19%, 7% or 0%? When companies invoice for their products and services, they need to look carefully at which tax rate is required by law. In this article, we'll explain what value-added tax is, which companies have to pay it and the tax rates that apply. We'll also go over the goods and services where a discounted tax rate applies, and what companies need to think about when issuing invoices in Germany and other EU countries.
What's in this article?
- What is value-added tax?
- Who does value-added tax apply to?
- What value-added tax rates are there?
- When does the discounted value-added tax rate apply?
- How should value-added tax appear on an invoice?
What is value-added tax?
Value-added tax (VAT) is a consumption tax that is levied on all private and public consumption. With the prerequisite that the provider of goods and services is required to collect value-added tax, it therefore has to be paid when purchasing products or receiving services. Value-added tax is one of the most important revenue sources at a national, state and municipal level: VAT accounts for than 30% of all tax receipts in Germany.
Value-added tax was introduced in Germany in 1968, with corresponding value-added tax rates that determined the level of the tax. The regular tax rate in 1968 was 10%, and the discounted rate was 5%. Since then, this has increased steadily: the regular rate is now 19%, and the discounted rate is 7%.
What is the difference between sales tax and value-added tax?
The terms "value-added tax" and "sales tax" are often used synonymously in casual conversation. Strictly speaking, value-added tax is a generic term that covers both input tax and sales tax. Input tax and sales tax are fundamentally the same tax – just from different perspectives: buyers or those using services pay sales tax, whereas businesses making a purchase or using a service pay input tax. For example, if you buy a product for €119, then this price includes 19% sales tax, which is €19. This €19 must be transferred from the company involved in the purchase to the tax authorities. The sales tax that the buyer pays becomes the value-added tax of the company that made the sale. This means that value-added tax is paid for indirectly by end consumers – while it is levied by the seller, they simply pass this tax on to the buyer.
Private individuals cannot claim input tax back from tax authorities. However, companies can deduct the costs and claim input taxes back from tax authorities if they buy goods or services from other companies that are liable for value-added tax. Using our example, a private citizen would pay €119 for the product, but in the end, a company would only pay €100.
In German tax law, the term "Umsatzsteuer" (or "sales tax") is preferred over the term "Mehrwertsteuer" (or "value-added tax"). However, we see "value-added tax" regularly in everyday life on invoices and receipts, usually in the abbreviated version "VAT".
Who does value-added tax apply to?
According to Section 1 paragraph 1 no. 1 of the German VAT Act (UStG), all "supplies and other services that a company based within the country provides for payment as part of its business activities" are subject to value-added tax. For this reason, value-added tax applies to every company in Germany that demands money for its deliveries and services. This also includes self-employed people, provided that they are entrepreneurial, which means that they independently carry out a commercial or professional activity to earn income.
Small businesses are exempt from the obligation to levy value-added tax. According to the exemption for small businesses set out in Section 19 of the UStG, companies with a turnover below €22,000 in the previous calendar year and which are not expected to have a turnover above €50,000 in the current calendar year are exempt from value-added tax. However, small businesses can voluntarily levy value-added tax if they wish to do so.
Medical professions are also exempt from levying value-added tax regardless of turnover, according to Section 4 of the UStG. These include doctors, psychotherapists and physiotherapists, as well as homeopathic practitioners. This exemption also applies to midwives, masseurs and masseuses, physiotherapists and those practising similar activities within the medical sector. The same is also true for care and support services, such as in hospitals, retirement homes and care homes.
Value-added tax is also not levied for the following services, among others:
- Revenue from the sale, leasing or renting of property
- Services from a homeowner association
- Revenue from insurance
- Revenue from social security providers, welfare or provisions or benefits made to those who are victims of war
- Services in the schools and education sector
- Revenue from maritime and air transport
- Certain gambling revenues, such as those from lotteries and betting on races
- Voluntary activities such as activity within a parliament, a union or working in the care and support sector
- Services linked to the upbringing and supporting of children and adolescents
What value-added tax rates are there?
Usually, three value-added tax rates apply in Germany: 19%, 7% and 0%. The typical tax rate that applies when purchasing a product or acquiring a service is 19%. However, some products and services are charged with a discounted value-added tax rate – a rate of just 7% is levied on certain everyday items. And a very small number of services are not liable for any tax at all, with a value-added tax rate of 0% (see the list in the "Who does value-added tax apply to?" section of this article).
When does the discounted value-added tax rate apply?
