Introduction
Value Added Tax (VAT) is a significant part of the tax system in Germany for every business. From the production of goods to their purchase, VAT plays a crucial role, which is a must to understand for everyone earning in Germany. Not just VAT, but the people must comprehend its implications and compliance requirements to boost their business development. Let’s learn what VAT is and why businesses need to understand its compliance requirements.
What is VAT and Why is it Important in Germany?
Value Added Tax or VAT is the tax each seller adds to the good’s price in the supply chain, starting from the raw material supplier to the retailer. In Germany, it is necessary for every business to gather VAT from its customers and return it to tax authorities to use this money for basic public service. Hence, it is vital for entrepreneurs to understand VAT and its compliance with VAT laws.
Let’s discover the necessary compliance requirements for German VAT:
1. VAT Registration in Germany
VAT registration is crucial for every business operating in Germany or every foreign seller selling their products in Germany. The threshold set for registration is 22,000 Euros, meaning if a company’s annual earning reaches or exceeds this amount, it will have to register for VAT. Therefore, you need to check your annual income for timely VAT registration constantly.
For registration, you are required to submit an application, which requires necessary business details like its name, documents, passport, and turnovers, to the local tax office. The local tax office will provide a VAT identification number, after which you must add VAT to the products’ selling prices and collect it from customers.
2. VAT Rates in Germany
Every business registered for VAT in Germany must understand VAT rates to collect the appropriate amount of tax from its customers properly. VAT rates are added to the original price of the products, which customers pay as a total amount. For instance, if the price of a product is 20 Euros, a 19% VAT rate will be added, and it will be sold for a total of 23.8 Euros.
Germany has set its VAT rates in three different categories: Standard, reduced, and zero rates.
- Standard Rate: The standard VAT rate is 19%, which is applicable to most of the products, including clothing, home care services, food items and beverages, electronics, and medical services.
- Reduced Rate: The reduced VAT rate in Germany is 7%, which applies to specific products, like books, public transport, gold coins, and wood for industrial use.
- Zero Rate: Some services or supplies have zero VAT rates, meaning that these supplies must be included in your VAT filing, although they have a 0% VAT rate. These services include intra-community and international transportation or trade.
3. VAT Invoices
A VAT invoice is another significant compliance requirement for VAT laws. VAT invoices are the formal records of every business transfer that the businesses must issue. VAT invoices allow both VAT registered seller and buyers to claim their input tax credits. VAT invoices must include supplier’s and consumer’s details, specifically their names, addresses, and VAT ID numbers.
Furthermore, every individual has a unique invoice number to eliminate the chances of duplicates at the time of reclaim by tax authorities. The date the invoice was issued must also be mentioned in the details. Besides, there must be a proper description of goods, their quantity and unit prices, and the VAT rates applied to these products.
4. VAT Return
VAT return, one of the prominent aspects of VAT compliance, should be filed frequently as per the business size. The startups can file their VAT returns every three months while flourishing organizations can file monthly. It is significant to record VAT-related activities and documentation correctly to avoid errors.
Moreover, businesses must file VAT returns timely keeping the deadlines in mind. Timely submissions will keep them safe from legal actions and penalties. The deadline for large businesses is the 10th of every month. On the other hand, small businesses must file on the 10th of every quarter of the year. However, Germany encourages businesses to file their VAT returns online, which is secure and time-saving.
5. VAT Audits
A VAT audit is an inspection by the tax authorities to ensure your VAT compliance. This inspection includes reviewing your VAT records, analysing VAT invoices, and checking selling records, documents, and annual accounts. You might also need to answer some questions from the tax authorities during the investigation. The VAT audits occur frequently depending on the business size. Larger businesses face VAT audits more frequently as compared to small ones.
These inspections may go on from a few weeks to months, and you will be notified earlier by the tax authorities. In case of minor errors, you will need to adjust your VAT liabilities, or you may need to pay extra taxes. However, you might be charged with fines or penalties if there are major errors in your VAT records.
Sum Up
Value Added Tax (VAT) is a fundamental tax system in Germany that every domestic and foreign business must be familiar with. VAT is a tax that adds value to the original price of the products or services. Germany has a specific threshold of 22,000 Euros at which every business must register for VAT. Every VAT-registered business must charge standard, reduced, and zero VAT rates with their respective products from the customers.
Apart from that, individuals must accurately monitor their VAT records, issue VAT invoices, and file VAT returns to the authorities. The tax authorities also frequently conduct VAT audits to examine the VAT records of the companies, as per their activities. Therefore, every individual conducting their business in Germany must understand and follow this tax system and its compliance with the VAT laws to avoid penalties or fines.
