Are you a freelancer who needs to charge and report VAT in Germany? With a number of taxes that freelancers have to deal with, VAT can be quite confusing. Here is a quick guide to VAT for freelancers in Germany.
Everyone knows it. Everyone pays it. You know that you cannot avoid it. 😉
We’re talking about the much confusing Value-Added Tax or VAT in Germany.
If you suddenly go from being a consumer to a freelancer or a self-employed person in Germany, you have to understand VAT more precisely, calculate it accurately, charge it and pay it correctly to the tax office.
Whether you are a trader or freelancer, or if you have your own business, you will have to deal with VAT. In Germany, there are very clear rules on how the VAT works.
All matters relating to the handling of VAT are regulated in the German VAT Act (UStG). For example,
- the obligations relating to invoicing
- the advance return for VAT
- the VAT return
- the deduction of input tax
It also lists in which cases how much tax on sales/purchases must be calculated.
In this post, you can read some important facts about VAT for freelancers in Germany.
But first, here is a glossary of some important German terms and their English meanings in this article.
|German Term||English Translation|
|Umsatzsteuer / Mehrwertsteuer||VAT / Value Added Tax/ Sales Tax|
|Europäische Union/ EU-Ausland||European Union|
|Nicht europäisches Ausland/ Drittland||Non-EU/ Third-country|
|Kleinunternehmerregelung||Small business rule|
|VAT Reverse-Charge Verfahren||VAT Reverse-Charge|
1. What is VAT For Freelancers in Germany?
VAT in Germany is a tax levied on the added value of a product or service along the entire value chain. The freelance or company collects this tax when selling a product or service and then pays the VAT to their local tax office.
VAT is levied in Germany on almost all goods and services. From a finance point of view, VAT is a value-added tax, as in the end only the difference between the sales price minus input services is taxed.
Since only the added value that a company generates is taxed, the amount paid to the tax office can be offset against the VAT that the company itself has already paid on preliminary products (raw materials, investments, etc.).
This is known as input tax deduction. In practice, the tax office always calculates the balance between the VAT received and the input tax paid.
2. How Much VAT Should You Charge?
Currently, the VAT in Germany is 19% on all products and services.
Exceptions are regulated in the fourth section of paragraph 12 of the German Value Added Tax Act, which currently applies a reduced rate of 7% VAT in Germany.
These exceptions to value-added tax include, for example:
- Certain foods items
- Livestock and plant rearing
- Tickets for cultural events, theatre, music concerts or museums
- Film distribution and screenings
- Circus performances
- Community service
- Operation of swimming pools and spas
- Overnight stays in hotels.
In case you’re unsure about your VAT amount, please consult a tax advisor specialising in VAT in Germany.
NOTE: The VAT rate has reduced from 19% to 16% and the reduced VAT rate from currently 7% to 5% for a limited period from July 1, 2020 to December 31, 2020.
3. How Do I Correctly Pay the VAT to the Tax Office?
The freelancer collects VAT on behalf of the tax office and must, therefore, pay it to the tax office on a regular basis. This is done via the advance return for value-added tax (Umsatzsteuervoranmeldung).
Here, the freelancer reports the turnover and the collected VAT.
At the same time, the freelancer must also report the VAT they have paid to other companies for services, etc. in order to be able to deduct input tax. If more VAT was paid than input tax, the difference must be paid to the tax office.
If the input tax amount was higher than the VAT received, this results in a credit that is paid out by the tax office.
You have TWO options for submitting your advance VAT return in Germany
- Do it manually: Either you go through all your income and expenditure for the advance return period, calculate the VAT collected and spent and enter all the figures manually, field by field, on the advance VAT return form in ELSTER online.
- Do it automatically with just a few clicks: A much quicker and easier way is to submit it through a dedicated VAT filling software for freelancers such as Sorted. With a tool like Sorted, you can create the advance return for VAT in English and file it directly to your local Finanzamt.
The UI of Sorted uses very simple English which makes it extremely helpful for expat freelancers who are uncomfortable with complicated legal or finance-related German terminologies.
You don’t even need an Elster certificate for this – Sorted sends the VAT return directly to the tax office. In addition, you can manage all your invoices and expenses in one place and have an overview of your business finances at all times.
Freelancers registered as Kleinunternehmer can use this tool for as little as €80 per year.
4. What Must be Taken Into Account When Filing the Advance Return for VAT?
Freelancers are obliged to submit an advance VAT return by the 10th of each month. This means that the VAT liability must be calculated and at the same time paid to the tax office.
Quarterly registration is possible, provided that no more than €7,500 VAT liability has arisen in the previous year.
The basis of assessment for the calculation of the turnover tax is initially the agreed remuneration (estimated taxes). The relevant factor here is which amounts are to be paid according to invoices – the actual incoming payment is not taken into account.
Since this can lead to charges for small companies in the event of late payments by customers, it is possible to tax on the basis of the actual remuneration received (actual taxation).
To do this, you must submit an application to the tax office. However, this is only permissible if your annual turnover does not exceed € 500,000.
5. VAT and Small Business Regulation
Freelancers whose annual turnover does not exceed € 22,000 and whose turnover in the next year is also expected to be below € 50,000, can exempt themselves from the advance return of VAT and do not have to pay VAT to the tax office.
This is known as Kleinunternehmerregelung.
However, the freelancer will then no longer be able to claim input tax and will not be able to show VAT on their invoice.
Read more about Kleinunternehmerregelung
6. VAT Regulation for Start-ups
During the first two calendar years, business start-ups are obliged to submit their advance VAT returns on a monthly basis. The VAT advance return should be submitted by the 10th day of the following calendar month. An extension of the deadline for another month can be applied for at the tax office.
Since 2005, advance VAT returns have been submitted electronically – further information can be found at www.elster.de. The respective annual statement of VAT is made with the VAT return to the tax office responsible for your company in the following year.
7. How to Charge VAT in Germany, EU Countries and Third Countries
If you sell goods or offer a service as a freelancer to clients in and outside Germany, you have to comply with different VAT regulations. These can be roughly divided into three geographical areas:
- European Union
- Non-European countries or Third Countries
Each area has different rules that you must follow. If you make mistakes, it could happen that you have to pay VAT even though you are exempt from VAT and are burdened with unnecessary fines and audits.
So here was my guide to VAT for freelancers in Germany. Are you also a freelancer who charges and registers VAT? Do you have any insider tips for dealing with VAT for freelancers in Germany?