Invoicing cross-border supplies can be challenging for German businesses. While the EU has a unified set of regulations, the rules in third countries vary. However, the reverse charge procedure is used the same way it is within the EU in many countries.

In this article, we explain the reverse charge procedure, including how it works and its legal basis. We also explain the effects of reverse charges on supplies in third countries, requirements for invoices, and steps to avoid typical errors when invoicing.

What’s in this article?

• What is the reverse charge procedure?
  
• What is the legal basis for the reverse charge procedure in Germany?
  
• What effect does the reverse charge procedure have on supplies to third countries?
  
• What are the German invoice requirements for the reverse charge procedure?
  
• How can you simplify billing to avoid errors when using the reverse charge for third countries?
  

What is the reverse charge procedure?

The reverse charge procedure is a special value-added tax (VAT) regulation that shifts liability from the seller to the customer for taxes due on certain supplies. Ordinarily, the seller invoices and collects VAT from its customers and remits this tax to the tax office. With the reverse charge procedure, the seller invoices their supply excluding VAT. Then, the customer calculates and remits the VAT.

This approach simplifies taxation on international supplies and reduces the administrative workload for businesses operating internationally. It is also intended to prevent VAT fraud.

Application of the reverse charge procedure

The reverse charge procedure is frequently applied to cross-border B2B transactions where the place of supply is the country where the customer is located, according to Section 3a of the German VAT Act (UStG).

Below are a few other specified services where tax liability shifts to the customer, according to the law:

• Work supplies from abroad: If a company based abroad provides work supplies and supplies of services, then tax liability shifts to the customer, subject to certain preconditions.
  
• Transfer of ownership via security: If ownership of movable property is transferred to creditors outside of insolvency proceedings without a change in possession, the reverse charge procedure applies.
  
• Land-related revenue: Certain transfers of land subject to the German Real Estate Transfer Tax (RETT) Act (Grunderwerbsteuergesetz) trigger a reversal of tax liability.
  
• Construction: For construction work, tax liability shifts to the customer, provided they perform construction services on a permanent basis.
  
• Energy trading: Supplies of electricity and gas via the natural gas grid are subject to special rules on VAT that shift tax liability to the recipient of the supply.
  
• Precious metals: Certain supplies of gold and gold plating are subject to special reverse charge rules.
  
• Electrical devices: Some electronic devices trigger a reversal of tax liability. This includes cellular devices, tablets, game consoles, and integrated circuits worth €5,000 or more, as well as certain telecommunications services.
  
• Cleaning businesses: The reverse charge procedure applies to building cleaning services, if the customer performs cleaning services themselves on a permanent basis.
  

What is the legal basis for the reverse charge procedure in Germany?

The laws governing the reverse charge procedure are based on national and EU regulations. At the EU level, the reversal of tax liability is governed by Article 196 of Council Directive 2006/112/EC. It establishes that VAT due on certain cross-border supplies within the EU is payable by the customer instead of the seller.

These EU rules are implemented by German tax law in Section 13b of the UStG. The UStG specifies when the tax liability shifts from the seller to the customer. It contains rules on both cross-border supplies and certain domestic sales where the reverse charge procedure applies to safeguard tax revenue and prevent VAT fraud.

What effect does the reverse charge procedure have on supplies to third countries?

For supplies to or from third countries (i.e., states outside of the EU), there are no unified rules. Each country governs its own taxation. Accordingly, there are differences in VAT obligations from one country to the next. For each case, businesses need to decide whether they are supplying goods or services to the third country.

Therefore, when doing business with third countries, companies should check the place of supply and determine which national law governs taxation. The reverse charge procedure is also applied in these cases, especially for B2B services. However, each country has its own specific regulations on how tax is handled.

Tax liability for supplies to third countries

The reverse charge procedure can be applied to cross-border supplies of goods and services between a third country and a German business. The applicability of the procedure is determined by the place of supply and is implemented according to applicable tax regulations. Many third countries—such as Switzerland, the UK, the US, Canada, Australia, and Singapore—have similar procedures in their national VAT systems for reversing tax liability.

If a business supplies services to a German business from a third country, as a rule, the place of supply is Germany. In this case, the foreign business issues invoices excluding VAT. The German business must calculate and remit VAT itself.

