Every freelancer or small business in Germany has to deal with the issue of VAT. It cannot be ignored. VAT stands for “Value added tax”. It is one of the indirect taxes i.e. a tax on the purchase of goods and services. (Direct taxes are directly on the income of an individual). An indirect tax means that the tax is passed on to the final customer as it is added on to the bill for the product or service.
This also explains why it is called “value added”. VAT is based on the additional value of a product or service as it moves through the manufacturing or delivery process. Any business that is registered for VAT performs a net calculation when transferring the VAT to the government. It is able to deduct the VAT it has already paid for materials, products or services from the VAT it must pay.
You may hear VAT in Germany being called either “Umsatzsteuer” or “Mehrwertsteuer”. The law in Germany refers to “Umsatzsteuer” but both terms have the same meaning.
Contents: A guide to VAT for freelancers in Germany
- 1. The VAT rates in Germany.
- 2. Registering for VAT as a freelancer or small business in Germany
- 3. What is a Small Trader (“Kleinunternehmer”)?
- 4. Who is required to account for VAT in Germany?
- 5. Monthly or Quarterly VAT Return (“Umsatzsteuervoranmeldung”)
- 6. What are the consequences if the monthly or quarterly VAT returns are not submitted on time?
- 7. Ongoing-Extension for submitting VAT returns (“Dauerfristverlängerung”)
- 8. Annual VAT return (“Umsatzsteuererklärung”).
- 9. Final Remarks on the guide to VAT for freelancers in Germany.
1. The VAT rates in Germany.
The standard rate of VAT is 19%. A reduced rate of 7%, however, applies to certain goods and services such as for example: food, newspapers, local public transport and taxis, and hotel stays.
2. Registering for VAT as a freelancer or small business in Germany
2.1 What is a freelancer in Germany?
There are different types of self-employment in Germany. On the one hand there are people who practice a craft or trade (traders or “Gewerbetreibende”) and on the other those whose work is more of an intellectual nature (freelancers or “freie Berufe”). The difference determines whether it is necessary to register your business as a trade with the city (“Gewerbeanmeldung”). This in turn determines whether the tax office requires you to pay trade tax (“Gewerbesteuer”) or not.
As far as VAT goes, though, all self-employed people have to account for VAT. There are exceptions and I will return to this later.
2.2 How to apply for a tax number.
When you first set up your business as a freelancer in Germany, you must apply for a tax number from the local tax office (“Finanzamt”). If registering a trade with the city, then the local tax office will automatically receive your details. If not, then you must inform the tax office (either by making an appointment there of informing them in writing) that you are setting up business as a freelancer.
2.3 The Tax Registration Questionnaire (“Fragebogen zur steuerlichen Erfassung”)
In both cases you need to fill out a fairly daunting form, the Tax Registration Questionnaire (“Fragebogen zur steuerlichen Erfassung”). You must fill it out in German (German being the only accepted official) language. Hanna Lisa Haferkamp has written really good detailed line-by-line instructions in English as to how fill out the form. You can find them on her blog HERE.
There are some sections, however, in which you must input some details in German: I would highly recommend you to make use of a German speaker at this point. Providing clear and detailed information at this point can save a lot of time and trouble dealing with the tax office later.
In the form you must estimate your revenue for the first and second years of business, in order to determine if you need to charge VAT or not. (This is in addition to other information relating to profit in order to determine whether you need to make prepayments of income or trade tax). Depending on your planned revenue, you may count as a “Small Trader” (“Kleinunternehmer”) and you do not need to charge VAT on the invoices to your customers.
2.4 VAT Identification Number (“Umsatzsteuer-Identifikationsnummer”)
You have the possibility in the Tax Registration questionnaire to apply for a VAT Identification number (“Umsatzsteuer-Identifikationsnummer”). You require this if you have customers or suppliers who are located within the EU but outside of Germany. If you are just doing business in Germany, you do not need the number. However, it costs nothing to get it and I would recommend applying for it straight away.
3. What is a Small Trader (“Kleinunternehmer”)?
Germany has tried to make it attractive to set up small businesses by removing some of the bureaucratic hurdles. As a “Small Trader” you do not have to charge VAT, but you can if you so wish.
