What is VAT in Germany? (Mehrwertsteuer Explained)

Value Added Tax (VAT) is a consumption tax applied to goods and services. In Germany, this tax is known as Mehrwertsteuer (MwSt.) or Umsatzsteuer (USt.). It forms a substantial source of revenue for the German government, influencing the final prices consumers pay for a wide array of products and services.

Core Principles of German VAT

VAT functions as an indirect tax levied at each stage of the supply chain, from production to final sale. While businesses add this tax to the price of goods and services, the ultimate financial burden rests with the final consumer. Businesses act as intermediaries, collecting the tax on behalf of the government.

For example, a manufacturer adds value to raw materials, a wholesaler adds value by distributing products, and a retailer adds value through sales. Each entity in the chain charges VAT on their sales but can generally reclaim the VAT they paid on their own business purchases, ensuring that only the value they added is effectively taxed at their stage. This system prevents cascading taxation. The German VAT Act (UStG) outlines that all goods and services supplied for consideration within Germany are subject to this tax, as are imports and intra-community acquisitions.

German VAT Rates and Special Cases

Germany applies different VAT rates depending on the type of goods or services provided. The standard VAT rate is currently 19%. This rate covers a broad range of items, from clothing and gasoline to many pharmaceutical products and alcoholic beverages.

A reduced VAT rate of 7% applies to specific categories of goods and services. Examples include most food items and non-alcoholic beverages, books, newspapers, and magazines. This reduced rate also extends to tickets for cultural events such as theatre performances, concerts, and museums, as well as public transport and short-term hotel accommodation. However, food consumed on-site in restaurants is generally subject to the standard 19% rate, while takeaway or delivered food often benefits from the 7% rate.

Certain services and supplies in Germany are exempt from VAT. Common exemptions include certain financial and insurance services, healthcare services provided by licensed professionals, and specific educational services from public or recognized private institutions. The long-term rental of residential real estate and various cultural activities also fall under these exemptions.

Business Obligations and Input Tax

Businesses operating in Germany have specific obligations concerning VAT, most notably the concept of input tax deduction, known as Vorsteuerabzug. This mechanism allows VAT-registered businesses to reclaim the VAT they have paid on purchases of goods and services that are used for their business activities.

To be eligible for input tax deduction, businesses must receive proper invoices that adhere to specific legal requirements. An invoice must include details such as the date of issuance, a unique sequential number, the VAT identification numbers of both the supplier and the customer, and a clear description of the goods or services provided, including the net value, the applicable VAT rate, and the VAT amount. Invoices must be issued within six months of the supply and retained for ten years for audit purposes.

Businesses must register for VAT if they exceed certain turnover thresholds. For domestic small businesses, there is a special regulation called Kleinunternehmerregelung. If a business’s turnover did not exceed €22,000 in the previous calendar year and is not expected to exceed €50,000 in the current year, it can opt not to charge VAT on its sales. However, businesses choosing this small business exemption cannot reclaim input tax on their purchases, which may be a disadvantage for those with significant business expenses. Foreign businesses have no VAT registration threshold for taxable supplies in Germany.

Cross-Border Transactions

VAT rules in Germany apply to transactions across international borders, particularly within the European Union (EU) and with non-EU countries. For transactions involving goods and services between Germany and other EU member states, specific VAT rules apply. This includes intra-community supplies and acquisitions.

The reverse charge mechanism applies for certain business-to-business (B2B) transactions within the EU. When a German business receives goods or services from a supplier in another EU member state, the responsibility for reporting and paying the VAT shifts from the supplier to the recipient. The supplier issues an invoice without charging VAT, and the German recipient accounts for both the input VAT and the output VAT on their VAT return. This simplifies compliance for non-German EU suppliers by removing the need for them to register for VAT in Germany for such transactions.

When goods are imported into Germany from non-EU countries, they are subject to German import VAT (Einfuhrumsatzsteuer). The import VAT rates are the same as the domestic VAT rates (19% or 7%) and are calculated on the customs value of the goods, which includes transport costs and duties. Businesses can reclaim this import VAT as input tax if the goods are imported for business purposes and proper documentation, such as customs declarations and proof of payment, is maintained. Conversely, exports of goods from Germany to non-EU countries are zero-rated.