Restaurant owners in Germany need to take a close look at value-added tax (VAT) rates. Several special regulations apply, especially to beverages. In this article, you will learn what VAT is and what tax rates apply in the hospitality sector. In addition, we will give you an overview of which VAT rates apply to various beverages, such as water, wine, sparkling wine and soft drinks.

What's in this article?

• What is VAT?
  
• How much VAT is charged on beverages?
  
• What tax rates apply in the hospitality sector?
  
• Should hospitality businesses pass on VAT directly to customers?
  

What is VAT?

Value-added tax, or VAT for short, is a consumption tax that is levied on the sale of goods and services. Unlike a direct tax, such as income tax, VAT is charged indirectly by including it in the price of goods and services. Ultimately, it is consumers who pay the tax, since VAT only applies when a good is actually consumed or a service is used. The term "value-added tax" is derived from the principle of added value. This means that businesses pay value-added tax on the added value they generate by selling a good or service.

In Germany, this is regulated by the VAT Act (UStG), which sets out the legal framework for collecting, calculating and paying VAT. The current standard tax rate according to Section 12(1) of the UStG is 19%. However, a reduced rate of 7% applies to some everyday goods and services (see Section 12(2) of the UStG) that are classified by the legislator as essentials. These include public transport, sports or cultural events, and staple foods. In addition to the standard tax rates of 19% and 7%, a 0% rate of VAT is levied on a small number of services; this essentially means that they are tax-free. This applies, for example, to services related to schools and education, insurance, aviation and maritime transport.

For more information, see the Stripe articles that explore what value-added tax is and VAT rates for businesses.

How much VAT is charged on beverages?

Are beverages subject to VAT at the rate of 7% or 19%? Unlike with food, the legislator does not distinguish between beverages consumed on-site or off-site. In principle, the VAT rate of 19% applies to all beverages. However, there are some exceptions to this rule. The decisive factor is the proportion of staple foods, such as water or milk, that they contain. Still water, for example, is considered a staple food and is therefore subject to the reduced tax rate. Carbonated water does not fall into this category and is therefore subject to VAT at the rate of 19%.

The situation is more complicated with coffee and beverages that contain coffee. In addition to a coffee tax, VAT is also payable on these items – but the rate is not unified. The amount depends on the milk content of the coffee product. For a black coffee or a coffee with a milk content of less than 75%, the VAT rate is 19%. By contrast, the reduced rate of 7% applies to cappuccinos or latte macchiatos, since their milk content is more than 75% and milk is considered by the legislator as a staple food. However, if a cappuccino or latte macchiato is prepared with alternative milks such as soy, oat, coconut or rice milk, the VAT rate is 19%.

There are also special regulations for fruit beverages. Freshly squeezed juices are subject to the standard tax rate, while smoothies are subject to the reduced rate – but only if the smoothie is drunk at a bar table or off-site. What about fruit lassies? Here again, it is the milk content that is decisive. Less than 75% cow's milk, VAT is 19% – but more than 75%, it is 7%. The following table provides a list of beverages and their corresponding VAT rates.

Overview of beverage tax rates:

What tax rates apply in the hospitality sector?

There is no single rate of VAT that applies in the hospitality sector. First, it is necessary to distinguish between food and beverages (see above). However, with prepared dishes, it is important to determine whether they are consumed on-site or off-site. Deliveries and pickups are considered off-site sales that do not include additional services, and so they are subject to the reduced rate of 7% – but only if staple foods are sold. In turn, a tax rate of 19% applies to luxury products such as lobster, caviar or high-priced meats. The reduced rate may also apply to premises that do not offer seating. This includes snack stands without furniture or restaurants that only have standing tables.

As soon as seating is available and the customer can eat on-site, the premises is considered a restaurant and catering service, for which the 19% rate of VAT generally applies. The decisive factor is always whether additional services are offered beyond the food. Additional services can mean, for example, being advised by staff or being provided with crockery, although crockery does not include single-use items. Single-use tableware is used only once and then thrown away. Crockery has to be cleaned, which in turn makes this type of consumption a service, so even a snack bar without seating has to pay 19% VAT on food if it is served on crockery.

In order to support the hospitality sector, the VAT rate for restaurant and catering services was temporarily reduced during the COVID-19 pandemic. From 1 July 2020 to 31 December 2023, the reduced tax rate of 7% applied to food. The standard tax rate of 19% has been in effect again since 1 January 2024.

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Should hospitality businesses pass on VAT directly to customers?

If hospitality businesses pass on VAT directly to their customers, this can cause irritation. Some businesses charge a premium for a cappuccino with oat milk instead of cow's milk. The same applies to a smoothie that is drunk in a café, compared to a smoothie that is drunk off-site.

Instead of pricing out each beverage type individually, it is recommended for restaurateurs to apply mixed calculations. If a cappuccino is to be sold for €3.50, VAT at 19% would equate to an additional 67 cents, 7% VAT would mean an additional 25 cents. The average would be 46 cents. If the cappuccino is sold for €4.00, the VAT amounts for adding cow's milk and vegan milk types are approximately averaged. Nevertheless, the respective VAT rate must be correctly stated on the customer's receipt.