Value Added Tax (VAT), or "Umsatzsteuer" in German, is a consumption tax assessed on the value added to goods and services at each stage of the production and distribution cycle. This tax type is used in over 160 countries worldwide, including Germany. Here, we provide a comprehensive understanding of how the VAT system operates within Germany.

Please note that a VAT number is different than a German Tax ID number. For more information on the German Tax ID number, read our article here.

Disclaimer: The information in this article is for general informational purposes only and should not be used as a substitute for professional advice. We are not tax advisors or lawyers, and while we aim for accuracy, we can't guarantee the information's completeness or applicability to your circumstances. Tax laws are complex and change frequently. Always consult with a qualified professional to get advice tailored to your specific situation. We're not liable for any outcomes resulting from the use of this information.

Basic Principle of VAT in Germany

The VAT system in Germany works on the premise that every business, during the process of providing goods or services, must charge VAT. This VAT collected by a business becomes payable to the German Federal Central Tax Office ("Bundeszentralamt für Steuern"). However, businesses are also permitted to deduct the VAT they paid on business-related goods or services from the VAT they collected. This mechanism ensures that the end consumer ultimately bears the burden of the tax, while businesses act mainly as intermediaries.

VAT Rates in Germany

Germany, like many EU countries, has a standard VAT rate and reduced rates for certain types of goods and services:

The standard VAT rate is 19%. This rate applies to most goods and services.
A reduced VAT rate of 7% applies to certain items, including food (except for luxury food items like lobster, champagne, etc.), books, newspapers, and public transport.
Some goods and services are exempt from VAT, such as healthcare and social services, financial and insurance services, and certain cultural and educational activities.

How to Calculate VAT

The VAT to be paid can be calculated by subtracting the VAT you've paid for business expenses (input VAT) from the VAT you've collected from your customers (output VAT). If the output VAT is higher than the input VAT, you must pay the difference to the tax authorities. If the input VAT is higher, you can claim a refund from the tax office.

VAT Registration and Compliance

Businesses in Germany, whether German-based or foreign, must register for VAT if their annual turnover exceeds a certain threshold, which was €22,000 for small businesses as of 2021.

Once registered, businesses must comply with several obligations:

Issuing VAT invoices:
For every taxable sale, a business must provide an invoice detailing the amount of VAT charged.
Keeping VAT records:
Businesses are required to keep VAT records for ten years. These records include all issued invoices, all invoices received, and documents relating to imports and exports.
Filing VAT returns:
Businesses must submit regular VAT returns, generally on a monthly or quarterly basis, depending on the business's size and VAT liability. The return details the amount of VAT collected and paid by the business during that period.
Annual VAT return:
In addition to regular VAT returns, businesses must also file an annual VAT return.

Securing a VAT Number in Germany

In Germany, the Value Added Tax (VAT) number, also known as Umsatzsteuer-Identifikationsnummer (USt-IdNr), is crucial for businesses as it facilitates the tax process, especially with regard to cross-border transactions within the EU.

Please note that a VAT number is different than a German Tax ID number. For more information on the German Tax ID number, read our article here.

The format of the VAT number varies by country. In Germany, the VAT number is made up of the country code 'DE' for Germany, followed by a nine-digit number. For example: DE123456789.

It's important to note that while all German VAT numbers have nine digits, they do not include leading zeros. This number is unique to the business or individual to whom it is assigned.

Here is a step-by-step guide on how to obtain a VAT number in Germany:

Step 1: Register Your Business

The first step towards obtaining a VAT number is registering your business. When you register your business with the German Trade Register (Handelsregister), you will automatically receive a tax identification number (Steuernummer). This Steuernummer is used for tax matters within Germany.

Step 2: Apply for VAT Identification Number

Once you have your Steuernummer, you can then apply for a VAT Identification Number. This is important for businesses trading within the EU. The application is made at the local tax office (Finanzamt) that serves the region in which your business is located.

To apply, you would typically fill out the 'Questionnaire for tax collection' ("Fragebogen zur steuerlichen Erfassung") provided by the Finanzamt, where you can indicate that you want to apply for a VAT ID.

Step 3: Wait for the Confirmation

After submitting the application, you have to wait for the confirmation from the Bundeszentralamt für Steuern, the German Federal Central Tax Office. The office will send you a letter stating your VAT Identification Number. This process usually takes two to three weeks.

Remember, it's crucial to apply for a VAT number as soon as possible if you are planning to do business across EU borders. It's a necessary prerequisite for taking advantage of the EU's VAT system and can save your company a significant amount of money.

