Your guide to VAT in Germany

Updated on May 23, 2022

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In Germany, there are a number of distinct types of value-added tax. This tutorial will explain everything you need to know about the various percentages and who is responsible for paying this vital sales tax.

What do your grocery bill, electricity bill, and theatre tickets all have in common? Each and every one of them contains VAT tax, thus the answer is clear. Most goods and services sold in the United States are subject to the “value-added tax,” or VAT, which is charged at either 7% or 19%. The problem is that it’s not always easy to know when and how much to charge, as well as which products and services are fully excluded.

If you’re a freelancer or considering about being self-employed in Germany, you’ll want to familiarise yourself with the various tax structures in the country. Let’s take the example of VAT. What is the procedure for making early VAT payments to the tax office? A small business can be defined in a variety of ways. Check out this article if you’ve been wondering about the basics of VAT—and much, much more!

What is VAT?

VAT stands for “value-added tax,” or Mehrwertsteuer in German; nevertheless, sales tax, or Umsatzsteuer, is the more popular term used to refer to it. When it comes to excise taxes, this is one that is imposed on the cost of goods and services before being passed on to the tax office. Input tax can be used to reduce a company’s VAT liability (Umsatzsteuerschuld). By deducting your input tax, you can recover back the taxes you owe the tax office.

As a result, the words “value-added tax,” “sales tax,” and “input tax” all refer to the same general tax. Companies and freelancers are simply collection agents for the tax burden, which is ultimately borne by the final customer.

There are three different types of VAT: 

VAT is levied on consumption-related products and services.
Products are subject to VAT. Capital goods VAT isn’t refunded in this case.
Income tax is imposed. In this case, the VAT paid is only recouped by the amount of money that was lost.

How does the VAT work?

Let’s have a look at an example to better understand how VAT works. Assume you’re in the market for a new pair of shoes. In the middle of your shopping spree, you come across the perfect pair of shoes.

Let’s go back in time a few months, shall we? The store had to buy the shoes straight from the manufacturer before they arrived at the shop. There is a 19 percent VAT added to the total price of €50 netto, so let’s assume it’s €9.50. This equates to a total purchase price of €59.50 for the retailer. Rather than keeping the full €9.50 VAT they got from the store, manufacturers are now required to pay it to the tax authority.

It’s now €100 plus 19 percent VAT (€19)—€119 in total—for the shoes. They’ve already paid the manufacturer €9.50 in VAT, but when you buy the shoes, you’ll be charged €19 in VAT.

As a result of the VAT deduction mechanism, a retailer may deduct from your VAT payment (€19-€9.50 = €9.50) any VAT that they paid to the manufacturer. As a result, when the store submits their next VAT declaration, they will have to pay the tax office €9.50.

When is the VAT applied?

Nearly all goods and services in Germany are subject to a 19 percent VAT. Products and services for basic necessities are subject to a 7 percent discount.

For example, cow’s milk is taxed at 7 percent whereas soy milk or lactose-free milk is taxed at 19 percent. It’s not apparent how decisions regarding what constitutes a “basic necessity” are made. The entire list of things that qualify for the reduced 7% tax rate can be found in the UStG (12 UStG).

And here’s a sample of what you can expect:

Food and drink are included in this category.
Newspapers and magazines
Public transit fare
What the world of art and culture has to offer (e.g. tickets for the theater, cinema, concerts, museums, zoos, and some creative services)
Feed for livestock and other livestock products from farms and forests
In Germany, VAT is not applicable in some instances (e.g., for shipping, insurance, and credit brokerage). A trip to the doctor, for example, is exempt from taxes because it does not count as consumption.

Who needs to charge VAT?

Generally speaking, anyone who engages in a business or professional activity on their own is required to charge VAT. Additional requirements include showing the net price, the amount and percentage of VAT that has been levied, and the total (brutto) amount on the company invoices or receipts.

Sales of less than €22,000 in the previous tax year and not expected to reach €50,000 this year qualify you as a small business owner and are exempt from sales taxes, according to the tax office. As a result, you won’t be liable for any taxes your consumers could owe you.

It’s especially relevant if you’re a self-employed person who has to file a tax return. But don’t be alarmed; we’ve compiled a wealth of tax-related knowledge for you right here.

The VAT in Europe

Various nations in Europe have different VAT rates. VAT rates vary widely across Europe, even though they are often about 20%. As an example, the VAT rate in Hungary is 27%, whereas it is 24% in Greece. VAT in Spain is 21%, but in Switzerland it is 7.7%.

In Austria, in addition to the usual 20% tax rate, there are two lower tax rates:

Groceries, apartment rentals, and public transportation tickets are all 10% off.
Stays in hotels or guesthouses, cinema tickets, and works of art are all eligible for a 13 percent discount.
Additional VAT reductions in Switzerland include a lower rate of 2.5 percent and a “special rate for lodging” of 3.7%. A notable exception is Denmark, which offers no lower VAT rates at all.

Your money at N26

What if there was an easy way to keep track of your finances as a freelancer? Then N26 Business accounts are for you. Open an account in only a few minutes and start using your Mastercard virtual card right away! For tax time, N26 Insights maintains track of your business spending for you, categorising every transaction so you don’t have to. There are 10 Spaces sub-accounts included with every premium account so that VAT and other taxes that are due to the Finanzamt can be stored there as well. Choose the N26 account that is most appropriate for your needs.