Taxes & Accounting

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. Some 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 “provision for small businesses”, “Kleinunternehmerregelung”), businesses can be exempted from VAT. Cross-border VAT: specific rules apply for businesses engaging in B2B or B2C cross-border trade within the EU or trade with Non-EU Member States.

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).

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.

Income tax (“Einkommensteuer”)

Tax on income – i.e. the sum of all revenues – is paid by natural persons. Income tax is paid on income from self-employed work (by business people and members of the liberal professions) and income from employment. The tax rate is progressive, i.e. it is linked to the amount of income. The higher your income, the higher the tax rate.  A taxpayer’s first EUR 9,984 (2022) 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.

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 600,000 and annual profits of EUR 60,000. However, if your business exceeds either of these limits, the tax office will notify you that double-entry bookkeeping is compulsory.

Please note the following exceptions:

• Incorporated firms (e.g. 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 invoices for small businesses (Kleinunternehmer) 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.