3.1 The Criteria for being a Small Trader
Two criteria determine whether you are a Small Trader or not:
- When you fill out the tax registration questionnaire, you must give an estimate of your revenue for the current year. As a small trader your revenue must not exceed EURO 17,500 for the whole year – or less on a pro-rata basis for a shorter time period. If you start your business in July and estimate you will achieve EURO 8,000 of revenue in the six month period, you will count as a Small Trader.
- The tax office also ask you to estimate your revenue in the next business year. This must not exceed EURO 50,000. If you estimate that this is likely to be the case, then you must start accounting for VAT immediately.
In subsequent years, you can remain as a Small Trader if your revenue continues to be below the EURO 17,500 limit. If however, you exceed this limit then you must start accounting for VAT from the following year.
3.2 The consequences of being a Small Trader
There are four main consequences of being a Small Trader:
- The invoices to your customers may not include any VAT amounts. The gross and net amounts are the same.
- Every invoice must contain a sentence saying that “The amount shown contains no VAT in accordance with §19 of the VAT law” (“Der ausgewiesene Betrag enthält gemäß § 19 UStG keine Umsatzsteuer”).
- You may not reclaim any VAT from your suppliers.
- You do not have to submit monthly, quarterly or annual VAT returns.
3.3 The advantages of accounting for VAT (even if you are a Small Trader)
- Despite the limits you can elect to account for VAT from the beginning of your business. From a cashflow perspective it can be advantageous if you, for example, have to make significant investments in equipment or services yourself at the beginning of your activities. You will be able to get back from the tax office the VAT you pay for those items.
- It is important to think about whether your customers will generally be businesses (who thus also have to account for VAT) or private individuals. If you charge VAT on your invoices to a business, they can get that amount back from the tax office in their next monthly or quarterly return. Private individuals cannot. Therefore for them the price for your services is effectively higher than for an business.
- From a marketing standpoint, it can be advantageous to account for VAT. You demonstrate to your customers that they should take your business seriously as you are not just a Small Trader.
4. Who is required to account for VAT in Germany?
The tax office requires all self-employed people in Germany to account for VAT on a regular basis. There are however three exceptions to this:
- Small Traders (as discussed above)
- Certain professions such as, for example, doctors, dentists and other members of the healing professions. The relevant VAT law also lists some other exceptions as well.
- If the amount of VAT you had to pay in the previous year was less than EURO 1,000, then the tax office may exempt you from the requirement to submit a monthly or quarterly return. (You must still do an annual VAT return though).
5. Monthly or Quarterly VAT Return (“Umsatzsteuervoranmeldung”)
If you are liable to account for VAT (either when you stop being a small trader or because you plan to exceed the limits), then you must submit either monthly or quarterly VAT returns.
5.1 Why is a monthly or quarterly VAT return required?
You have collected VAT from your customers and you must pass this amount on to the tax office. The documentation of this transaction happens in the monthly or quarterly VAT return.
The tax office has an interest in ensuring that it collects the tax as close to the transactions as possible. This reduces the risk that the business will have financial difficulties and be unable to hand over the VAT it has collected.
5.2 Monthly or Quarterly VAT Returns?
When you start your business you must do a VAT return monthly in the initial year and in the year following that. The return has to be done by the 10th of the following month. So the return for March, for example, must be done by April 10th.
After the initial two years – and depending on the amount of VAT you have paid in the previous year – it is possible to change the VAT return to a quarterly basis:
- If the VAT paid in the previous year was more than EURO 7,500 then you must continue with monthly returns.
- You can apply for quarterly returns if the amount paid was between EURO 1,000 and EURO 7,500.
- If the amount paid was less than EURO 1,000 then there is no requirement any longer for a monthly or quarterly return. However you must still make an annual VAT return.
5.3 Completing the Monthly or Quarterly VAT Return
Provided you have been systematically recording your customer and supplier invoices, it is not complicated to complete the VAT returns. On the return you need to enter:
- Your net sales to customers (sales without VAT) and the amount of VAT charged.
