newspapers, local public transport, and hotel stays). Some services (such as bank and health services or community work) are completely VAT exempt.
Companies must add the applicable VAT tax rate to value their prices. On purchasing goods or making use of services, companies regularly have to pay value-added tax themselves. The taxes collected and paid can be balanced out via input VAT deduction (Vorsteuerabzug). Companies submit periodic VAT reports online to the tax authorities (Umsatzsteuer-Voranmeldung) on a monthly or quarterly basis using Germany’s ELSTER online tax office system. The frequency depends on the company’s level of turnover. In addition, an annual VAT return (Umsatzsteuer-Jahreserklärung) must be submitted.
In specific business-to-business transactions, the business customer has to transfer the VAT to the tax authority – so-called reverse charge procedure. This is applicable, for instance, to certain types of construction work carried out by subcontractors.
Example: How Input VAT is Balanced
A car dealer has sold ten vehicles in one month, each at a gross price of EUR 17,850 (net cost EUR 15,000). For each sale, the dealer receives EUR 2,850 in VAT from the customer. At the end of the month, the dealer therefore owes the tax authorities EUR 28,500.
However, in the same period, the car dealer also bought ten cars from the car manufacturer. The net cost of each car was EUR 10,000. The car manufacturer added 19 percent VAT to this amount. The dealer therefore transferred EUR 119,000 (including EUR 19,000 in VAT) to the manufacturer.
Thus, the car dealer has received EUR 28,500 in VAT and paid out EUR 19,000 in VAT. These totals are communicated to the tax office (Finanzamt), and only the difference of EUR 9,500 must be transferred by the car dealer to the tax authorities.
Cross-border Trade within the EU
Trade within the EU is free from customs and other restrictions. However, goods traded between different EU member states are subject to a so-called acquisition tax (Erwerbssteuer). The reverse charge procedure is in general applicable to intra-community sales of goods and services between entrepreneurs in different EU states. This means that these customers pay VAT on the goods/ services received at the applicable rate in their country. For detailed information about cross-border VAT in the EU please see the dedicated EU website.
Acquisition tax is payable by the recipient of the goods. If an EU company exports goods to a company located in another EU member state, the delivering company therefore must not charge VAT. Accordingly, the company in the other EU member state receiving the goods accordingly has to pay acquisition tax. Acquisition tax rates correspond with the VAT tax rates of the country where the recipient of the goods is located. Companies can however reclaim acquisition tax like regular VAT.
In the case of intra-community deliveries of goods from a company to a private consumer, however, the private consumer is generally charged the respective sales tax of the country in which the selling company is based.
If a company intends to deliver goods to/import goods from other EU member states, it requires a VAT identification number (Umsatzsteuer-Identifikationsnummer). The VAT identification number application can also be filed online or combined with the regular tax number application. The German Federal Central Tax Office provides initial online information on VAT procedures in Germany.
Trade with Non-EU Member States
Goods imported from non-EU states are liable to import VAT called import turnover tax (Einfuhrumsatzsteuer). The import turnover tax rate equals the VAT rates of 19 percent or 7 percent and is paid to the customs authority.
However, the import turnover tax on goods imported from non-EU states can be deducted as input tax (Vorsteuer). As a prerequisite, the company must have the necessary import documents with customs proof of payment (import declaration).
Exports are exempt from VAT.