Taxation

VAT Internationally – Reimbursement

VAT in the court of intracommunity trade is nothing simple to handle. Did not all European governments want to enhance the trade of businesses inside the European Community? Well, we will describe what you need to know to have any VAT inside the EU reimbursed.

Darn it! I had to pay my EU supplier’s bill with VAT and now how the heck am I to collect this input tax? Do I have to apply for refunding from every other European country? I bet I will have to start learning a language which I do not need.

Relax! Yes, you can apply for refunding the paid VAT. No, you do not have to learn another language. German will suffice – at least almost always. Only for details for code no. 10, keep on reading, might a translation be necessary since the contents of the form are uniform all over Europe. When you have some kind of “other (outside the catalog)” expense/income, that might need a translation. Assuming this “other expense” is in English, then – taking it from a practical standpoint – relax and do not worry about translation.
§§

Need an online dictionary? Check out http://www.leo.org/ende/index_de.html

Do I get the paid VAT back automatically or do I have to apply for it?

As sure as the world is round, you have to apply for refunding from a German administrative office. You have to apply at the Central Office of the place where your business is located for this foreign country, in other words in Germany and in German (art. 7 Directive 2008/9/EG). Pursuant to §18g UStG, this office is the Bundeszentralamt für Steuern.You will have to apply for each individual country from which you want a rebate. Aggregated applications are not possible. This application must be submitted electronically.
§§§

Technical / Procedural Details

What does an application contain?

The application must contain the following details (art. 8 Directive 2008/9/EG)!

  • Name and complete address of applicant,
  • address for electronic communication;
  • description of applicant’s business, for which the products and services have been bought;
  • Period of applied refunding;
  • applicant’s declaration that he has neither rendered any services nor sold any products during the refunding period in Germany – disregarding the above exceptions (pursuant to art. 3 lit. b no. i and ii Direktive 2008/9/EG);
  • applicant’s VAT-ID or tax registration number for purpose of refunding VAT,
  • Banking details (incl. IBAN and BIC).
  • name and complete address of supplier (goods and services);
  • VAT-ID or tax registration number of supplier (art. 239 and 240 der CSoVAT;
  • Prefix of refunding Member State (art. 215 CSoVAT);
  • Date and number of invoice or import document,
  • Net price and VAT amount in the original currency of the refunding State,
  • Computed amount of deductible VAT amount of deductible VAT pursuant to art. 6 II Directive 2008/9/EG in the original currency of the refunding State;
  • Eventually computed pro-rata-rate of input tax pursuant art. 6 Directive 2008/9/EG,
  • Kind of obtained goods or services, broken down by code number laid down in art. 9 Directive 2008/9/EG.

For breaking down the obtained / provided goods and services following code numbers are to be used (art. 9 Directive 2008/9/EG):

  • 1 for fuel;
  • 2 for renting means of transportation;
  • 3 for expenses for other means of transportation (other those mentioned under no. 1 or 2),
  • 4 for toll and fees for usage of streets,
  • 5 for traveling costs like taxi, public transportation means,
  • 6 for accommodation;
  • 7 for meals, beverages and restaurant services,
  • 8 for entrance fees for fairs and expositions,
  • 9 for luxury expenses, expenditures for recreation and representation,
  • 10 miscellaneous. N.B. When using this code number you are to describe the received goods or services.
Do I still have to present copies of my invoices?

Typically no, because everything is supposed to be done electronically – remember “eGovernment”. However, the individual Member State may require to have a copy of the invoices or import documents when the net sum of the bill totals to € 1,000 (€ 250 for fuel) or equivalent in that country’s currency (art. 10 Directive 2008/9/EG).

How much time do I have to apply for refunding?

You must submit your application for refunding (Erstattungsantrag) by the latest September 30 next year (i.e. the year following the year you are to report). However, bear in mind carefully that the application must be valid to count, i.e. it must meet all formal requirements of art. 8, 9 and 11 Directive 2008/9/EG (so art. 15 Abs. 1 Directive 2008/9/EG). For the sake of legal security, the Directive provides that the government is to send without undue delay a transmission receipt to you (art. 15 Abs. 2 Directive 2008/9/EG). Do check it very carefully in order to double check what you have submitted. September 30 is the final deadline (BFH, judgment of October 21, 1999, re V R 76/98). You have no chance to extend it – neither in advance nor afterwards!

Are there really no exceptions?