If the service is supplied to the third country by a German business, then the place of supply is typically the third country. This means the supply is not taxable in Germany. Consequently, the German business should issue an invoice excluding German VAT. Then, the supply is taxed as necessary according to the regulations in the third country.

Reverse charge in third countries: A case study of Switzerland

From a tax perspective, Switzerland is treated as a third country. When issuing invoices to Switzerland, the principles for German businesses include the following:

• As a rule, sales of goods to private individuals in Switzerland are treated as tax-exempt export deliveries, provided the goods are exported to Switzerland and there is proof of export.
  
• Supplies of goods to a Swiss business are treated as tax-exempt export deliveries in accordance with Section 4, No. 1a of the UStG and Section 6 of the UStG, provided the goods physically enter Switzerland and the export is properly documented. Thus, German businesses are not permitted to indicate German VAT on the corresponding invoice.
  
• Supplies of services to Swiss businesses are largely taxable where the Swiss business’s headquarters are located. Therefore, the supply is not subject to VAT in Germany, and the Swiss business remits VAT in Switzerland.
  

These are only general principles. However, Swiss tax law contains other special regulations on VAT that sellers must also observe. Since 2018, foreign businesses can also be required to remit VAT in Switzerland, if their global annual turnover exceeds 100,000 Swiss francs. German businesses that regularly supply services in Switzerland and exceed this threshold must register with the Swiss VAT register. Once registered, they are considered taxable entities in Switzerland and must remit VAT on supplies there.

What are the German invoice requirements for the reverse charge procedure?

Specific rules apply when a German business issues an invoice in a third country under the reverse charge procedure. There are two key differences between this invoice and a standard invoice.

Firstly, this invoice must only indicate net amounts. The issuer does not calculate VAT because tax liability shifts to the invoice recipient. Secondly, the invoice must clearly indicate that the reverse charge procedure applies. The standard approach is to include a note, such as “Reverse charge” or “Tax to be paid on reverse charge basis.” This information is mandatory to identify why the issuer of the invoice is not indicating VAT.

German businesses must also include the mandatory information generally required by Section 14 of the UStG on invoices issued to third countries where the reverse charge procedure is applied. This includes the following:

• Full name and address of the company supplying the goods or services
  
• Full name and address of the recipient of the goods or services
  
• Issue date of the invoice
  
• Date of delivery or other supply in the third country (i.e., the performance period)
  
• Tax number issued to the seller by the tax office or the VAT identification number (VAT ID) issued by the Federal Central Tax Office
  
• A sequential, unique invoice number
  
• Quantity and type of goods supplied or scope and type of services rendered
  

How can you simplify billing to avoid errors when using the reverse charge for third countries?

Businesses in Germany should take extra care when issuing invoices under the reverse charge procedure. Errors can increase administrative workload and lead to back taxes and audits. Here are the key points businesses should consider.

Determine the place of supply

The place of supply is important when determining who is liable for the tax on a cross-border supply. If the issuer determines the wrong place of supply, the invoice might not include a note on the reversal of tax liability. The procedure could also be applied unlawfully. In particular, caution is advised with supplies of services to a third country because there are no unified regulations. Therefore, German businesses should always clearly document the place of supply and retain relevant documentation for internal or tax audits.

Indicate VAT correctly

Invoices for supplies to third countries made under the reverse charge procedure must only contain net amounts. German businesses that make supplies both domestically and internationally sometimes indicate German VAT on their invoices because this is the standard within the country. However, this results in incorrect tax information because tax liability shifts to the invoice recipient under the reverse charge procedure. An invoice that indicates VAT incorrectly might not be recognized by the authorities and could result in the tax office assessing back taxes.

Include a note on the reverse charge procedure

A correct reverse charge invoice issued to a third country must include both the mandatory information stipulated by Section 14 of the UStG and a note regarding the reversal of tax liability. If this is omitted, the tax office can consider the invoice incorrect. In this case, the tax validity of the invoice is at risk.

Use automated support

Professional tools—such as Stripe Tax—help businesses avoid typical errors when issuing invoices to other EU states and third countries. Tax automatically calculates the correct tax amounts, adds the necessary information on the reversal of tax liability to invoices, and helps businesses factor in the mandatory information required by law. This reduces errors, simplifies processing, and makes international invoicing reliable.