What Is German VAT and How Does It Work?

Value Added Tax (VAT), known in Germany as Umsatzsteuer (USt) or Mehrwertsteuer (MwSt), is a consumption tax applied to most goods and services within the country. It is a significant component of the German fiscal system, contributing substantially to government revenue. As a key element of the broader European Union (EU) VAT framework, it affects transactions across diverse sectors, ensuring a standardized approach to taxation within the common market. This system aims to tax consumption, with the ultimate burden falling on the final consumer.

Fundamental Concepts of German VAT

German VAT is levied at each stage of a product’s or service’s journey through the supply chain. Businesses charge VAT on sales (output VAT) and reclaim VAT paid on purchases (input VAT). The net amount, the difference between output and input VAT, is then remitted to or recovered from tax authorities, ensuring the tax burden ultimately rests with the end consumer.

A “taxable supply” encompasses all goods and services provided by a business for consideration within Germany. This includes the import of goods from non-EU countries and the intra-Community acquisition of goods from other EU member states. The “taxable event” that triggers VAT liability typically occurs when goods are made available to the customer or when a service is completed. For prepayments, VAT becomes due at the end of the return period in which the payment was received.

“Place of supply rules” determine where VAT is legally due, generally aligning with where consumption occurs. For goods, this is typically where transport begins or where the goods are physically located. For business-to-business (B2B) services, the place of supply is usually where the recipient is established. For business-to-consumer (B2C) services, the general rule places the supply where the supplier is established.

German VAT Rates and Exemptions

Germany applies a standard Value Added Tax rate of 19% to most goods and services, including electronics, clothing, and consulting services.

A reduced VAT rate of 7% applies to certain essential goods and services. This includes most foodstuffs, books, newspapers, admission to cultural events, public transport, hotel stays, and medical and dental care. From January 1, 2025, art sales will also be subject to the 7% reduced VAT rate.

Certain supplies are exempt from VAT, meaning no VAT is charged, and businesses cannot reclaim input VAT on related costs. Examples include financial, healthcare, educational, and some social services, plus certain real estate transactions. “Zero-rated” supplies, such as exports outside the EU and intra-Community supplies of goods, are taxed at 0%, but businesses can still reclaim input VAT on associated purchases.

Who Must Deal with German VAT

Any individual or entity independently conducting an economic activity is considered a “taxable person” for German VAT purposes. These businesses must register for VAT, charge it on sales, and remit it to tax authorities. Businesses handle VAT collection and remittance, while end consumers ultimately bear the tax burden.

Germany offers a Small Business Exemption (Kleinunternehmerregelung) to simplify compliance for smaller enterprises. As of 2025, businesses can opt out of charging VAT if their turnover did not exceed €25,000 net in the previous year and is not expected to exceed €100,000 net in the current year. Opting for this exemption means the business does not charge VAT on sales and cannot reclaim input VAT on purchases. Invoices issued by businesses using this exemption must include a statement indicating no VAT is charged, referencing Section 19 of the German VAT Act.

Businesses whose turnover falls below these thresholds can still choose to register for VAT voluntarily. This may be advantageous if they incur significant input VAT on expenses, as voluntary registration allows them to reclaim that VAT. Non-German businesses supplying goods or services within Germany may also have VAT obligations, often with no registration threshold.

Key Business Obligations

Businesses registered for German VAT must obtain a VAT Identification Number (Umsatzsteuer-Identifikationsnummer or USt-IdNr.). This unique identifier is for VAT purposes, particularly for transactions within the European Union. This number is essential for verifying VAT status in cross-border trade and must be included on invoices for such operations.

Invoicing requirements adhere to German law. Mandatory information on a German VAT invoice includes:
Date of issue
Unique sequential invoice number
Supplier’s VAT ID or tax number
Full addresses of both supplier and customer
Description and quantity of goods or services
Date of supply
Net amount
Applicable VAT rate(s)
VAT amount
Total gross amount

From January 1, 2025, a mandatory electronic invoicing (e-invoicing) obligation for domestic B2B transactions comes into effect, requiring invoices to be issued in structured electronic formats.

Businesses must maintain accurate and complete records of all sales and purchases. The record retention period for accounting documents has been reduced from 10 years to 8 years. Regular submission of VAT returns (Umsatzsteuervoranmeldung) is required, typically monthly or quarterly, depending on the business’s VAT liability. Businesses with a VAT liability exceeding €9,000 in the previous year generally file monthly, while those between €1,000 and €9,000 file quarterly. New businesses must file monthly for their first two years, regardless of turnover.

Deadlines for preliminary VAT returns and payments are typically the 10th day of the month following the reporting period. Businesses can apply for a one-month extension, known as “Dauerfristverlängerung.” An annual VAT return (Umsatzsteuererklärung) is required to reconcile VAT liabilities. The normal deadline for this annual return is July 31st of the following year, though this is extended to February 28th of the second following year if prepared by a recognized tax consultant. Small businesses benefiting from the small business exemption are exempt from filing an annual VAT return starting in 2025.