Pursuant to §110 AO, you can apply to be restituted into the previous status (“Wiedereinsetzung in den vorigen Stand”). This is not easy and you will have to produce good arguments.
§§§§

After having submitted my report, does the German government just forward it or will this bureaucracy check if everything is correct? What happens?

You would be naïve to believe that a German agency does not check a report it gets handed. The Bundeszentralamt für Steuern functions as a collecting point for all nations – and vice versa. This office just makes a preliminary test for the following details:

  • Is the indicated VAT-ID correct and can it be assessed to the applicant without any doubt?
  • Is the applicant a business permitted to deduct input tax?
  • Does the transmitted application contain all mandatory details?
    §
What happens when the office does not find any problems?

The Bundeszentralamt für Steuern forwards your application within the next 15 days to the relevant country via their electronic interfaces. Upon forwarding your application, this Central Office confirms that the VAT-ID is valid and the business is registered for VAT matters (art. 18 Directive 2008/9/EG).
§

Cool. I don’t have to make sure that the other European country really gets my application. But what happens when the office finds something is wrong in my application?

When Germany’s Central Tax Office, Bundeszentralamt für Steuern has a reason to complain (e.g. the VAT-ID is wrong), it will reject your application and will not forward it the other country (art. 18 Directive 2008/9/EG). You have the right to contest this decision (Einspruch einlegen). 
§§§

Taxation of Businesses

Since tax law is subject to fluctuations it is difficult to write down the state of the law. Following provisions will only give you a rudimentary primer on what you need for understanding. For more, detailed and up to date information consult your attorney or tax advisor.

This presentation is reaching out to SME not required to keep books. Since keeping books is a very formal and a sophisticated matter in general, and bigger companies will have their bookkeeping personnel anyway, no need for any such information is assumed here.

BTW: Did you know? Tax Return - its origin:

Until 1694, English sovereigns financed their expenditure simply by issuing credit tokens (IOUs) to taxpayers at a discount. In other words a tax-payer could "prepay" his taxes, for instance by giving the sovereign 8 pounds sterling in goods and services in exchange for a 10 pound token from the Exchequer (Treasury), which could be returned in payment of taxes.
Interestingly, the phrase "tax return" derives from the payment of tax by returning the credit token to the King's Exchequer, and the phrase "rate of return" literally described the time over which the taxpayer could achieve his discount and profit by returning his tokens/credits to the Exchequer. So in the above example, if the taxpayer paid 10 pounds tax in one year, he would make a 2 pound profit on an 8 pound investment and a 25% rate of return. If he paid 5 pounds in tax a year then the rate of return would be 12.5% and so on. It will be observed that no compound interest was involved. But that's history; it is not so easy anymore today.

 

Computing the Taxable Income
pursuant to §2 EStG (N.B. This overview covers about 90% of the rules!)
  Turnover (earnings before
operational deductions)
Umsätze (Einkünfte vor Abzug
von Betreibsausgaben
)
  earnings (= profit) Einkünfte (= Gewinn)
minus contribution to assistance for old-age Altersentlastungsbeitrag
minus relief for single parents Entlastungsbeitrag für Alleinziehende
minus € 640 for income in forestry
and agriculture
€ 640 bei Einkünfte aus Forst-
und Landwirtschaft
  = total amount of earnings = Gesamtbetrag der Einkünfte
minus special expenses Sonderausgaben
minus extraordinary burdens Außergewöhnliche Belastungen
  income = Einkommen
minus
child benefits or exemptions
Kindergeld oder Kinderfreibetrag
  = income to be taxed or taxable income = zu versteuerndes Einkommen

 

Why is the tax law and taxation in Germany so very complicated?

The law on taxes in Germany is as regular as the irregular verbs in the English language. This fact is due to the Germans’ attitude toward the fiscal authority. It is considered as a sport, comparable to a cat and mouse game, for a German to outwit the fiscal authority in order to reduce tax payments as much as possible. This corresponds with the difficulty of tax law. The eagerness for this game supposedly derives from the general dissatisfaction with Germany’s political and/or commercial situation.
§

Do I not have to pay any value added or sales tax when I buy something? I have been always paying the price on the tag and nothing more.

Sure, you are paying value added tax. Here we typically have all inclusive prices. Taxes and service fees must be included in prices for the end consumer (§1 I 1 PAngV). As a businessman on the other hand, you will often find two or three sums as the “price” (net/gross sum, VAT). What ever the price structure may be, do take a good look for the final price.
§

Being a businessman, which taxes do I have to pay?

