Depending on whether you plan to exercise a business or a liberal profession and which legal form you choose, these decisions will directly influence tax regulations and accounting standards. When it comes to working with clients from abroad, you need to check which tax rules apply on an international level.
Value-added tax (“Umsatzsteuer”)
Value-added tax (VAT) is a consumption tax on the exchange of goods and services. At present, the standard VAT tax rate in Germany is 19 percent. A reduced rate of 7 percent applies to certain consumer goods and everyday services. Other services are completely VAT exempt. Companies are obliged to add VAT to their prices and to invoice their customers accordingly. They must submit an advance VAT tax return to the tax office four times a year. Under certain circumstances, the “small business owner regulation” (“Kleinunternehmerregelung”) applies and businesses can be exempted from VAT. Specific rules apply for businesses engaging in B2B or B2C cross-border business within the EU or with Non-EU Member States.
FAQ How do I apply for the small business owner regulation – Kleinunternehmerregelung?
Trade tax (“Gewerbesteuer”)
All commercial business operations are liable to trade tax. Although trade tax is regulated by federal law, it is a municipal tax with rates varying at the municipal level. Trade tax is paid on the annual trade income (essentially the same as profit) earned by self-employed business activities. The trade tax rate is determined by a federal rate of 3.5 percent and a multiplier (Hebesatz) stipulated individually by every municipality. Example of city multiplier (with resulting trade tax rates in brackets): Munich – 490 percent (17.15 percent). Unincorporated firms enjoy a tax allowance of EUR 24,500 and these entrepreneurs can set off part of their trade tax liability against their income tax liability. There is no trade tax allowance for incorporated firms (e.g. GmbH/UG). The city will issue a trade tax assessment (Gewerbesteuerbescheid) that is also available via ELSTER, the online portal used by the government’s financial administrative authorities. Additionally, the city may annually issue a trade tax prepayment assessment (Gewerbesteuervorauszahlungsbescheid) for the current assessment period.
Corporation tax (“Körperschaftssteuer”)
This tax is based on the profits of incorporated firms (e.g. limited liability companies). A flat tax rate of 15 percent applies.
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Income tax (“Einkommensteuer”)
Tax on income is paid by natural persons. Income is generated through self-employed work, employment and capital assets among others sources of income. The tax rate is progressive, that means that it is linked to the amount of income. The higher your income, the higher the tax rate. A taxpayer’s first EUR 11.604 (2024) of income is tax-free. Thereafter, the income tax rate starts at 14 percent and can reach a maximum overall rate of 45 percent. The rule is: the higher your taxable income, the higher the rate of taxation. In addition a solidarity surcharge of up to 5.5 percent may apply. The Federal Ministry of Finance provides an online calculator to help you understand how the tax is calculated on your individual income.
A general distinction is drawn between single-entry bookkeeping with net income statements and double-entry bookkeeping with an annual balance sheet and income statement. Single-entry bookkeeping is easier and less expensive to use. Double-entry bookkeeping leads to significantly higher running costs for tax advice and for accounting activities. Single-entry bookkeeping is sufficient up to annual revenues of EUR 800,000 and annual profits of EUR 80,000. However, if your business exceeds either of these limits, the tax office will notify you that double-entry bookkeeping is compulsory. Commercial tax and accounting software can help with invoicing, VAT reporting and tax declaration.
Please note the following exceptions:
- Incorporated firms such as limited liability companies must always use double-entry bookkeeping, regardless of their level of revenue or profit.
- For self-employed persons in the liberal professions, single-entry bookkeeping is always sufficient, regardless of revenue and profit levels.
If invoicing is not done correctly it often results in delayed payment. When you are issuing invoices, make sure they meet all the legal requirements. It makes no difference whether the invoices are for goods, services, or fees. Do you use the small business regulation (Kleinunternehmerregelung) according to Section 19 of the VAT Act (UStG)? Or do you want to issue an invoice for a small amount (Kleinbetragsrechnung)? Here, too, there are certain requirements. Commercial tax and accounting software can help with invoicing, VAT reporting and tax declaration.
The Federal Ministry of Finance is planning to make electronic invoices for B2B business transactions mandatory by the year 2025.
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Helpful hints
There are all kinds of special cases and exceptions relating to tax issues. Please contact a tax adviser to find out about them!
Please note: The information in this document is not legally binding and cannot replace professional legal or tax advice! Please address detailed questions on tax or legal matters to a tax adviser or a lawyer.