Lastly, note that the German VAT number is different from the EU VAT number. The former is used for transactions within Germany, while the latter is used for transactions within the EU. Both numbers are important and serve different purposes.

It is recommended to consult with a tax advisor or legal expert when dealing with VAT registration and compliance to ensure all procedures are correctly followed, and all requirements are met.

Finding a Business's VAT Number

Here's how you can find a business's VAT number:

On the Business's Official Documents:
A business's VAT number is usually displayed on official documents, such as invoices, receipts, and their website (Impressum). It's a legal requirement for companies to include their VAT number on invoices if they are VAT registered.
VAT Information Exchange System (VIES):
For businesses within the EU, you can use the European Commission's VAT Information Exchange System (VIES). It's an online tool that allows you to verify the validity of a VAT number issued by any EU member state. You can access it here.
German Federal Central Tax Office:
In Germany, you can request the validation of a VAT number by contacting the German Federal Central Tax Office (Bundeszentralamt für Steuern). You can find their contact information on their official website.
Local Trade Register:
Another useful resource is the local Trade Register (Handelsregister), where companies are required to register. This public register usually contains the VAT number, along with other information about the business.

Obtaining a VAT Refund in Germany

In certain situations, businesses and individuals may be eligible to request a refund for the Value Added Tax (VAT) they've paid in Germany. The process varies depending on whether the requester is a non-EU tourist, resident business, a non-resident business within the EU, or a non-resident business outside the EU.

Here's a general guide on how to apply for a VAT refund in Germany.

VAT Refund for Individuals & Tourists

Non-EU tourists can also apply for VAT refunds on goods purchased during their visit to Germany. This is done through the Retail Export Scheme.

The process generally involves the following steps:

Obtain a Tax-Free Shopping Form:
When making a purchase, ask the retailer for a Tax-Free Shopping Form and have it filled out.
Get the Form Validated by Customs:
Before leaving the EU, present your unused goods, receipts, and Tax-Free Shopping Form to customs for validation.
Claim Your Refund:
After the form is stamped by customs, you can obtain your refund, often at refund offices in major airports, by mail, or by direct deposit to your credit card.

VAT Refund for Businesses

For Resident Businesses

For businesses based in Germany, the VAT refund process is integrated into regular tax reporting. When preparing their periodic (monthly, quarterly) and annual VAT tax returns, businesses calculate the VAT they've paid (input VAT) versus the VAT they've collected (output VAT). If the input VAT exceeds the output VAT, this will result in a VAT credit.

The business can then apply for a refund when filing the tax return to the local tax office (Finanzamt). This refund is typically transferred directly to the business's bank account.

For EU-based Non-resident Businesses

For businesses based in another EU country, the process is facilitated by the EU's VAT refund directive. Businesses can apply for a refund electronically via the portal provided by their home country's tax authority. This portal is designed to forward the refund application to the German Federal Central Tax Office.

The application must include digital copies of invoices or import documents for amounts above €1,000 (or €250 for fuel) and should be submitted before October 1 of the year following the refund period.

For Non-EU Based Businesses

For businesses based outside of the EU, the process is slightly different. These businesses need to apply directly to the German Federal Central Tax Office using the form "USt 7" and include original copies of all relevant invoices and customs documents. The application deadline is June 30 of the year following the refund period.

It should be noted that some countries have reciprocal agreements with Germany that allow for VAT refunds, while others do not. Businesses from non-EU countries should consult with a tax professional to understand their eligibility for a VAT refund in Germany.

VAT in International Transactions

For cross-border transactions within the EU, the "destination principle" typically applies. This principle means that VAT is charged in the country where goods are consumed. Thus, for goods shipped to a business in another EU country, the seller does not charge German VAT, but the recipient is liable to pay VAT in their own country.

For services, the "place of supply" rules determine where VAT is to be charged. These rules can be quite complex, as they vary depending on the type of service and the status of the buyer.

Exports from the EU are generally exempt from VAT, while imports into the EU are subject to VAT.

Conclusion

The VAT system in Germany, as in other countries, is a complex framework requiring strict compliance. Businesses need to ensure that they are charging the correct amount of VAT, keeping appropriate records, and filing the necessary returns. For international transactions, businesses also need to understand how VAT applies in different countries and to different types of goods and services. However, with a thorough understanding of the system and appropriate professional advice, businesses can successfully navigate the VAT landscape in Germany.

Demystifying the Value Added Tax (VAT) System in Germany: A Comprehensive Guide