The input tax deduction allows companies to withhold the value-added tax (VAT) they have paid on purchased goods and services from their VAT liability. However, not all are automatically entitled to the deduction. In this article, you will discover what “eligibility for input tax deduction” means and who is entitled to withhold it. We also explain the conditions under which companies can reclaim VAT and the types of goods and services for which this is possible. Additionally, we outline the important requirements that an incoming invoice must satisfy to be eligible for input tax deduction and give you a concrete example of such an entitlement.

What’s in this article?

• What does eligibility for input tax deduction mean?
  
• Who is entitled to deduct input tax?
  
• When is a company entitled to deduct input tax?
  
• Which services are eligible for input tax deduction?
  
• What requirements must an invoice meet to qualify for input tax deduction?
  
• Example of an input tax deduction entitlement
  

What does eligibility for input tax deduction mean?

“Eligible to deduct input tax” means that companies can reclaim from the tax office the VAT they have paid on goods or services. The tax office calls this paid amount as “input tax.” Under certain conditions, companies can offset this tax from their VAT liability. This means they only have to pay the difference between the VAT collected and the VAT paid to the tax office. Sections 15 and 15a of the German VAT Act (UStG) regulate input tax deductions.

Who is entitled to deduct input tax?

According to Section 2 of the UStG, only entrepreneurs can deduct input tax. This includes all persons and organizations that independently carry out a commercial or professional activity for profit. Companies can be both natural and legal persons.

Natural persons are individuals who carry out commercial activities. This includes, among others, sole proprietors who work freelance or commercially, self-employed consultants, and small craft businesses. Legal persons are legal entities such as limited liability companies (GmbH), stock corporations, associations, or cooperatives. These are also considered companies if they are economically active.

Conversely, private individuals are not entitled to deduct input tax because they are not engaged in commercial activities and do not generate taxable sales. That said, companies can also be excluded from these adjustments under certain conditions. This applies, among other things, to companies that do not levy on goods and services.

This affects those who use the small-scale entrepreneur rule per Section 19 of the UStG. The prerequisite for small entrepreneur status is an annual revenue of less than €22,000 in the previous year and less than €50,000 in the current year. Anyone under these limits can use the small-scale entrepreneur rule and be exempt from VAT. Since these businesses do not charge VAT on goods and services, there is no entitlement to input tax deductions. Still, small-scale entrepreneur status is not mandatory: companies that fall below the legal revenue limits have the choice of whether or not they want to operate as a small business. Anyone not using the small-scale entrepreneur rule is automatically liable for VAT and entitled to deduct input tax.

When is a company entitled to deduct input tax?

The input tax deduction is only possible if the entrepreneurs carry out taxable transactions. Companies that exclusively provide VAT-free services are generally not entitled to withhold input tax.

Furthermore, the company can only use the goods and services for taxable transactions. Input tax deduction is possible for tax-free transactions in a few exceptional cases, such as intracommunity supplies.

A prerequisite for input tax deduction is that companies purchase goods and services from other taxable companies. You cannot withhold, for instance, services provided by private individuals.

Also excluded from these deductions are purchases for private purposes that have no clear connection to business activities.

It also requires that the entrepreneurs receive proper invoices. These must include all legally required information by Section 14 of the UStG. Entrepreneurs looking to deduct input tax cannot include purchased goods and services without a proper invoice in their calculation.

Which services are eligible for input tax deduction?

In principle, all goods and services purchased by companies as part of a business activity subject to VAT are eligible for an input tax deduction—provided those purchases meet the abovementioned conditions. Below, you will find a selection of goods and services that are eligible.

Goods and services for business purposes

• Operating and production resources: Some examples are machines, tools, or raw materials.
  
• Office and business equipment: This includes computers, technical equipment, software, furniture, and office supplies.
  
• Vehicles: You can also claim company cars and means of transport as input tax if you use them for business. Moreover, you can deduct this proportionately if you use it for business and personal reasons. You cannot claim personal use vehicles on your input tax deduction.
  
• Rent and lease: If your landlords charge VAT on your rent, you can deduct the input tax for business rentals or leased commercial properties.
  
• Advertising and marketing: These include, for example, costs for advertising campaigns, online marketing services, social media advertising, or print materials.
  

Intangible assets

• Software licenses: Purchasing software licenses for business purposes is eligible for input tax deduction.
  
• Patents and licenses: You can also claim the use of patents, trademarks, or other industrial property rights as input tax.
  

