When it comes to starting a business, there are many questions and issues that need solving such as company’s legal form and structure, business operations plan, marketing strategy, investment funding, cost management, etc.
Besides that, it is tax and all of its related regulations that businesses of all kinds should take into consideration carefully. Depending on the government policy and geographical location in which the company is operating, the taxation regulations can vary respectively. For further information on VAT and Input tax (Vorsteuer) in Germany – the two most common tax types – please see our article below, first in a small article series explaining what to keep in mind when starting a business in Germany.
Value Added Tax aka VAT (called Umsatzsteuer and commonly abbreviated USt in German)is usually included in product prices. Therefore, it’s the end consumers who are paying the VAT. After collecting all VAT received from their customers, enterprises will then transfer the taxes collected to the local or regional tax office on a regular basis such as monthly, quarterly or yearly, depending on your company’s turnover.
The standard VAT rate in Germany is 19%. A reduced rate of 7% is applied for daily and consumer goods transactions, for example food, hotel stays, newspapers or public transport. Below is the chart of ‘VAT Rates of Selected EU States’, 2017.
The German VAT rate is quite competitive to other EU member states ‘VAT rates. While Germany’s rate is only 19%, most others’ range from 20% to 25%. It is worth noting that, based on German VAT law, there are some exemptions from value-added tax applied for financial/ insurance services, export deliveries, selling and buying real estate, etc.
Generally speaking, all enterprises in Germany have to register for VAT purposes. Nevertheless, if a company turnover in the former calendar year did not exceed 17.500€ and is forecast not to surpass 50.000€ in the current year, a particular scheme for small businesses applies; therefore no VAT is required by tax authorities. Additionally, in Germany, even non-residents making taxable supplies of services or goods also must register.
The tax year for businesses is calculated according to the calendar year. By the 10th day of every month, entrepreneurs must file a digital preliminary VAT return and hand in the VAT due. In case the input tax, which will be mentioned in details below, surpasses the VAT, that company will receive a return. Furthermore, if the tax from former calendar years exceeded 7.500€, companies must file monthly preliminary returns.
2. Input tax
In contrast to VAT paid by companies’ customers, VAT paid by businesses to other businesses is considered as input tax (known as Vorsteuer in German) when making use of services or purchasing goods from third parties. In the end, after collecting and paying taxes, companies need to balance their input tax deduction, as illustrated by the example below.
To summarize, an enterprise can claim the VAT it paid as input tax and get a refund for it. The main idea behind this concept is that under certain conditions companies buying goods or services should not have to pay VAT, otherwise a finished product would have been subject to value added tax several times in all stages of production. It is therefore made deductible as input tax and only the end consumer pays VAT, as illustrated by the example below.
For instance, a car dealer sold 20 cars in one month, each priced at 10.000€ including the VAT (at a rate of 19%), resulting in a VAT amount of 1.596,64€ included in the final price. At the end of that month, the dealer owes 31.932,77€ in VAT to the tax authorities. However, in the same month, this same dealer bought 20 other cars from another car manufacturer for 15.000€ each including the VAT of 19%. Therefore, the car dealer has to pay 47.899,16€ to the car manufacturer after the VAT rate is applied. Finally, the car dealer has obtained 31.932,77€ in VAT and paid out 47.899,16 € in VAT; thus, the dealer is eligible for a return of 15.966,39€ in taxes paid.
As a prerequisite for 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.
In short, those are the main points you need to keep in mind about VAT and the input tax based on German taxation system. Our next article in this series will cover trade tax, corporate tax and income tax – so stay tuned!
Richard Hoffmann is a partner at ECOVIS Beijing China. Richard obtained an honors degree in law and worked in Germany, the United States, and China for various prestigious law firms prior to joining ECOVIS. In addition to being a member of the board of ECOVIS International, he is Supervisor for the China business of a respected German company and shares his extensive knowledge to students by teaching commercial law in China at SRH Hochschule Heidelberg. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV stations. Contact: email@example.com
Ecovis Beijing is the trusted tax and legal advisor to several embassies and official institutions in China. It specializes in mid-sized international companies and is focused on tax & legal advisory, accounting and auditing. If you’re interested in finding out more about tax and legal, don’t hesitate to sign up for our Newsletter, give us a call +86 10-65616609 or contact us directly via firstname.lastname@example.org.