Value Added Tax (VAT) for German Nonprofit Organizations
VAT in associations, foundations and nonprofit LLCs
For the German government, VAT is a main source of income and is therefore one of the most important taxes.
Tax is levied on the remuneration for goods and services provided within Germany. The value added tax amounts to either 19 or 7 percent of the remuneration and is ultimately borne by the end consumers.
German nonprofit organizations, such as associations, foundations, charitable LLCs, charitable stock corporations and charitable entrepreneurial companies primarily encounter VAT issues when they start a new economic activity. This can concern business activities within the scope of a so called unrelated trade or business (steuerpflichtiger wirtschaftlicher Geschäftsbetrieb), traditional charitable activities furthering the charitable purposes of the charity, or it can be a sponsoring measure, for example. Also, innovative forms such as social entrepreneurship, which combine economic activities with social concerns, are increasingly becoming the subject of VAT considerations.
VAT is incurred despite exemption from corporate income tax
Nonprofit organizations often focus on avoiding corporate and trade tax by taking strict care not to exceed the turnover exemption limit of EUR 35,000 p.a. that applies to the organization's (unrelated trade or) business operations for corporate income tax reasons.
In this regard, many charitable organizations are subject to a misunderstanding: They assume that the exemption from corporate income tax also exempts them from value added tax. However, this is not the case. It is only in their purely charitable sphere (where, for example, donations and membership dues are received) that tax-exempt nonprofit organizations are not subject to VAT, because these transactions are not considered a business for value added tax purposes.
Are charitable organizations exempt from VAT in Germany?
In Germany, there is no general VAT exemption for nonprofit organizations per se, because the tax exemptions applicable under VAT law only apply to specific services listed in the German Value Added Tax Act and the European Value Added Tax Systems Directive. Since these services are usually only provided in certain sectors, organizations from the following sectors can typically expect to be exempt from VAT for their services listed in the Code:
- welfare institutions,
- cultural institutions,
- educational institutions, and
- youth hostels.
When does the reduced tax rate of 7 percent apply?
In principle, all deliveries and services are to be taxed at 19 percent. However, numerous goods to cover the basic supply of goods benefit from a reduced tax rate of only 7 percent. These include food, for example, but also books and wheelchairs as well as prostheses and more than 50 other items listed in an annex to the VAT Act.
For charitable organizations, the preferential treatment of goods and services provided by the charity while promoting its charitable purposes is of particular importance. A special provision in the Value Added Tax Act often grants a reduction of the tax rate to 7 percent in these cases.
However, for many charitable organizations it is difficult to determine whether they are subject to the general rate of 19 percent or only to the reduced rate of 7 percent. The decision usually depends on the concrete individual case and can often only be made in consideration of the European Value Added Tax Systems Directive.
What penalties could be imposed if NPOs do not pay VAT?
If it is subsequently established (e.g. during a tax audit) that services requiring VAT have been rendered but no declaration has been made, there is a risk of criminal prosecution in addition to high supplementary payments. In most cases, tax authorities assume a case of tax evasion. For nonprofit organizations, the accusation of tax evasion is to be taken very seriously, because it can lead to the complete revocation of the tax-exempt status.
The effects of this withdrawal can be drastic, especially if public subsidies are reclaimed, donations or endowments become subject to subsequent taxation with inheritance tax, or if the organization is held liable for the tax advantages that the donors had because of their donation deductions. Furthermore, all income that was previously received tax-exempt by the charity, is now subject to ordinary corporate income tax.
Audit steps regarding value added tax for nonprofit organizations
Typically, nonprofit organizations must answer the following questions in order to decide whether a supply or service is subject to German VAT:
- Is the charity engaged in business activities?
- Is the turnover subject to tax or does the law (Article 4 of the Turnover Tax Act, § 4 UStG; Article 132 ff. of the European Value Added Tax Systems Directive) provide for an exemption from tax?
- What is the tax base and tax rate: 7 percent or 19 percent?
- Is it possible to reduce the payment burden to be paid to the tax authorities by claiming input tax?
Our consulting services on Value Added Tax
- We provide you with legal and tax advice in the run-up to your business activities so that the intended activity is correctly classified for VAT purposes. In this way, errors and possible additional tax payments are avoided from the start.
- If you are planning larger investments, VAT optimization can provide more liquidity if input tax from invoices can be deducted.
- We also check whether your activities are part of your charity's tax-free spheres (your organization's asset management sphere or any business operations with which the charity is promoting its charitable purposes), so that either no VAT applies or the reduced tax rate can be applied.
- We support you in the question of whether your charity can directly invoke exemption regulations under EU law or whether it is appropriate to treat your organization's membership fees as tax-free or as taxable.
- We will examine all VAT structuring options for you, in particular the VAT consolidated tax group.
- In the case of sponsoring services, we take care of the VAT classification for you.
- We take care of the VAT declaration for you and prepare both advance VAT declarations and VAT returns.
Your attorney for Value Added Tax in German nonprofit organizations
Your contact persons for all questions regarding VAT for nonprofit organizations in Germany are
- Attorney Johannes Fein (Certified Specialist for Tax Law) and
- Attorney Dr. Thomas Dehesselles (Certified Specialist for Tax Law).
The easiest way to reach us is by e-mail (firstname.lastname@example.org) or by telephone (+49 69 76 75 77 80). Do not hesitate to contact us with your questions. We are here to assist.