Generally, companies subject to value-added tax (VAT) must show it on their invoices for goods and services sold. However, it is important to take a closer look at customers abroad. Individual tax regulations apply, particularly for deliveries and other transactions in third countries. In this article, you will learn what a third country is and which VAT regulations apply to services and deliveries there. We also explain the difference between handling VAT in Germany and within the community territory.

What’s in this article?

• What is a third country?
  
• Which VAT regulations apply domestically and in the community territory?
  
• Which VAT regulations apply in third countries?
  
• What must you know when importing and exporting goods to third countries?
  
• What do you need to know for services in third countries?
  

What is a third country?

When German companies sell goods and services, they must differentiate between three VAT target areas: Germany, other European countries, and non-European countries.

According to Section 1, Paragraph 2 of the German VAT Act (UStG), the Federal Republic of Germany is a domestic territory. Excluded and subject to special regulations are, among others, the area of Büsingen, the island of Heligoland, and free zones defined within the meaning of Article 243 of the Union Customs Code.

Section 1, Paragraph 2a of the UStG describes the community territory as separate from it. This includes the territories of the other member states of the European Union, in addition to Germany. Member states of the EU are:

• Austria
  
• Belgium
  
• Bulgaria
  
• Croatia
  
• Cyprus, including the British military bases Akrotiri and Dhekelia
  
• The Czech Republic
  
• Denmark
  
• Estonia
  
• Finland
  
• France
  
• Germany
  
• Greece
  
• Hungary
  
• Ireland
  
• Italy
  
• Latvia
  
• Lithuania
  
• Luxembourg
  
• Malta
  
• The Netherlands
  
• Poland
  
• Portugal, including the Azores and Madeira
  
• Romania
  
• Slovakia
  
• Slovenia
  
• Spain, including the Balearic Islands
  
• Sweden
  

The community territory also includes the Principality of Monaco and the countries of Iceland, Liechtenstein, and Norway. The latter are not members of the EU but are part of the European Economic Area (EEA).

Third countries are all states outside the community territory, i.e., the EU or the EEA (Section 1, Paragraph 2a of the UStG). These include Brazil, China, Japan, Russia, and the United States. Still, they can also be located on EU territory but not belong to the community area, such as Andorra, San Marino, or Vatican City.

Due to their exit from the EU, the UStG has generally identified Great Britain and Northern Ireland as third countries since 2021. However, Northern Ireland has a special status: for trading in services, it is considered a third country, but for trading in goods, it is part of the community territory.

Which VAT regulations apply domestically and in the community territory?

Three VAT rates apply in Germany: the standard tax rate on most supplies and services is 19%, certain everyday goods are subject to a reduced tax rate of 7% (see Section 12 of the UStG), and few services are completely VAT-free with a VAT rate of 0% (see Section 4 of the UStG).

VAT liability generally applies to all German companies that charge money for their deliveries and services. This also includes freelance professionals if they independently operate a commercial or professional activity for remuneration. Nevertheless, those voluntarily claiming small-scale entrepreneurial status below legally defined sales limits are exempt from VAT (see Section 19 of the UStG).

Other VAT regulations apply if a German company sells goods or services across national borders within the community territory. For cross-border deliveries of goods and products between European entities, a so-called intracommunity supply applies. Under certain conditions, they are exempt from VAT.

When German companies provide transactions to clients in another EU country, this is a so-called intracommunity service. Since the activity does not take place in Germany, it is not taxed there but rather where the recipient is based. In these cases, the so-called reverse charge procedure applies.

What is the reverse charge procedure?

In this procedure, the recipient of the transaction collects VAT, not the provider. Article 196 of the EU VAT Directive regulations can reverse tax liability for cross-border deliveries of goods and services. In this case, German companies only have net amounts on their bills. They must also include the written addition “tax liability of the service recipient” on invoices. The reverse charge procedure is applicable in all EU member states under certain conditions. The legal basis is the VAT Directive, binding for all EU countries (Directive 2006/112/EC) and in German sales law Section 13b of the UStG.

Which VAT regulations apply in third countries?

In contrast to domestic and community territory tax, VAT in third countries is subject to individual regulations. General, cross-border regulations do not exist. Many, including Austria, Canada, China, Great Britain, Singapore, Switzerland, and the US, use the reverse charge procedure to collect VAT. Additionally, Germany has comparable tax agreements with some nations. Although in some cases, German companies must also register for VAT in the country in question or appoint a “fiscal representative” to represent them in tax matters.

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What must you know when importing and exporting goods to third countries?

According to Section 4 No. 1a and Section 6 of the UStG, deliveries from German companies to entities in third countries are tax-free export deliveries. German companies do not have to show VAT on their invoices—the prerequisite is that the goods must physically reach the third country. A company can prove this, for example, by export documents or written confirmations from customs. The German company must provide proof of export to benefit from the tax exemption. As soon as the goods arrive in the third country, they are subject to the respective country’s customs and import VAT regulations. Usually, the receiving entity pays these.

If companies in third countries import goods into Germany, customs must clear them, subjecting them to import VAT. The importing company usually collects import VAT. The standard tax rate of 19% applies, or for certain goods, the reduced tax rate of 7%. If the receiving company uses the goods for business, it can claim them as input tax as part of its VAT return.

What do you need to know when providing services in third countries?

If a German company offers service to a client in a third country, this is generally taxable in the country of the recipient. As outlined in Section 3a, Paragraph 2 of the UStG, the place of performance is either the receiving client’s headquarters or the permanent establishment’s location if the activity occurs there. However, this regulation only applies to B2B transactions. For services given to private individuals in third countries, the tax office usually charges VAT in Germany (see Section 3a, Paragraph 1 of the UStG). Therefore, the benefit recipients must prove their entrepreneurial status, e.g., using a certificate from their responsible tax authority. Exceptions are so-called catalog services per Section 3a, Paragraph 4 of the UStG: in these cases, proof is not necessary, as they are generally taxable in the third country, regardless of the status of the benefit recipient.

That said, special rules apply to determine the place of performance for some services. For example, real estate activities are taxable at the location where the property is situated. The prerequisite is that the property is a central part. In the case of short-term rentals of means of transport, the place of performance is where the means of transport are made available. Restaurant and catering services are also taxable where they are provided. Exceptions only apply if this happens on board a ship, train, or aircraft.

If a foreign entity based in a third country provides services to a German company, the reverse charge procedure applies. This means that the German company, as the recipient, becomes liable for tax and must pay the VAT.