One of the most important aspects of invoicing is handling value-added tax (VAT) correctly. Businesses in Germany must check which tax regulations apply to each sale, especially when issuing invoices to foreign customers. The same applies to freelancers and self-employed individuals with foreign customers.

In this article, we explain when German businesses have to charge VAT to foreign customers and what VAT regulations apply to B2B and B2C sales within and outside of the EU. We also explain how to determine the place of supply, when the reverse charge procedure applies, and what registration, reporting, and documentation obligations businesses must observe outside of Germany.

Key takeaways

• The applicability of German value-added tax (VAT) depends on the place of supply, type of sale, and customer status.
  
• VAT regulations differ depending on whether the customer is a business or an individual and whether they reside in an EU member state or third country.
  
• Under the reverse charge procedure, the customer is liable for VAT.
  
• German businesses can be required to register for VAT in a foreign country if they are directly liable for VAT there.
  
• When conducting cross-border sales, German businesses must furnish appropriate proof that documents their fulfillment of applicable criteria for VAT treatment of the sales.
  

When are German businesses required to charge VAT to foreign customers?

When selling to foreign customers, German businesses must check if and where VAT is due. VAT treatment is not based solely on the customer’s location or residence in a foreign country.

Fundamentals of VAT treatment

According to Section 1, Paragraph 1, No. 1 of the German VAT Act (UStG), supplies of goods and services are subject to German VAT if a business makes these supplies within the territory of Germany in exchange for a fee. The regulations on place of supply determine whether a supply to a foreign customer is deemed to have been made in Germany. Section 3 of the UStG governs the place of supply for goods, while supplies of services and other special cases are subject to Sections 3a–3g of the UStG.

The UStG contains special provisions on certain cross-border sales. The first step is to differentiate between supplies of goods and services because different regulations apply to each. It also matters whether the customer is a business or an individual and what country the customer resides in. There are some differences in the regulations on sales to customers within and outside of the EU. These criteria determine which country is ultimately entitled to tax the sale.

Depending on the specific circumstances, the German business can charge German VAT, report tax-exempt sales excluding German VAT, or make a sale where the place of supply is located in a foreign country. If the place of supply is located abroad, the regulations applicable there determine whether VAT is due, who is liable for it, and whether the German business must register.

How is the place of supply determined for VAT purposes?

The place of supply is the country where a sale is subject to VAT. The UStG differentiates between supplies of goods and supplies of services and stipulates different regulations for each. There are also special provisions that govern certain types of sales.

Place of supply for goods

Supplies of goods are divided into supplies with transport and supplies without dispatch or transport. If the item is dispatched or transported, then the basic rule is that the place of supply is where the dispatch or transport begins. If the item is not dispatched or transported, then the place of taxation is where the goods are located when they are made available to the recipient.

However, cross-border supplies of goods are subject to special regulations. For example, Section 3c of the UStG determines the place of supply for distance sales based on the place where the goods reach the customer. There are also special regulations on supplies onboard ships, airplanes, and trains and on supplies of gas, electricity, heating, and cooling.

Place of supply for services

Supplies of services are subject to different regulations. For services performed for businesses, the place of supply is the customer’s headquarters. However, if a business supplies a service to an individual, the place of supply is the headquarters of the business performing the service.

There are several exceptions to these basic regulations that affect services related to real estate, short-term vehicle rentals, events services, some telecommunications and radio services, and certain services performed via electronic means.

Therefore, the place of supply of cross-border sales is determined by more than just the German business’s headquarters or the customer’s invoice address. What matters is the type of supply, VAT status, and, where applicable, location or business establishment of the customer, as well as any special regulations.

What are the VAT regulations on B2B and B2C sales within the EU?

Sales to customers in other EU member states are subject to different regulations depending on whether they are made to businesses (i.e., B2B) or consumers (i.e., B2C). Again, the key is whether the business supplies goods or services.

Sales to businesses within the EU

If a German business sells goods to a business in another EU member state, the supply can be exempt from VAT as an intracommunity supply. This is outlined in Section 4, No. 1 of the UStG in conjunction with Section 6a of the UStG. For this to apply, the goods must enter another EU member state, and the receiving business must be VAT-registered in that state. The customer must also use a valid VAT identification number (VAT ID).

However, services performed for businesses in another EU member state are generally subject to the location of recipient principle. This means that the place of supply is the customer’s location. Therefore, the German business does not charge German VAT. Instead, the customer can be liable for VAT in their country. The reverse charge procedure applies if the relevant criteria are met.

Sales to individuals within the EU

Direct sales to consumers or private individuals in other EU member states can constitute intracommunity distance sales, according to Section 3c, Paragraph 1 of the UStG. In this case, the destination country principle applies. This means the German business charges VAT according to the rules of the recipient’s country.

