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.
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.
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:
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.
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.
Typically, nonprofit organizations must answer the following questions in order to decide whether a supply or service is subject to German VAT:
Your contact persons for all questions regarding VAT for nonprofit organizations in Germany are
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