Are you a freelancer intending to work with clients in Germany, EU or outside the EU? Read here on how to correctly Charge VAT as a Freelancer in Germany to your international clients.
If you are an expat freelancer or self-employed person moving soon to Germany, chances are you want to bring your international clients with you as well as work with local businesses.
Freelancers or self-employed people in Germany face no restrictions for the geographical location of their clients. However, there are a few rules to keep in mind when writing invoices to your local and international clients.
Like in most countries, VAT or sales tax is quite commonly charged on goods and services in Germany. The rules on how much and who to charge VAT can vary from country to country. This is the focus of this blog post.
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|
Let’s take a look at how freelancers in Germany can charge VAT to their international and local clients.
1. What is value-added tax?
In general terms, sales or value-added tax or VAT is a tax levied on the added value of a product or service along the entire value chain. If you sell goods or offer a service as an entrepreneur or a freelancer, you have to pay a certain amount of tax to the tax office for the turnover generated.
VAT is the most important source of income for the state. A company collects this tax when selling a product or service for the state and then pays the VAT to the tax office.
As noted in the glossary above, you will often see two different terms for this tax in both English and German.
The difference between the value-added tax and sales tax is, in short: NONE.
They are synonymous with one another.
2. Should you charge 19 % or 7 % VAT?
The normal VAT rate in Germany is 19%.
The reduced rate for VAT is 7 % and applies to some special product categories. These exceptions to value-added tax include some of the following:
- Some foods items
- Livestock rearing and plant breeding
- Benefits from the activity as dental technician and certain dental services
- Tickets for cultural events, theatre, music concerts or museums
- Film distribution and screenings
- Circus performances
- Community service
- Operation of swimming pools and spas, or
- Overnight stays in hotels
If you are unsure, how much VAT should you charge on your invoices, please consult a tax advisor specialising in value-added tax.
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. VAT for providing services to clients in the EU and outside
If it is already clear to you at the start of your business that you want to provide services to clients across EU borders, you should apply for a VAT identification number at the tax office responsible for you.
This is done at the time of registration as a freelancer/ self-employed person with Finanzamt.
With the VAT identification number, you can deliver your goods or services to other EU countries.
Also, read this post to learn more about the German VAT ID and how to apply for it.
4. Charging VAT in Germany, EU countries and Third countries
The VAT in Germany is relevant for three geographical regions:
- European Union
- Non-European countries or Third countries
There are different rules for each region that you must follow in your invoicing. If you make mistakes in your invoices, you could pay VAT even though you are exempt from VAT and face additional unnecessary costs.
What is a third country?
The term third country refers to places outside the German and EU territory. Russia, Norway, Japan, China or the United States of America are counted among the third countries.
You may be interested in- How to Correctly Create a German VAT invoice (incl. FREE Templates)
4.1 VAT for services provided to clients in Germany
In Germany, sales tax is currently 19%, with a reduced rate of 7% on most consumer goods – such as food or books. These requirements are regulated in the Value Added Tax Act (UStG) and define all specifications for invoicing.
An exception applies to small businesses (Kleinunternehmerregelung).
Learn more about Kleinunternehmerregelung here.
4.2 VAT for services provided to clients in other European countries
In addition to the basic information on invoices, such as the number of the invoice and the date of delivery, the following things must be observed when issuing invoices within the EU.
For services supplied in the EU, there is a reversal of the tax liability. It is called the “reverse charge procedure”.
The recipient of the service (your client) calculates the tax themselves based on the applicable tax rate in their country, declares the amount to their tax office and deducts it.
In summary, this means that VAT is levied in the country where the customer is based. Besides, invoices issued abroad must contain a reference to the transfer of the tax liability.
4.3 VAT for services provided to clients in a third country
The same applies here.
Show the invoice without the German sales tax, which means you don’t have to pay sales tax.
There is no uniform legal basis for invoicing to clients located in a third country (non-European countries). The tax systems of third countries differ considerably. However, many countries use a similar system as the reverse charge procedure.
Whether the respective country has such regulation must first be checked by the freelancers/ self-employed person.
A Little Heads-up!
Invoices to other EU countries and third countries are subject to the requirements of the GoBD. This means that you must keep them unaltered – for 10 years!
If the GoBD are not adhered to, there is a risk of high additional demands by the tax office. You can automate this process by using an invoicing & accounting tool that can automate most of the bookkeeping for you. Saving you tons of admin time, paperwork and possible errors!
Read my practical guide on how to choose an AFFORDABLE (and English) accounting tool in Germany.
5. How do you report advance VAT return to Finanzamt
The advance VAT can only be reported online. The submission in paper form is only permitted in exceptional cases and upon special requests.
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 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 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 €80 per year. High earning freelancers and sole traders can use Sorted for €60 per quarter (€240 per year).