Simplified rules can apply to businesses with EU-wide revenue of up to €10,000, subject to certain eligibility criteria. This threshold applies to a business’s revenue in both the preceding and current calendar year. German businesses can use the One Stop Shop (OSS) to report and remit foreign VAT, according to Section 18j of the UStG. Businesses that centrally report their revenue via the OSS are not required to report this same revenue in individual destination countries.

In the case of services performed for individuals, the place of supply is the provider’s headquarters. In this case, the German business charges German VAT. However, there are exceptions for telecommunications, radio, television services, and other services performed via electronic means. In principle, these services are taxed at the customer’s residence. This means the German business must apply VAT according to the rules in the recipient’s country. However, the EU-wide €10,000 threshold can also apply here, subject to certain criteria.

What are the VAT regulations on sales outside of the EU?

Sales to customers outside of the EU are subject to the VAT rules on business with third countries. Again, there are differences between supplies of goods and services made to businesses and those made to individuals.

Sales to businesses outside of the EU

If a German business sells goods to a business outside of the EU, this can constitute an export. If the requirements of Section 6 of the UStG are fulfilled and the business can furnish proof of export, the supply is exempt (i.e., tax-free), according to Section 4, No. 1a of the UStG. Therefore, the German business does not charge German VAT.

For services performed for businesses outside of the EU, the place of supply is the customer’s location. Therefore, the German business does not charge German VAT. VAT can still be due in the customer’s country according to local regulations. Depending on the regulations that apply in the third country, a reverse charge procedure or comparable shift of tax liability can be applicable.

Sales to individuals outside of the EU

Sales of goods to individuals outside of the EU can also qualify as exempt exports. In this case, the German business does not charge German VAT. This requires that the goods enter the territory of the third country and that the statutory requirements are fulfilled, including proof of export.

In the case of services performed for individuals, the place of supply is generally the headquarters of the German business. Therefore, the business charges German VAT. However, certain services are subject to special provisions, according to Section 3a, Paragraph 4 of the UStG.

For example, certain consulting, advertising, and licensing services are provided to private individuals in a third country at the customer’s place of residence or registered office. In such cases, German VAT generally does not apply. Instead, tax can be due in the third country.

When does the reverse charge procedure apply?

The reverse charge procedure transfers tax liability from the business to the customer. In this case, the German business does not indicate VAT separately. Instead, the invoice must include a note indicating this shift of the tax liability (e.g., “Reverse charge applies.”) In addition, invoices for certain cross-border supplies must also contain the VAT IDs of both the business and the customer.

The reverse charge procedure predominantly applies in the following cases:

• Services performed for businesses in other EU member states
  Customers obtaining services that are—according to the basic rule—supplied at their location are liable for VAT in their respective states.
  
• Services performed for businesses outside of the EU
  B2B services outside of the EU are also supplied at the customer’s location. The national law of the respective third country determines if this tax liability can shift to the customer or if the German business must register for VAT.
  
• Certain domestic sales
  The reverse charge procedure also applies to certain sales made within Germany, such as construction services, building cleaning services, and legally stipulated supplies of goods. The customer is liable for VAT, subject to the requirements of Section 13b of the UStG.
  

When must German businesses register for VAT in foreign countries, and what are their reporting obligations?

Registration abroad is particularly relevant when a German business generates taxable sales there and is liable for VAT. This can be the case for supplies of goods or services where the place of supply is outside of Germany.

However, registration is not always mandatory. For example, businesses might be able to apply the reverse charge procedure to cross-border B2B services. In this case, the customer is liable for VAT. Supplying a service in a customer’s country does not automatically mean that a German business must register for VAT in that country.

For certain B2C sales within the EU, using the OSS can eliminate the need for separate VAT registrations in individual countries of destination for sales covered by the scheme. Whether a separate registration is required depends on who is liable for VAT and which procedure is used to report and remit it.

Reporting obligations

German businesses must also observe the tax reporting and declaration obligations in each country where they do business. These can include preliminary VAT returns, annual VAT returns, and other recordkeeping and documentation requirements.

In addition, Section 3a, Paragraph 2 of the UStG requires businesses in Germany to file a recapitulative statement for intracommunity supplies of goods and certain taxable supplies made in the rest of the EU. The regulations of each state determine what filings must be made and at what intervals. Therefore, business owners need to review the relevant national legislation ahead of time.

What evidence is required for cross-border sales?

When conducting cross-border sales, German businesses must produce appropriate documentation that shows the fulfillment of applicable criteria for VAT treatment on each sale.

For intracommunity supplies of goods, this includes proof that the goods have physically entered the territory of another EU member state. Accepted forms of proof include entry certificates and shipping documents. The customer’s VAT ID must also be documented. The required documentation must be clear and easily auditable.

Exports to non-EU countries also require appropriate evidence to verify that the supply qualifies as exempt. The German business must demonstrate that the goods were physically exported to the territory of the third country. According to the German VAT Implementation Ordinance (UStDV), proof of export for electronics must be furnished in the form of an export declaration. Shipping, delivery, or haulage documents can also be required in other procedures.

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FAQs on charging VAT to foreign customers