Third-party services

• Consulting services: For example, from business, IT, or tax consultants, as well as from lawyers.
  
• Repairs and maintenance: For example, services used for the maintenance or repair of machinery, vehicles, or operating equipment.
  
• Transport and logistics: For example, services for transporting goods and using delivery or logistics services.
  
• Continuing education and training: For example, company-related seminars, workshops, or training courses for employees.
  
• Personnel placement and recruitment: For example, service providers and headhunters provide services.
  

Investments in buildings and facilities

• Construction and renovation work: You can deduct input tax for all construction services that serve commercial use. This includes, for instance, construction or renovation work on company buildings or production facilities.
  
• Purchase and installation of equipment: These kinds of deductions include, for instance, investments in technical equipment, production facilities, or other operating facilities
  

Travel expenses and entertainment

• Business trips: If the trips are for business reasons, you can claim the costs for hotel stays, flights, train tickets, or rental cars as input tax.
  
• Entertainment costs: Expenses for business meals or entertainment are generally deductible up to 70% (Section 4, Paragraph 5, No. 2 of the German Income Tax Act [EStG]). However, they are not eligible for full credit because they are often for business and personal use.
  

Gifts

• Gifts for third parties: According to Section 4, Paragraph 5, No. 1 of the EStG, expenses for gifts to people who are not company employees are only entitled to input tax deductions up to €50 per year per person. These can, in particular, include gifts for business partners or customers.
  

What requirements must an invoice meet to qualify for input tax deduction?

Proper incoming invoices are a prerequisite for the deduction of input tax. You must submit these to the company in their original form, legible and intact, and they must contain the following mandatory information according to 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
  
• Date of delivery of the product or service
  
• 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
  
• Quantity and type of products delivered or the scope and type of service provided
  
• Gross and net amount
  
• Applicable tax rate and the corresponding tax amount or, in the case of a tax exemption, a reference to the exemption
  

Small-value invoices are an exception here. These invoices, which are up to a total gross amount of €250, require less information for input tax deduction according to Section 33 of the German VAT Implementation Ordinance:

• Complete name and address of the company providing the product or service
  
• Date of the invoice
  
• Quantity and type of products delivered or the scope and type of service provided
  
• Gross and net amount
  
• Applicable tax rate and the corresponding tax amount or, in the case of a tax exemption, a reference to the exemption
  

Common small-value invoices include cash register receipts, receipt documents, and cash and purchase receipts. Receipts for entertainment also count as small-value invoices. For the tax office to accept these for an input tax deduction, you must fill them out completely with the following information:

• Full name and address of the catering establishment
  
• Date of the business lunch
  
• Short description of the event
  
• All names of the event attendees
  
• Food and drinks consumed, listed individually with prices
  
• Remuneration, including tax rate and tax amount
  
• Voluntary tip
  
• Place and date
  
• Signature
  

For further information on this topic, see our articles on invoicing.

Example of an input tax deduction entitlement

Below is a concrete example of an input tax deduction entitlement.

A small company specializing in furniture production wants to increase its manufacturing capacity. To this end, it plans to purchase new machines. It turns into a mechanical engineer offering a special production milling machine.

Step 1: Order and invoice

The company orders the milling machine for €10,000 net. The engineer delivers the machine and emails the invoice to the company and includes an additional 19% VAT, i.e., €1,900. Therefore, the total amounts to €11,900. The invoice contains all the required mandatory information.

Step 2: Use of the machine

The company installs the milling in its production hall and uses the new machine exclusively to make furniture for sale. Since the company only uses the machine to carry out services subject to VAT, this meets the requirements for input tax deduction.

Step 3: Input tax deduction

The company can claim the VAT paid as input tax. This means it can adjust €1,900 from the collected amount when selling its furniture. To illustrate, if the company sells furniture worth €20,000 in the same month at 19% VAT, it can deduct the input tax of €1,900 from the collected total of €3,800. The liability for the corresponding month is €1,900.

Stripe Tax helps companies calculate their VAT liability by automatically determining the correct amount for all sales. In addition, you can always see at a glance how high the VAT is on all purchases and sales. With Stripe Tax, this means you can also determine which input tax amounts you can claim and how high your expected VAT burden is.

Step 4: Preliminary VAT returns

In the monthly preliminary VAT return, the company declares its sales, collected amounts, purchases, and deductible input tax. This reduces the VAT liability, which must be paid to the tax office.