According to Section 12 of the UStG, a reduced tax rate of 7% applies to the following goods and services, among others:
- Food
- Meat and edible offal
- Fish, crabs and molluscs – with the exception of ornamental fish, crayfish, lobsters, oysters and snails
- Milk and dairy products
- Fresh, dried and provisionally preserved vegetables
- Grain and milled products such as flour, groats and meal
- Edible fruits and nuts
- Edible animal and vegetable fats and oils
- Spices
- Sugar and confectionery
- Coffee, tea and mate
- Water, with the exception of prepacked drinking water, spring water and table water – as well as healing water and water vapour
- Meat and edible offal
- Live animals such as bees, domestic cattle, pigs, sheep or rabbits
- Flowers, blossoms, leaves, branches and other parts of plants – as well as grasses, mosses and lichens for binding or ornamental purposes
- Animal- or plant-based fertilisers, with the exception of guano
- Wood, in the form of firewood (round logs, pieces, branches, bundles or similar) or wood shavings, wood waste and scrap (even if this is processed to make pellets, briquettes or other shapes afterwards)
- Books, brochures, newspapers and magazines, picture albums, drawing and colouring books, printed or handwritten notes, stamps and maps of all kinds (such as world atlases or globes)
- Phonograms that only contain the reading of a book as an audio recording
- Wheelchairs and other means of transport for people with disabilities
- Replacement body parts, orthopaedic apparatuses and other orthopaedic devices, as well as devices for remedying functional damage or infirmities (such as prostheses, artificial limbs, hearing aids or pacemakers)
- Menstrual hygiene products, such as tampons and pads
- Works of art, such as paintings and drawings, original engravings, cuts and lithographs, as well as original sculptures from all kinds of materials
- Zoological, botanical, mineralogical or anatomical collection pieces – as well as collection pieces of historical, archaeological, palaeontological, ethnological or numismatic value
- Entrance tickets for theatres, concerts, museums and comparable performances from artists
- Public transport within a municipality or over a distance that is less than 50 kilometres
- Rental of living and sleeping areas as well as campsites for temporary accommodation of third parties
In response to the coronavirus pandemic, the German legislature also decided on a temporary reduction of value-added tax rates for some specific goods and services: for example, the discounted tax rate of 7% applies to restaurants and gastronomy services until 31 December 2023. Only drinks are exempt from this rule. The value-added tax rate for provision of gas and heat via the natural gas and heating network was also reduced to 7% until 31 March 2024.
How should value-added tax appear on an invoice?
Value-added tax should be one of the main parts of every invoice issued by a company (UStG Section 14 paragraph 4), regardless of whether it is sent to private individuals or to other companies. The net amount of the product or service, the value-added tax rate, the resulting amount of total value-added tax and the total gross amount are all listed on the invoice. Value-added tax is what determines the difference between net and gross in an invoice.
Example of a value-added tax account statement:
Total net price of product/service: €100
Value-added tax at 19%: €19
Total gross price: €119
Companies that send invoices to other EU countries can essentially handle this in the same way as an invoice within Germany – at least when sent to a private citizen. In such cases, the place of delivery is considered to be Germany, so value-added tax must be included on the invoice and remitted to the tax authorities.
Different rules apply if a German company sends an invoice to one that's based in another EU country. The place of delivery and the service are in the recipient's country, so value-added tax must therefore be levied, and the recipient company must remit the value-added tax to the tax authorities in its own country. As this is fairly complicated, a reverse-charge procedure is used as a special arrangement in this case. In this procedure, liability for paying value-added tax is reversed, so the recipient company – and not the German company issuing the invoice – must remit the value-added tax within its own country. In terms of invoicing, this means that German companies do not charge value-added tax when invoicing companies from other EU countries. The invoice is only issued for the net amount, and the invoice should state "reverse charge procedure" or include the phrase "tax liability passes to the recipient".
Value-added tax is also not added to invoices that are sent to companies outside the EU. In some cases, you need to check which obligations apply in the country in question. In many countries, registration for VAT is required or you need to have a fiscal representative present. Legal regulations vary from country to country outside Europe. In invoicing, the following applies: A note such as "export" or "tax-exempt export delivery" should be stated on an invoice to a company outside Europe.
Companies may use the services of certified payment service providers for invoicing purposes. These offer automated processes, based on smart invoicing programs, as well as vastly reduced error rates for things such as calculating the tax amount.