Value Added Tax

Value added tax (VAT) is not borne by the selling company, but paid by the end user of a product or service.

The normal VAT rate of 19 percent is just under the European average.

A lower rate of 7 percent is charged for convenience goods and services needed on a day-to-day basis, such as food, newspapers, or public transport.

Some services – including banking, healthcare, and non-profit work – are VAT-exempt.

The official German term for VAT is Umsatzsteuer, but it was originally called Mehrwertsteuer and is still often referred to by this name.

Procedure
Companies must add VAT to their prices. Assuming the net sales price of a car is EUR 15,000, the car dealer must demand an extra 19 percent, or EUR 2,850, from the buyer. The gross price for the customer is therefore EUR 17,850. The dealer transfers the VAT received to the tax authorities on a monthly, quarterly, or annual basis. The period depends on the level of company turnover.

Input VAT
Companies themselves also pay VAT when they purchase goods or services. The taxes collected and paid can be balanced out in the VAT return as input VAT (Vorsteuerabzug).

In practice, companies occasionally pay out more VAT than they receive. This is often the case in the start-up phase, for example, when expenditure is high but income is still low. In these cases, the tax authority quickly refunds the excess tax paid.

SMEs – Imputed Taxation and Taxation of Actual Value
An important ruling for small and medium-sized companies is the option of actual receipts taxation (Istbesteuerung). Under the normal method of imputed taxation (Sollbesteuerung), VAT is due as soon as goods or services are billed, irrespective of the time of actual payment. However, German law provides an exception to ensure that companies do not experience cash flow problems as a result. A company can apply for VAT to be calculated by the actual receipts taxation method for a turnover of up to EUR 250,000, rather than the imputed taxation method. In this case, smaller companies do not need to forward the VAT to the tax authority until the payments have actually been received. In states in eastern Germany, the ceiling will be EUR 500,000 until the end of 2009.

VAT in the European Single Market

Trade within the EU is free from customs and other restrictions.

However, a few rulings must be borne in mind with regard to VAT. When goods or services are sold to private consumers in other member states, the VAT for a delivery from Germany is included on the invoice in the same manner as for deliveries in Germany, and is collected and transferred to the tax authority.

The foreign consumer therefore pays the German supplier the price including VAT, and the vendor then transfers the VAT to the German tax authority. In the case of imports from countries that also charge VAT, however, no German VAT needs to be paid. The German consumer only pays the purchase price including (foreign) VAT to the foreign importer, who then pays the VAT in the home country.

VAT identification numbers exist to enable the tax authorities to retain an overview of the traffic of goods across borders. This number indicates that European companies are liable to VAT.

Inport Turnover Tax (Einfuhrumsatzsteuer)

Goods imported from non-EU states are liable to import VAT.

The import VAT (Einfuhrumsatzsteuer) rate is 19% and is paid to the customs authority.

However, the Import Turnover Tax on goods imported from non-EU states can be deducted as input tax (Vorsteuer) by the tax authority if the company resells the goods. As a prerequisite, the company must have the necessary import documents with customs proof of payment (the import declaration). Exports are exempt from VAT.

No Import VAT on Intra-Community Shipments
Goods sold directly from a Germany-based company to a commercial customer in another EU member state in the course of commercial trade are exempt from import VAT.

However, the recipient entrepreneur in the EU member state of destination is subject to acquisition tax with regard to the received intra-Community shipment. The acquisition tax rate – like import VAT – amounts to 19% / 7%, but in contrast to import VAT it is the recipient entrepreneur who has to declare these acquisitions to the tax authorities in the advance VAT return (Umsatzsteuer-Voranmeldung).

Like all other input VAT, the tax-paying entrepreneur can directly deduct the paid acquisition tax in the advance VAT return.

The following additional information have to be included in any invoice of the exporting company in the course of a VAT-exempt intra-Community shipment.

Information about the VAT exemption of the intra-Community shipment

• VAT identification number of the exporting company (in Germany issued on request by the Federal Central Tax Office)
• VAT identification number of the receiving company/purchaser.

The VAT identification numbers of selling and receiving company must be issued from different EU member states

Comparison of Real Property and Trade Tax in Germany and in North Rhine-Westphalia
Over 70 percent of all the German municipalities with the lowest tax collection rates are located in North Rhine-Westphalia. With regard to municipal taxes in general, North Rhine-Westphalia is to be found in the lower to middle regions.

(Source: Data and Statistics Office of the State of North Rhine-Westphalia)