What Is the VAT in Germany and How Does It Work?

German VAT Fundamentals

Value Added Tax (VAT), known as Mehrwertsteuer (MwSt.) or Umsatzsteuer (USt.) in Germany, is a consumption tax applied to most goods and services at each stage of production and distribution. Businesses collect this tax, but the final consumer ultimately bears the financial burden as part of the purchase price.

The German VAT system operates on an “all-phase net sales tax with input tax deduction” principle. Businesses charge VAT on their sales (“output VAT”) and pay VAT on their purchases (“input VAT”). Businesses can generally deduct the input VAT they have paid from the output VAT they have collected. The net amount, representing this difference, is then remitted to the tax authorities. This mechanism ensures that businesses act primarily as tax collectors for the government, and prevents the tax from compounding at each transaction stage.

Applicable VAT Rates and Exemptions

Germany applies different VAT rates: a standard rate and a reduced rate. The standard VAT rate is 19% and applies to the majority of goods and services sold within the country, including electronics, clothing, most restaurant services, and professional consultations.

A reduced VAT rate of 7% applies to certain categories of goods and services considered essential or culturally significant. This includes many foodstuffs, books, magazines, newspapers, local public transportation, and tickets for cultural events like theater performances or concerts.

Beyond these rates, certain services are exempt from VAT. Common exemptions include various financial services, certain medical and dental care services, and educational services. These exemptions are outlined in the German Value Added Tax Act (Umsatzsteuergesetz). A small business exemption also exists for businesses with limited turnover, allowing them not to charge VAT on their sales if certain thresholds are not exceeded.

VAT for Businesses

Businesses providing taxable goods or services in Germany must engage with the VAT system. They must charge VAT (output VAT) on their sales to customers, which is then remitted to the German tax authorities (Finanzamt).

Businesses can deduct the input VAT they pay on business-related purchases. For instance, if a business buys supplies or equipment, the VAT paid can typically be offset against the output VAT collected from sales. This ensures businesses are not financially burdened by the tax on their expenditures, as the ultimate tax cost falls on the end consumer.

VAT registration in Germany is mandatory for businesses exceeding specific annual turnover thresholds. Businesses can opt for the small business exemption if their turnover did not exceed EUR 25,000 in the previous calendar year and is not expected to exceed EUR 100,000 in the current year. When issuing invoices, businesses must include their VAT identification number and clearly show the net price, the applied VAT rate, the VAT amount, and the total gross amount.

Business VAT Reporting

Businesses registered for VAT in Germany are required to submit regular VAT declarations to the Finanzamt. The frequency of these submissions depends on the business’s annual VAT liability, with some filing monthly, others quarterly or annually.

These periodic reports are known as VAT pre-declarations (Umsatzsteuer-Voranmeldung). They detail the output VAT collected from sales and the input VAT paid on purchases during the reporting period. The net difference, representing the VAT due or refundable, is then calculated. Businesses must also file an annual VAT return (Umsatzsteuererklärung) for each calendar year, providing an overall reconciliation. Payment of any net VAT due is typically made by the tenth day of the month following the reporting period, aligning with submission deadlines.