Businesses in Germany are, in principle, required to collect value-added tax (VAT) on their products and services—but there is an exemption available for smaller enterprises. This article explains what standard taxation is and the difference between it and the small-business rule. We’ll also outline how to register your venture for tax correctly, what the responsibilities are under standard taxation, and how to update invoices when making the switch without falling foul of the law. Plus, we’ll walk you through the typical auditing risks and share some tried-and-tested best practices that businesses can use to ensure they comply with their VAT obligations securely and efficiently.

What’s in this article?

• What is standard taxation?
  
• How do you register a business for tax in Germany?
  
• What are the VAT obligations businesses in Germany have to fulfill?
  
• Correcting invoices when switching to standard taxation
  
• Audit risks involved in standard taxation
  
• Standard taxation best practices
  

What is standard taxation?

Standard taxation refers to the normal fiscal regime per German VAT law. Within this regime, businesses charge and collect VAT on revenue from supplies and other taxable performances. That means VAT has to appear on invoices, and the amount shown must be remitted to the tax office. Standard taxation also comes with ongoing documentation and reporting obligations.

One of the main benefits of using standard taxation is the input tax deduction. The VAT that businesses receive on incoming bills can be reclaimed as input tax, meaning they are solely on the hook for the VAT they have actually incurred.

This isn’t a blanket rule, though, and in certain cases, activities in the country might be able to exempt themselves from VAT. Selected items and offerings, for example, are zero-rated. German businesses also invoice intracommunity supplies of goods and services exclusive of VAT, since the receiving businesses tax these supplies in their respective European Union member state under the reverse charge mechanism. Regardless, some can, in principle, exempt themselves entirely from charging VAT utilizing the small-business rule.

Exempt: Small businesses

According to § 19 of the German VAT Act (UStG), smaller enterprises are exempt from standard taxation if their revenue is below specified thresholds. Specifically, their earnings must have been less than €25,000 in the previous calendar year and is unlikely to exceed €100,000 in the current year. Entities that apply the small-business rule cannot list VAT on invoices and are not required to file its preliminary returns. However, that also means they cannot claim input tax deductions.

Ventures beneath the revenue limits are exempt from taking small-business status. Yet, if they opt out of the small-business rule at incorporation, they are bound to the regular fiscal regime for five years (see § 19.3 of the UStG). They will have to wait until the five-year timeframe is over before opting in again. Those who claim this status and whose earnings exceed the stated limits are automatically required to register for VAT the following year.

How do you register a business for tax in Germany?

If you’re looking to do business in Germany, you’ll need a tax identification number issued by the tax office for levy purposes. This tax ID is a unique number assigned to taxable and legal entities that enables fiscal agencies to identify returns and payments correctly. Ventures and freelance professionals liable for VAT must include their tax ID on invoices.

If a German business makes taxable supplies to operations in other EU countries, it will need both a tax and VAT ID. The two are needed for acquiring goods or services, and for intracommunity supplies of items or offerings. The Federal Central Tax Office provides VAT IDs and ensures that taxable revenue is captured and billed accurately.

Smaller enterprises that opt for standard taxation are liable for VAT from the time they make this choice. Subsequently, they are obligated to list a tax ID on their invoices. If they operate in other EU countries, they must also apply for a VAT ID well in advance. This is the only way to bill EU-wide supplies of goods and services accurately. Planning the changeover with care helps avoid errors, arrears, and delays in obtaining VAT refunds.

What are the VAT obligations businesses in Germany have to fulfill?

There are several obligations that businesses subject to standard VAT must fulfill. Below are some of the most important ones.

Invoicing

§ 14.4 of the UStG lists the mandatory information a proper bill has to contain. Those that lack the necessary details could be rejected during a company or tax audit, leading to arrears or fines. In order to fulfill their VAT obligations, German businesses must correctly indicate the following info on their invoices:

• Full name and address of seller
  
• Full name and address of buyer
  
• A sequential, unique invoice number
  
• Issue date of invoice
  
• Date of delivery or other service
  
• Performance period
  
• The tax ID or—for cross-border supplies within the EU—the VAT ID
  
• Quantity and type of products supplied or the scope and type of service rendered
  
• Net and gross amount
  
• Applicable tax rate and the corresponding tax amount or, in the case of a tax exemption, a reference to the tax exemption
  

VAT rates

In principle, Germany has two VAT rates (see § 12 of the UStG). The baseline percentage for most items and offerings is 19%. Selected goods and services, though, are subject to a reduced percentage of 7%. This applies, in particular, to everyday essentials, such as certain food items, books, newspapers, and magazines, as well as local public transport within a municipality or on a journey of less than 50 kilometers.

