Businesses in Germany must be diligent with invoicing, especially when offering services. The type and place of supply and the recipient have a direct impact on where value-added tax (VAT) is charged.

This article explains ancillary services within the meaning of Section 3(9) of the German VAT Act (UStG). We also outline how to determine the place of supply for services under Section 3a of the UStG for B2B and B2C transactions, including cases involving third countries. Lastly, we explain which VAT rules apply in each case and how to avoid common errors.

What’s in this article?

• What is an ancillary service?
  
• How to determine the place of supply in B2B and B2C transactions
  
• Ancillary services supplied to customers outside of Germany
  
• What VAT regulations apply to ancillary services?
  
• Risks and causes of errors with ancillary services
  

What is an ancillary service?

An ancillary service means any supply that does not constitute delivery of an item. Section 3 of the UStG governs which supplies constitute ancillary services. According to Paragraph 9, an ancillary service is any supply that does not involve the transfer of the power to dispose of an item. Conversely, deliveries a business makes are defined in Section 3.1 of the UStG as supplies that give third parties the power to dispose of an item. All supplies that do not fall under this definition qualify as ancillary services.

Ancillary services include services of an intangible nature, travel services, and tolerating or deliberate omission of actions. An example of the latter is when a property owner tolerates his neighbor running a cable through his property for a fee. Another example includes entering into a contract and being paid not to carry out a specific activity.

How to determine the place of supply in B2B and B2C transactions

The place of supply determines in which country a business must pay VAT for a service. When determining the place of supply for an ancillary service, it is important to correctly classify the recipient as either a business or individual. Depending on who the service is provided to, either the business location principle (Section 3a.1 of the UStG) or the recipient location principle (Section 3a.2 of the UStG) applies.

According to the recipient location principle, the place of supply for ancillary services provided to businesses is generally the place where the recipient conducts business. On the other hand, the business location principle stipulates that the place of supply to individuals is the supplier’s headquarters. In other words, services to businesses are supplied at the recipient’s location, while services to individuals are supplied at the supplier’s headquarters.

Special provisions

The UStG defines certain exemptions to the basic principle of the place of supply. Section 3a and subsequent sections establish special places of supply for specific activities. Here are a few examples:

• Real estate services
  The place of supply for real estate is where the real estate is located. This is regardless of whether it is being supplied to a business or individual. These services include selling and acquiring real estate and preparing, coordinating, and carrying out construction services (Section 3a.3.1 of the UStG).
  
• Work performed on movable objects
  The place of supply for services that include working on movable objects and the appraisal of such items is where the business performs the services (Section 3a.3.3a of the UStG).
  
• Short-term vehicle rentals
  The place of supply for short-term vehicle rentals is where the vehicle is provided to the recipient (Section 3a.3.2 of the UStG).
  
• Food and beverage services
  When food and beverages are sold for immediate consumption, the place of supply is where the business provides the food and beverages. This includes where they are consumed. Exceptions apply to sales made on ships, trains, and airplanes while in transit (Section 3a.3.3b of the UStG).
  
• Admission to events
  When admission is sold to a cultural, artistic, academic, sporting, or similar event, the place of supply is where the event takes place (Section 3a.3.5 of the UStG).
  
• Digital services
  When German companies supply digital services—such as software—the place of supply is the location of the recipient’s place of residence. This is regardless of whether the service is for a business or individual. The same applies to ancillary services for telecommunications, radio, and television (Section 3a.5 of the UStG).
  

Ancillary services supplied to customers outside of Germany

For customers outside of Germany, the place of supply is determined by the same principles as in Germany or other EU countries. The place of supply for ancillary services provided to businesses outside of Germany is the recipient’s location. For individuals, the place of supply is the supplier’s headquarters.

Exemptions also apply to services that are physically provided at a location, such as real estate services or repairs to movable objects. Here, the place of supply is determined by where the services actually take place. Digital services, on the other hand, are supplied at the recipient’s location (Section 3a.5 of the UStG).

What VAT regulations apply to ancillary services?

Most ancillary services in Germany are subject to VAT. The standard VAT rate is 19%, while certain everyday supplies are subject to a reduced rate of 7%. There is also a limited number of supplies that are exempt from VAT altogether.

In principle, all German businesses that provide ancillary services to individuals or other businesses in Germany are liable for VAT. They must show VAT on their invoices, and remit this tax to the tax office. Small-scale entrepreneurs who do not exceed certain thresholds can claim an exemption under Section 19 of the UStG.

Cross-border services provided within the EU are subject to special rules. When a German business supplies an intracommunity ancillary service, the place of supply is the country where the recipient is located. In this case, VAT is due in the customer’s country, not Germany. The reverse charge procedure—whereby liability for tax is transferred to the recipient—applies here. The German company’s invoice should only show the net total and include a note stating, “Reverse charge applies.” The reverse charge procedure is regulated by EU VAT Directive 2006/112/EC and Section 13b of the UStG.

There are no unified rules for ancillary services provided to customers outside of the EU—each country sets its own VAT regulations. Some countries also use the reverse charge procedure, while others require the German business to register for VAT or hire a tax representative. Therefore, it is important for ancillary service providers to research the national regulations of the countries they sell to before invoicing to ensure correct VAT handling.

With Stripe Tax, you can make sure you calculate VAT correctly every time. Tax automatically collects the right amount of tax—regardless of whether you are supplying your service in Germany, the EU, or elsewhere. This means no more skimming through pages and pages of documents to work out which VAT regulations apply in the country you supply to. With Stripe’s VAT calculator, you can get VAT rates for specific countries in seconds.

Risks and causes of errors for ancillary services

In practice, errors happen often when billing ancillary services. These errors can result in tax arrears, penalties, or even audit requests from the tax office. Some typical root causes of errors include the following:

• Classifying the recipient
  Many businesses make errors when determining the place of supply for ancillary services outside of Germany. Pay close attention to whether the supply is for a business or an individual. If the recipient is not classified correctly, then the place of supply and VAT obligations will also be incorrect.
  
• Applying the reverse charge procedure
  Making errors when applying the reverse charge procedure can also have legal and financial implications. Make sure to include a note on the invoice stating, “Reverse charge applies.” Remember that the reverse charge procedure can only be used for B2B transactions; supplies to individuals are not eligible.
  
• Providing services to third countries
  Providing ancillary services to third countries requires particular care and attention. Failure to observe national regulations, registration and reporting obligations, and differing reverse charge rules can lead to errors.
  
• Applying tax rate to domestic supplies
  It is also important to be vigilant when providing services within Germany. Assessing the wrong tax rate is a common error. Many businesses incorrectly apply the full VAT rate to domestic supplies, which are actually subject to a discounted tax rate or can be tax-free.
  

With clarity and caution, ancillary service providers can avoid these mistakes and ensure that VAT is applied correctly.