Businesses with low sales volumes can take advantage of Germany's small-scale entrepreneur regulation and benefit from reduced administrative work. This article will explain what the small-scale entrepreneur rule is and how you can apply for it. We will also explore whether it's possible to make a retroactive switch from standard taxation to small-scale entrepreneur taxation and explain how to do it. At the end of the article, we have also included a sample letter that you can use to inform the tax office about a change.

What's in this article?

• What is the small-scale entrepreneur rule?
  
• How do businesses apply for the small-scale entrepreneur rule?
  
• Is it possible to make a retroactive switch to the small-scale entrepreneur rule?
  
• How can businesses make a retroactive switch to the small-scale entrepreneur rule?
  
• Sample application for switching to the small-scale entrepreneur rule
  

What is the small-scale entrepreneur rule?

The small-scale entrepreneur rule is a special regulation providing administrative and tax relief for businesses with low sales volumes. In essence, businesses in Germany are obliged to charge VAT on their goods and services. However, they have the option of applying for exemption from this obligation thanks to the small-scale entrepreneur rule. In order to be eligible for the small-scale entrepreneur rule, a business's annual turnover for the previous year must not exceed €22,000 and it must not be expected to exceed €50,000 in the current year. These prerequisites are laid out in Section 19 of the VAT Act (UStG). For businesses that are not founded on 1 January, these limits apply on a pro-rata basis in the founding year. For example, if the business begins trading on 1 July, total sales for the remainder of the year must not exceed €11,000.

The small-scale entrepreneur regulation is particularly suitable for founders, microbusinesses and the self-employed. However, it is never mandatory: anyone who falls below the sales limit can take advantage of the rule, but they are not obliged to. Deciding to apply for the small-scale entrepreneur rule, and thus VAT exemption, will reduce administrative work, as you will not have to submit any preliminary VAT returns. However, it also means that small-scale entrepreneurs cannot have any input tax refunded by the tax office.

What is the difference between a small-scale entrepreneur and a small business?

There is a clear distinction between a small-scale entrepreneur and a small business. The latter is a commercial enterprise that does not need to be entered into the German Commercial Register, and it is not subject to the provisions of the German Commercial Code (HGB) – provided that its annual sales are lower than €600,000 or its profits are lower than €60,000. A small business is limited to small business operators, whereas small-scale entrepreneurs can be business operators as well as freelancers, or employees in agriculture and forestry. However, small business operators can also take advantage of the small-scale entrepreneur rule.

How do businesses apply for the small-scale entrepreneur rule?

Anyone wishing to take advantage of the small-scale entrepreneur rule and register a small business must inform the relevant offices of their decision. Businesses that are still in the startup phase and are already forecasted to fall below the annual turnover limit have two options: on the one hand, they can inform the tax office of their intention to use the small-scale entrepreneur regulation in the tax registration form. If they have just founded their business, they can also add a corresponding note when registering as a business.

However, they can also apply for the small-scale entrepreneur regulation during ongoing operations (i.e. when the business is already trading). To do this, an informal letter to the relevant tax office with reference to Section 19 of the UStG (see below) is sufficient. The tax office will then check whether the business meets the requirement and approve the application. The small-scale entrepreneur rule never applies automatically, regardless of annual turnover; it needs to be proactively selected and applied for.

Is it possible to make a retroactive switch to the small-scale entrepreneur rule?

In principle, you can decide to apply for the small-scale entrepreneur rule at any time – either when setting up the business or at a later stage. It is also possible to make repeated switches between small-scale entrepreneur and standard taxation at the end of the financial year. However, any businesses that voluntarily choose not to register for the rule when they are founded are bound to standard taxation for five years. Only after this five-year period has passed can the business switch to the small-scale entrepreneur regulation. This restriction is intended to prevent businesses with low sales from receiving high input tax refunds in the first year and switching to the more convenient small-scale entrepreneur rule in the second year.

How can businesses make a retroactive switch to the small-scale entrepreneur rule?

On occasion, businesses may find that sales are lower than expected or planned. In this scenario, you can submit a retroactive application for small-scale entrepreneur status with your VAT return in the following year. If such a retroactive change is made, any refund already received from the tax office must be repaid. Furthermore, from this point on, any invoices issued can no longer include VAT. You are also advised to inform your customers about future use of the small-scale entrepreneur rule. Your customers should know why VAT is no longer listed on the invoices.

You should provide notification to customers of your switch to the small-scale entrepreneur rule as soon as possible. Ideally, this notification should take place at the end of the financial year or at the beginning of the new financial year. If notification is only made as part of the VAT return, this could result in significant additional work. It is possible, in theory, to retroactively send customers corrected invoices without VAT. However, if you choose to do this, both the invoicing business and any customers entitled to deduct input tax must then update the corresponding preliminary VAT returns. This takes time and can lead to irritated and dissatisfied customers.

Which special cases should you take into consideration when switching to the small-scale entrepreneur rule?

If a business changes its form of taxation and switches to the small-scale entrepreneur rule, there are some special cases for incoming and outgoing invoices at the turn of the year. It is important that you take these into account. Generally, the time at which the service or goods were provided is always key.

• Special case 1: If an invoice is dated from the previous year and still contains VAT, but the customer doesn't pay the invoice until the new year, then a subsequent invoice correction is not required. It is assigned to the advance return for the relevant month (e.g. January) or the relevant quarter, and it is included in the VAT return for the new year.
  
• Special case 2: If businesses generate outgoing invoices at the beginning of the year for services that were already provided in the previous year, these invoices must still include VAT. The associated VAT revenue will be included in the VAT return for the new year. It should also be included in the advance return for the relevant month or quarter.
  
• Special case 3: If businesses receive an incoming invoice in the new year for services or goods that were purchased in the previous year, the VAT portion can still be claimed as input tax in the new year.
  
• Special case 4: If businesses have claimed input tax in the past five years on the purchase of fixed assets – such as business vehicles, machinery or office equipment – then the input tax deduction must be calculated from the point at which the business switched to the small-scale entrepreneur rule. However, a business is only required to correct the input tax deduction if the input tax portion of the purchased asset is over €1,000.
  

Sample application for switching to the small-scale entrepreneur rule

An application, which informs the tax office about your switch to the small-scale entrepreneur rule, can be reasonably informal. You can use the following sample as a guide:

Tax number: 12 / 345 / 67890
VAT identification number: DE123456789
Switching to the small-scale entrepreneur rule from 01/01/2025

To whom it may concern,

I am writing to inform you that my business, XYZ, will be making use of the small-scale entrepreneur rule in accordance with Section 19 of the UStG. This change will come into effect on 1 January 2025. For context, the business's annual sales fell short of my forecasts. In the previous financial year (2024), my annual sales subject to VAT plus the applicable VAT totalled €15,000. Total sales in the current calendar year will almost certainly not exceed €50,000. Please update your documentation to reflect the fact that I am a small-scale entrepreneur and, therefore, I would like to be exempt from the requirement to submit preliminary VAT returns in the future. I request that you offset my repayment obligations against my claim for reimbursement from the VAT paid to you.

If you have any questions or comments, please contact me at any time. I look forward to receiving written confirmation in due course. As soon as I have received your response, I shall inform my invoice recipients that the VAT that previously stated was incorrect. I will then send you a copy of my correspondence to enable you to refund the relevant amounts to me.

Yours sincerely,
Jane Doe

In general, we recommend discussing any planned switches to the small-scale entrepreneur rule with a tax advisor. For more information about taxation or business accounting, visit the Stripe resources portal. If you are looking for professional support for your financial processes, please contact our sales team.