Every freelancer or small business in Germany has to deal with the issue of VAT. It cannot be ignored. VAT stands for “Value added tax”. It is one of the indirect taxes i.e. a tax on the purchase of goods and services. (Direct taxes are directly on the income of an individual). An indirect tax means that the tax is passed on to the final customer as it is added on to the bill for the product or service.
This also explains why it is called “value added”. VAT is based on the additional value of a product or service as it moves through the manufacturing or delivery process. Any business that is registered for VAT performs a net calculation when transferring the VAT to the government. It is able to deduct the VAT it has already paid for materials, products or services from the VAT it must pay.
You may hear VAT in Germany being called either “Umsatzsteuer” or “Mehrwertsteuer”. The law in Germany refers to “Umsatzsteuer” but both terms have the same meaning.
The standard rate of VAT is 19%. A reduced rate of 7%, however, applies to certain goods and services such as for example: food, newspapers, local public transport and taxis, and hotel stays.
There are different types of self-employment in Germany. On the one hand there are people who practice a craft or trade (traders or “Gewerbetreibende”) and on the other those whose work is more of an intellectual nature (freelancers or “freie Berufe”). The difference determines whether it is necessary to register your business as a trade with the city (“Gewerbeanmeldung”). This in turn determines whether the tax office requires you to pay trade tax (“Gewerbesteuer”) or not.
As far as VAT goes, though, all self-employed people have to account for VAT. There are exceptions and I will return to this later.
When you first set up your business as a freelancer in Germany, you must apply for a tax number from the local tax office (“Finanzamt”). If registering a trade with the city, then the local tax office will automatically receive your details. If not, then you must inform the tax office (either by making an appointment there of informing them in writing) that you are setting up business as a freelancer.
In both cases you need to fill out a fairly daunting form, the Tax Registration Questionnaire (“Fragebogen zur steuerlichen Erfassung”). You must fill it out in German (German being the only accepted official) language. Hanna Lisa Haferkamp has written really good detailed line-by-line instructions in English as to how fill out the form. You can find them on her blog HERE.
There are some sections, however, in which you must input some details in German: I would highly recommend you to make use of a German speaker at this point. Providing clear and detailed information at this point can save a lot of time and trouble dealing with the tax office later.
In the form you must estimate your revenue for the first and second years of business, in order to determine if you need to charge VAT or not. (This is in addition to other information relating to profit in order to determine whether you need to make prepayments of income or trade tax). Depending on your planned revenue, you may count as a “Small Trader” (“Kleinunternehmer”) and you do not need to charge VAT on the invoices to your customers.
You have the possibility in the Tax Registration questionnaire to apply for a VAT Identification number (“Umsatzsteuer-Identifikationsnummer”). You require this if you have customers or suppliers who are located within the EU but outside of Germany. If you are just doing business in Germany, you do not need the number. However, it costs nothing to get it and I would recommend applying for it straight away.