Businesses need to ensure the correct rate appears on each invoice. Stripe Tax supports calculating the proper levy percentage. Tax is automatically calculated and collected, based on your product offering and point of sale. It also factors in national and international tax provisions and adjustments, with updates implemented daily. Plus, Tax generates ready-to-use fiscal data for filing VAT returns.

Reporting obligations

Businesses subject to VAT are required to file regular preliminary VAT returns with the tax office (see § 18 of the UStG). This form lets them tell the authority—on either a monthly or quarterly basis, depending on what a local tax agency asks for—how much VAT got charged, and how much input tax is deductible. The authority offsets the amount collected against deductible input tax, then either collects the difference or issues a refund.

Still, this is only a provisional VAT report: businesses submit an annual VAT return at the end of the year. This form summarizes each periodic statement for a specific year, and so is used to make any necessary corrections and determine the final amount of levy owed.

Smaller enterprises are not required to file preliminary VAT returns. They use that annual return to report their exemption. Businesses that are liable for VAT and those that are not can both protect themselves against arrears, default interest, or financial penalties by taking extra care to comply with the reporting obligations. That’s why it’s key to establish clear workflows for periodic and annual submissions and pay close attention to the relevant deadlines.

Correcting invoices when switching to standard taxation

Invoices generated correctly under the small-business rule prior to switching to standard taxation do not need to be adjusted retroactively. Having said that, new ones must start showing the right VAT rate as soon as the regular fiscal regime kicks in.

If an invoice originally issued exclusively of VAT per the small-business rule is amended following a change, it remains VAT-free. Its liability does not apply retroactively, meaning services already rendered could remain VAT-free if the correction occurs after standard VAT is adopted.

It’s also imperative, once you’ve switched to standard taxation, to check your incoming invoices carefully, and to document them properly so that you can claim input tax. Input tax is deductible only if bills meet every formal requirement. Internal workflows for invoice review and correction help prevent errors and support a smooth transition from the small-business rule to a regular regime.

Audit risks involved in standard taxation

Standard taxation means more demanding conditions for applying VAT correctly. With that come greater audit risks.

A small business owner transitioning to a regular regime needs to ensure every applicable responsibility is met the moment they make the switch. Key requirements include generating invoices with the correct VAT percentage, carefully documenting received bills for input tax deductions, and filing preliminary returns on schedule. Companies engaged in cross-border activity within the EU also need to apply for a VAT ID well in advance. Failure to do so could lead to demands or penalties from the tax office.

Submitting an incomplete or incorrect periodic VAT statement or filing after the deadline, for instance, can trigger interest on arrears or land you a penalty. Another audit risk involves assigning revenue or input tax amounts to the wrong levy timeframe. Recording earnings or input tax in the wrong accounting period could result in adjustments, supplementary charges, or additional audits from the fiscal authority.

Standard taxation best practices

There are a few tried-and-tested approaches that operations in Germany need to consider to fulfill their VAT responsibilities efficiently and error-free. These practices minimize audit risks and make the changeover from small-business rules to standard taxation more straightforward.

Always keep one eye on revenue thresholds

Small businesses need to review revenue regularly to identify when they’ll exceed earning thresholds in advance. Continuously monitoring your income makes sure your venture won’t be caught off guard by an automatic switch to standard taxation. This is especially important during seasonal fluctuations or unexpected revenue growth.

Automate your invoicing

Issuing invoices accurately is key to VAT compliance. Automated systems, such as Stripe Tax, can help businesses send bills that show the right tax rates and include all required information, and also provide tamperproof document storage. Automation reduces human error and saves you time you would otherwise spend reviewing and correcting invoices.

Validate VAT identification numbers

German companies conducting cross-border activity within the EU need their customers’ VAT identification numbers. Incorrect or invalid IDs could land you in hot water with the tax office. Organizations therefore need to regularly check the validity of VAT IDs and document the relevant audit evidence using official databases or automated validation tools, for example.

Structure internal controls

Regular internal reviews of audits, incoming documents, and VAT returns allow early identification of errors. Documented controls ensure accurate VAT input claims and the timely, complete submission of preliminary statements.

Plan your transition to standard taxation early

Switching from the small-business rule to standard taxation needs to be mapped out with care. Businesses must prepare all the systems and processes they will need before exceeding the revenue thresholds, so they can meet every obligation properly the moment they make the switch. Careful preparation will make the move easier and help fulfill fiscal duties without fail.