Input tax deduction in Germany explained

Tax
Tax

Stripe Tax lets you calculate, collect, and report tax on global payments with a single integration. Know where to register, automatically collect the right amount of tax, and access the reports you need to file returns.

Learn more 
  1. Introduction
  2. What is an input tax deduction?
  3. What is the difference between input tax and VAT?
  4. How does input tax deduction work?
  5. What are the requirements for input tax deductions?
    1. Entrepreneur status
    2. Services or deliveries by other companies
    3. Application to tax-obligatory sales
    4. Proper invoicing
  6. When can you deduct input tax?

The input tax deduction is an essential component of the German tax system, offering companies significant financial relief. It makes it possible to offset value-added tax (VAT) paid on business expenses against VAT paid to the tax office. In this article, you will learn what input tax deduction is and how it differs from VAT. We also explain how this exemption works, what requirements you must meet, and when you can deduct input tax.

What’s in this article?

  • What is an input tax deduction?
  • What is the difference between input tax and VAT?
  • How does input tax deduction work?
  • What are the requirements for input tax deductions?
  • When can you deduct input tax?

What is an input tax deduction?

According to Section 15 of the German VAT Act (UStG), input tax deduction is a tax procedure that enables companies subject to VAT to offset the tax they have paid on their purchases of goods and services against the amount they collect from their customers.

Input tax refers to the VAT that companies pay when purchasing goods and services. The VAT liability is calculated as the difference between the VAT collected from customers and the input tax that can be deducted. The tax office calculates a company’s obligation regularly as part of preliminary VAT returns and the annual return. This ensures they pay their taxes in full or receive refunds for any excess payments.

What is the difference between input tax and VAT?

Think of input tax as the other side of VAT. Taxable companies usually collect VAT on their deliveries and services and pay it to the tax office as a transitory item (Section 1, Paragraph 1, No. 1 of the UStG). In this sense, they act as mediators.

When companies purchase goods or services themselves, they also initially pay VAT. However, they can claim this input tax back from the tax office. Although private end customers pay the gross amount when making a purchase, companies only have to pay the net value due to the input tax deduction. This is because they can subtract the VAT paid on expenses from their sales liability and only pay the difference between the collected VAT and their input tax. This prevents the tax authority from taxing companies twice and ensures that only the end customer bears VAT.

How does input tax deduction work?

Input tax deduction is an offsetting of the tax you’ve paid on purchases. You can complete this in five steps:

Steps
Responsible party
A company purchases goods or services and pays input tax to the suppliers Company
A company sells goods or services and charges VAT to its customers Company
As part of the preliminary VAT return, the company submits the amounts of paid input tax and collected VAT to the tax office Company
The tax office calculates the company’s VAT liability from the difference between the two amounts Tax office
Depending on the determined VAT liability, the company must either transfer the difference to the tax office or receive a refund Company / tax office

Whether a company has to pay taxes or receive a refund depends on its income, expenses, and the associated tax amounts. A positive VAT liability arises if the input tax is less than collected. In this case, they must pay the difference to the tax office. If it exceeds the VAT collected, this results in a negative VAT obligation or an input tax surplus. In such cases, the tax office will refund the difference to the company.

Input Tax Amount < VAT Amount = VAT Liability
Input Tax Amount > VAT Amount = Input Tax Surplus

Example 1 for calculating the VAT liability

Gross sales prices
Gross purchase prices
Gross sales prices €23,800 Gross purchase prices €14,875
Net sales prices €20,000 Net purchase prices €12,500
VAT amount €3,800 Input tax amount €2,375

VAT Amount – Input Tax Amount = VAT Liability
€3,800 – €2,375 = €1,425

The VAT liability in this example calculation is positive and amounts to €1,425. In the opposite case, the company pays the difference to the tax office.

(Assumption: the purchases and sales made are subject to VAT at a rate of 19%.)

Example 2 for calculating the VAT liability

Gross sales prices
Gross purchase prices
Gross sales prices €11,900 Gross purchase prices €14,280
Net sales prices €10,000 Net purchase prices €12,000
VAT amount €1,900 Input tax amount €2,280

VAT Amount – Input Tax Amount = VAT Liability
€1,900 – €2,280 = €380

The VAT liability in this example calculation is negative. This results in an input tax surplus of €380, which the tax office refunds.