- The amount of input VAT (VAT you paid to your suppliers) in the different categories (19% and 7%).
- Details of any import VAT paid (see below)
5.4 Submitting the Monthly or Quarterly VAT Return
You must submit the monthly or quarterly VAT returns electronically. There are various software packages available to do this, if you wish to do it yourself. The tax office also provides free software that you can use called Elster. You can download Elster here.
If you consult with a tax advisor (“Steuerberater”) she or he will be able to submit the return on your behalf.
6. What are the consequences if the monthly or quarterly VAT returns are not submitted on time?
6.1 Estimation of sales for VAT returns
If you do not submit the VAT returns on time, the tax office can estimate the amount of the sales. It can then demand payment based on that number. Generally, the estimations will be higher than the average sales for the period. (They will then make adjustments to the VAT to be paid, when the actual returns are made).
6.2 Penalty for late submission (“Verspätungszuschlag”)
The tax office can also charge a penalty for late submission (“Verspätungszuschlag”) . It can only waive this if you can show there was a good reason why the return was submitted late. The amount cannot be more than 10% of the tax that is due (up to EURO 25,000).
It is often worth contacting the tax office if a penalty for late submission has been charged as the tax office officials have some leeway in their decisions. You must nevertheless be able to justify plausibly why the submission was late.
6.3 Penalty for late payment (“Säumniszuschlag”)
If you fail to pay the amount of VAT due by the due date, the tax authorities will charge a penalty for late payment (“Säumniszuschlag”). This amounts to 1% of the tax amount due (rounded down to the nearest EURO 50) for every month that the payment is late.
6.4 Direct Debit for tax payments
If you have set up a direct debit (“Lastschrift”) with your bank for payment of the VAT to the tax office, it will not charge you the penalty for late payment. (A direct debit automatically pays from your bank the amount due on the due date.)
7. Ongoing-Extension for submitting VAT returns (“Dauerfristverlängerung”)
7.1 Application for Ongoing-Extension for submitting VAT returns (“Dauerfristverlängerung”
You have the option of applying for an Ongoing-Extension of the time for submitting your VAT return. This will normally be possible after you have been submitting returns on time and paying VAT for at least a year. The extension allows you to submit your return one month later. So the return for March will not be due on April 10th but on May 10th.
7.2 Requirement for payment of 1/11th
In order for the tax office to grant the Extension to be granted, you have to pay an amount as a deposit. This is equivalent to 1/11th of the VAT you paid in the previous year. In the VAT return for December this prepayment will be included and accounted for thus reducing the VAT you might have to pay in that month.
There is no tax advantage in taking advantage of the extension. It can be useful, though, in situations where it is difficult to get all the documents together by the 10th of the month.
8. Annual VAT return (“Umsatzsteuererklärung”).
Once a year you must submit an annual VAT return. If you submit the return yourself, the relevant date is May 31st. If a tax advisor submits it on your behalf, then the date is extended to September 30th.
The Annual return is based on the data for the whole year (as opposed to the monthly or quarterly data). It summarizes what has already been submitted monthly or quarterly. In most cases, there will be little to pay (or receive back) as the amounts have already been paid during the year.
9. Final Remarks on the guide to VAT for freelancers in Germany.
The laws and regulations relating to VAT in Germany are very complex and I have only given a summary of the most relevant points for the majority of freelancers and small businesses.
Dealing with and accounting for VAT is an ongoing element of your business. The good thing is that, when you have sorted out any initial questions and issues, most of it is then routine.
As a final word – I would strongly advise you to consult a tax advisor (“Steuerberater”) if you have issues concerning VAT or any other tax related topics. She or he can not only advise you but also represent you as far as any dealings with the tax office are concerned. Even if you do the routine work yourself – such as submitting the monthly or quarterly returns – it is without doubt of great value to have someone you trust to advise you as and when necessary.
Photo via Visualhunt.com
As a freelancer or small business in Germany, you may be doing business with consumers or other businesses outside of Germany – either within or outside of the EU.
I have addressed the VAT issues related to this in a further blog article: “A Guide to VAT abroad for freelancers in Germany”.