Taxes and 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. 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.

Income tax (“Einkommensteuer”)

Tax on income is paid by natural persons. Income is generated through self-employed work, employment and capital assets among other 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.

In Germany, employees are assigned to different income tax brackets, which are commonly referred to as tax classes (Steuerklasse). They help the employer in the process of calculating the income tax of an employee. As a self-employed person you do not have a tax class for your self-employment. Instead, self-employed persons must pay income tax to the tax office four times a year in advance. These quarterly installments will be offset on filing an annual return.

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. Make sure that the software is able to integrate with the Tax Office’s ELSTER platform.

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 you supply goods or provide services to other businesses (B2B), you are obliged to issue invoices within six months. When supplying goods or services a private individual (B2C), you are generally free to decide whether to issue an invoice. Further exceptions are regulated by the Value Added Tax Act (Umsatzsteuergesetz, UStG).

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 owner regulation (Kleinunternehmerregelung) according to Section 19 of the VAT Act (UStG)? Or do you want to issue a so-called low-value invoice (Kleinbetragsrechnung) for a total amount of up to 250 euros? Here, too, there are certain requirements. Also get to know the difference between an invoice and a receipt.

The Chambers of Commerce and Industry (IHK), the Chamber of Skilled Crafts (HWK), the Munich Tax Office and the Institute on Liberal Professions provide free information:

• IHK guide Mandatory information for invoices
• IHK guide Retention periods
• IHK example Invoice including VAT PDF 41.1 KB
• IHK example Low-value invoice PDF 110 KB
• IHK example Low-value invoice with small business regulation PDF 69.6 KB
• Munich Tax Office Information sheet with sample invoices PDF 526 KB
• Liberal Professions: From business letters to bookkeeping and invoices PDF 538 KB
• FAQs on invoicing

Commercial tax and accounting software can help with invoicing, VAT reporting and tax declaration. Make sure that the software is able to integrate with the Tax Office’s ELSTER platform.

Important: Special requirements apply to invoices sent abroad! Entrepreneurs who use the so-called small business owner regulation may also be affected!

• IHK guide B2B trade within the EU
• IHK guide B2C trade within the EU PDF 358 KB
• IHK guide Trade with third countries
• IHK guide Services across the border

Mandatory e-invoicing in Germany

On January 1, 2025, the electronic invoice (elektronische Rechnung), or e-invoice (E-Rechnung ) for short, will be introduced for businesses in Germany. An e-invoice is an invoice issued, transmitted, and received in a special format that enables automatic processing. An invoice in PDF format does not meet this requirement. Check whether your digital invoicing and accounting program can receive and create e-invoices in accordance with the latest standards or speak to your tax advisor or accounting office.

• in English: e-invoicing factsheet Germany of the European Commission
• IHK guide e-invoice
• HWK guide e-invoice simply explained

1. Receiving and processing invoices:

All businesses in Germany that exchange products, services, or information with other businesses (B2B) or private individuals (B2C) in Germany must receive and process e-invoices from January 1, 2025.

2. Issuing and sending invoices:

All businesses in Germany that exchange products, services, or information with other businesses (B2B) in Germany, must not only receive e-invoices, but also issue and send them. If their previous year’s turnover is less than 800,000 euros, this obligation will only apply from January 1, 2028, provided the invoice recipient agrees.

There are some exceptions in the B2B sector where no e-invoice must be issued, such as small-value invoices under 250 euros or tax-free deliveries and services.

In the B2C sector no e-invoices have to be issued. If you still want to issue an e-invoice, you need the recipient’s consent.

Mandatory information in business letters

Business letters are subject to different legal regulations than invoices.

• IHK guide Information on business letters PDF 32.1 KB
• HWK information sheet Mandatory information in business correspondence PDF 87.6 KB