Overview On German VAT

 
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1 Introduction

In contrast to personal taxes (e.g. income tax), German Value Added Tax ("VAT") is a tax on transactions. VAT is a sales tax which is levied at all levels of taxable supplies of goods and services made by a taxable person in the course of any business activity carried on in Germany and on the importation of goods from other states.

The German VAT Act ("VATA") is harmonised under the EU-wide VAT system. Therefore, decisions of the European Court of Justice have an important impact on the interpretation of the VATA.

Due to the possibility for entrepreneurs to deduct VAT (input tax) paid for received services or goods if these are related to taxable output transaction or certain VAT-exempt transactions, the tax payment is generally neutral for the business of the entrepreneur. This means that VAT is not an expense item but it is only a pass-through item. Only for private individuals or certain tax-exempt entrepreneurs, VAT paid to customers is a final expense.

2 Taxable Events

The following events are - inter alia - subject to the VATA;

Supply of goods and services rendered by an entrepreneur for remuneration within Germany for its business; Importation of goods from territories outside the EU into Germany (Import VAT) and Intra-EU acquisitions (supply of goods from another member state of the EU to Germany). Even if the aforementioned events are subject to the VATA, it ultimately has to be determined whether VAT is actually due. The VATA provides for certain VAT exemptions (see section 5 below). VAT will only be levied if the respective event is subject to the VATA and a tax exemption does not apply.

3 VAT liability

3.1 Entrepreneurs

Any individual, corporation or partnership carrying out trade or professional activities with the objective of earning income is generally treated as a tax-liable entrepreneur under the VATA. As a result, sole proprietors and self-employed persons as well as commercial entities, whether incorporated or not, are subject to the VATA.

The VAT liability of entrepreneurs begins with the initial business activities and ends once all legal relations of the business, including with the tax authorities, are completed.

3.2 Exemptions

(a) Small entrepreneur

If the annual turnover of the preceding calendar year did not exceed an amount of €17,500 and will presumably not exceed an amount of €50,000 in the current calendar year, the so-called "small-entrepreneur" (Kleinunternehmer) is generally not entitled to separately charge VAT in its invoices and can therefore not take advantage of the input tax relief.

However, the entrepreneur may waive the tax exemption and opt for regular taxation and input tax deduction. The entrepreneur is bound by such waiver for a minimum period of five years.

(b) VAT group

If one or more entities are integrated financially, economically and organisationally into the business of a German top parent entity, the entities build a VAT group. As a consequence, the VAT group as a whole will be regarded as only one entrepreneur. Consequently, the German top parent entity is liable for all VAT obligations (e.g. registration, tax filings, VAT payments) of the VAT group.

The domestic supply of goods and services between the members of the VAT group are not subject to VATA. However, the regime of the VAT group only applies for German entities. In the event of an international group of entities, the most significant German entity is deemed to be the entrepreneur liable for VAT.

(c) Holding companies

Entities that acquire, hold and sell interests in companies are...

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