(Assumption: the purchases and sales made are subject to VAT at a rate of 19%.)

Stripe Tax simplifies the process by automatically calculating the correct tax amounts for all your sales. It also provides detailed insights on how much VAT is owed on purchases and sales. This will help you determine which input tax figures you can claim and how high your expected VAT liability is.

What are the requirements for input tax deductions?

To deduct input tax, you must meet certain conditions regulated by the UStG. The following is an overview of the most important requirements.

Entrepreneur status

According to Section 2 of the UStG, only entrepreneurs can subtract input tax, i.e. persons or organisations who independently carry out a commercial or professional activity to make a profit. This means that private individuals are excluded from deducting it. The same applies to companies that use small business regulations as outlined by Section 19 of the UStG. Because they do not charge VAT on goods and services sold, they cannot claim input tax on their purchases.

Services or deliveries by other companies

An input tax deduction is only possible if companies purchase goods or services from other businesses subject to VAT. As an example, if a company pays a private individual for a service provided, it cannot claim it.

Application to tax-obligatory sales

Not every purchase of goods or services by a company from another automatically entitles it to deduct input tax. For instance, expenses for private purposes or those without a clear connection to business activities do not qualify. In addition, there are some special regulations: e.g. entertainment expenses are only deductible at 70% (Section 4, Paragraph 5, No. 2 of the German Income Tax Act (EStG)) because they often have a private nature. Gifts to business partners only qualify for an input tax deduction of up to €50 per person per year (Section 4, Paragraph 5, No. 1 of the EStG).

Another important prerequisite for input tax deduction is that the company must use the goods and services for taxable sales. This excludes, for example, certain medical offerings or the rental of residential property. Still, some tax-free transactions, such as intra-community supplies, make this deduction possible.

Proper invoicing

The tax office uses the company’s incoming invoices to calculate input tax and the resulting VAT liability. To qualify, they must contain all mandatory information as per Section 14 of the UStG:

  • Complete name and address of the company providing the product or service
  • Complete name and address of the recipient of the product or service
  • Date of the invoice
  • The date of delivery of the product or service
  • The tax number issued to the performing company by the tax office or the VAT identification number issued by the Federal Central Tax Office
  • A consecutive, unique invoice number
  • The quantity and type of products delivered or the scope and type of service provided
  • Net amount
  • The applicable tax rate and the corresponding tax amount or, in the case of a tax exemption, a reference to the tax exemption
  • Gross amount

You can find detailed information on this topic in our article on invoicing.

When can you deduct input tax?

Companies can claim input tax deductions as part of their preliminary VAT returns. According to Section 18, Paragraph 1 of the UStG, they must submit these to the tax office monthly or quarterly. The cycle depends on the VAT paid in the previous calendar year. If that exceeds €7,500, they can file monthly. A quarterly return is sufficient if the paid VAT in the previous year is between €1,000 and €7,500. An exemption is possible for totals under €1,000. Nevertheless, anyone in their first or second year of business must submit a monthly VAT return, regardless of the amount collected.

The decisive factor for the timing of the input tax deduction and, with it, any additional payment or refund, is the type of taxation. The tax office distinguishes between accrual-based and cash-based taxation (see Sections 16 and 20 of the UStG). With accrual taxation, you must pay collected VAT directly during invoicing. When companies receive incoming invoices, they can claim input tax immediately. For cash-based taxation, however, it is not the invoice date but the time of payment that is decisive. Companies can only deduct input tax when they have received or spent the money.

Regardless of monthly or quarterly VAT returns, companies subject to it must submit an annual return at the end of the year. This summary corrects the previously submitted advance notifications if necessary. The tax office calculates your VAT obligation for the entire year and might adjust your input tax payment or refund.

The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accuracy, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent lawyer or accountant licensed to practise in your jurisdiction for advice on your particular situation.

Ready to get started?

Create an account and start accepting payments – no contracts or banking details required. Or, contact us to design a custom package for your business.
Tax

Tax

Know where to register, automatically collect the right amount of tax, and access the reports you need to file returns.

Tax docs

Automate sales tax, VAT, and GST collection and reporting on all your transactions – low- and no-code integrations are available.