Value added tax (VAT) is a significant source of revenue for the state, making it one of the most crucial forms of taxation in Germany. It is imposed on payment for goods and services provided by companies within the country. The tax rate is either 19 percent or 7 percent of the fee for goods and services and is ultimately borne by the end consumers.
Known as a ‘net all-phase tax with input tax deduction’, VAT is only charged on the added value produced at each stage of value creation. This ensures that no value added tax is generated during the value creation process.
Input tax refers to the VAT charged to business owners when they purchase goods or services. Under certain conditions, this can be offset against the VAT due in advance VAT returns.
Section 15 of the Value Added Tax Act (Umsatzsteuergesetz, UStG) outlines the conditions that must be met for input tax deduction:
- The tax must be legally owed.
- The tax is due for supplies and other services.
- The other service was performed by another business for the tax debtor’s company.
The German VAT Act also provides additional scenarios for the application of input tax deduction, such as the import or intra-community movement of goods.
As part of the taxation procedure, business owners must electronically submit a VAT advance return to the tax office by the tenth day following the end of each advance return period. Business owners are responsible for determining the reportable amounts. The advance return includes all taxable and tax-exempt turnover of an advance return period and turnover with intra-community reference.
In addition to reporting the turnover and resulting VAT, the business owner also reports their deductible input tax. The value added tax payable or the value added tax surplus is calculated by subtracting the input tax from the sum of the value added tax. The VAT due must be paid to the tax office by the tenth day following the end of the reporting period.
The calendar quarter generally serves as the advance return period, but this can change to monthly or annual advance returns depending on the amount of VAT paid in the previous year. In addition to the advance VAT returns, an annual VAT return must be submitted, declaring the annual total for reportable turnover and input tax.
VAT is a crucial factor in planning your company’s liquidity. Therefore, proactive tax planning is essential. The German Value Added Tax Act is one of the most complex areas of law and has become more involved in recent years due to the EU’s harmonization efforts.
The implementation of the EU VAT Directive introduced additional regulations and special tax rules into the German VAT Act. Furthermore, numerous rulings by the Federal Fiscal Court and the European Court of Justice have implications for the taxation of companies in Germany.
To avoid penalties and sanctions from tax authorities as well as unintended tax consequences, it is crucial to seek tax and legal advice in this area. This is especially true for internationally active companies as they must consider the effects of value added tax when structuring their transactions, such as in the application of international trade clauses (Incoterms).
Our team of tax advisors and specialist tax lawyers offer a range of services in the area of VAT law, including:
- Support and assistance with VAT registration in Germany and other countries
- Determination of entrepreneurial status
- Preparation, review and submission of advance VAT returns, recapitulative statements, refund applications and annual VAT returns
- Optimization of internal processes
- Advice on general VAT issues, such as invoicing, taxability and tax exemptions
- Counsel on VAT issues in national and international contexts
- Instruction on the intersection between VAT and customs law
- Support in dealings with tax authorities, such as during tax audits
- Counsel on specific VAT matters
Are you in need of a lawyer or tax advisor who specializes in VAT law? Do you have queries regarding input tax deduction or VAT advance returns? We are here to help!
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