This depends on the kind of businessman you are. All are subject to income tax (Einkommenssteuer) respectively corporate tax (Körperschaftssteuer) for incorporated companies, and VAT. Only those practicing a trade or industry (and not a free profession) will have to pay trade tax (Gewerbesteuer). Trade tax will always be imposed upon all corporations.
§ - §§§§

Value Added Tax  

This page will discuss the issues of VAT exclusively when business is done exclusively in Germany. When you end up having a customer / client abroad (outside of Germany), then visit the page "VAT Internationally". First let me start with wording hints: VAT is in German either USt or Umsatzsteur, resp. MwSt or Mehrwertsteuer. Colloquial German also comes up with Märchensteuer or Meerschweinsteuer – better not mention these words to an official auditor. They know these words but will feel assaulted or insulted.

 What is this Value Added Tax (VAT) and input tax all about? Is there a tax that will value me and so add to my worth?

© Mariusz Prusaczyk - Fotolia.com

It is all about how the state wants to legalize pulling money out of your pocket. No, I’m only kidding! VAT or better even turnover tax is the taxation of turnover made by selling goods or rendering services. The official definition is: All such performances of a business are subject to VAT that are done for remuneration in Germany. 
§

How many different VAT rates are there in Germany?

Yes, there are three: 0%, 7% and 19%. As a rough differentiation, everything is to be billed with 19% except for art, printed literature, food stuffs (not eaten on the premises), public transportation, and taxis. However, there some services that are not billed with VAT at all. The most prominent example for billing with 0% are medical treatments – because the law does not levy VAT on these services / sales.

We have decided to start a translating business in Munich. Are we subject to VAT?

As a rule, all business are subject to VAT. However, if your turnover will estimate to no more than € 17,500 in the year of opening and in the next year, then you can opt out of billing with VAT (§19 III UStG). This is considered as the “small entrepreneur’s rule”.    
§§§

Starting my business from scratch, does it make sense to apply the small entrepreneur’s rule to my business?

To find out if you should invoice with VAT answer the following questions:

  • Do you have many foreign companies assigning / ordering from you?
  • Will next year's turnover be more than € 17,500?
  • Are most of your customers billing with VAT?
  • Will you be purchasing many expensive things for the business?

If the majority of your answers were “no” then it would not make much sense to bill with VAT. Consider your choice carefully because you will be bound to this for the next three years. If you have problems deciding hire me for an initial consultation or call the service number.
§§§

Are all services to be billed with VAT - disregarding the small entrepreneur's rule?

No! Typical examples of professions not billing with VAT are physicians, (insurance) brokers, bank (money) services, etc. (§4 UStG). However, when a physician starts writing expert's opinions for insurance, this will be subject to VAT and the input tax in relation to that income will be deductible - under the "normal" rules.
§§§§

Aw, I'm a start-up, I can't afford an accountant just to find out if I am to bill with VAT or not and anyhow, I want to do all the accounting myself. Must I really hire a tax guy?

Oh, but you should. However, nobody will force you to hire a tax consulting lawyer. The catch to this is that when you were actually subject to VAT the tax office will want to have its money ASAP. The office will consider you retroactively late - with "good" legal right! Depending on your assumed turnover, negotiate with your consultant for a "fair" price.
§§§§

I seem to think that it is not a “must” for me to have VAT-ID since my business is exclusively domestic. Should I still have a VAT-ID?

Yes and no. This question actually opens many permutations because for the correct answer to be “yes” depends on which legal situation you are thinking of.

  • VAT: using ID will prove that this income is for business purposes,
  • Income tax: using ID proves taxable income,
  • Income tax: not using ID hints that income can be for private purposes,
  • Remote Business Law (Fernabsatzrecht): Using ID will exclude consumer rights of revocation,
  • “Homepage law”: either (income) tax number or VAT-ID is needed,
    §
Heck, I don’t have such a thing. Where do I get a VAT-ID? How long will it take and how much does it cost?

You will get it at the Bundeszentralamt für Steuern. Click on this sentence to be lead to the application for a VAT-ID! When you already have a normal tax number (especially when you have several then the one for VAT is needed). This service is free of cost. Anyhow your tax consultant will normally also take care of this issue. This will take about a week.
§

I heard of the possibility to submit a flat VAT return? As I am not good at math, I look into that. Is there such possibility?

There is such a possibility and will be described on a different page: Flat Rate for Input Tax in Annual Statement