The global market has opened up numerous opportunities for freelancers and small-to-medium businesses (SMBs) based in Germany. However, these opportunities also come with an added layer of complexity when it comes to Value Added Tax (VAT/Umsatzsteuer/Sales tax). Understanding how VAT works internationally is crucial for German businesses to maintain compliance and optimize their operations. Let's delve in.
Purchasing Goods and Services Internationally
A German business might be subject to VAT when it buys goods or services from a foreign company. Here's how it works:
Goods: When importing goods into Germany from non-EU countries, import VAT (Einfuhrumsatzsteuer) is applied. The rate is the same as the standard German VAT rate, currently at 19%. However, you can often reclaim this as input tax, just as with domestic purchases, provided you have the necessary import documents.
Services: For services, the 'reverse charge' mechanism usually applies. It shifts the VAT liability from the supplier to the customer. Thus, as a German business, you pay the VAT directly to your local German tax office and not to your foreign supplier.
Software/Subscriptions: Digital services, like software subscriptions from non-EU providers, are also subject to VAT. Similar to other services, the 'reverse charge' system applies. You pay the VAT in Germany at the local rate.
Invoicing International Customers
When you sell to international customers, the rules can vary, depending on whether your customers are businesses (B2B) or consumers (B2C) and whether they're in the EU or outside.
B2C within the EU: For B2C transactions, since 2021, you generally need to apply the VAT rate of the customer's country due to the new EU e-commerce VAT rules. The EU's One Stop Shop (OSS) simplifies this process, allowing you to declare and pay this VAT in a single quarterly return.
B2B within the EU: For B2B transactions within the EU, 'reverse charge' applies. You issue an invoice without VAT, and your customer accounts for it in their country. Don't forget to validate your customer's VAT ID and mention on the invoice that the reverse charge mechanism applies. A straightforward way to do this in German is by adding "Umkehrung der Steuerschuldnerschaft: Die Mehrwertsteuer ist vom Leistungsempfänger gemäß Artikel 196 der EU-Mehrwertsteuerrichtlinie zu entrichten." In English, you could state - "Services subject to the reverse charge - VAT to be accounted for by the recipient as per Article 196 of Council Directive 2006/112/EC".
Transactions outside the EU: For both B2B and B2C transactions outside the EU, no VAT is charged, as these are considered exports. However, your customers may have to pay VAT (or equivalent) according to their local rules when they receive the goods or services.
Specific country examples
Purchasing Goods and Services Internationally
Example: From Poland & France (EU Countries) If a German SMB purchases goods from a supplier in Poland or a service from a business in France, the reverse charge mechanism applies. The German business won't pay VAT to the Polish or French supplier. Instead, they will account for it in Germany.
Example: From Switzerland & United Kingdom (Non-EU Countries) Suppose a German freelancer buys software from a company in Switzerland or imports goods from the UK. In both cases, the German business will pay the import VAT (Einfuhrumsatzsteuer) in Germany. The rate is the same as the standard German VAT rate of 19%.
Example: From United States & China (Outside Europe) Let's say a German business subscribes to a SaaS product from a US company or buys goods from China. In either case, the German company will pay the import VAT at the German rate for goods. For digital services, the 'reverse charge' applies.
Example: From UAE (VAT Implemented Recently) If goods are imported from the UAE, import VAT applies in Germany. Given that UAE has implemented VAT recently, the reverse charge mechanism would apply if services are bought, requiring the German business to pay VAT at the local rate in Germany.
Invoicing International Customers
Example: Poland & France (EU Countries) If you provide services to a business in Poland or France, you should invoice without VAT, stating that the reverse charge applies. For B2C, you would apply the VAT rate of the customer's country (23% for Poland, 20% for France as of the date of this article).
Example: Switzerland & United Kingdom (Non-EU Countries) For B2B and B2C transactions with customers in Switzerland or the UK, you would invoice without VAT, as these are considered exports.
Example: United States, China & UAE (Outside Europe) When selling to customers in the US, China, or UAE, you won't charge VAT on your invoices, as these are considered exports. However, your customers may need to pay their local equivalent of VAT or import taxes when they receive the goods or services.
Remember that these are general examples, and specific circumstances may vary. Always consult with a local tax office when in doubt.
Key Takeaways
International VAT can be complex, but understanding these basic principles will help you navigate with confidence:
Always verify if a reverse charge applies when you purchase services or digital products from abroad.
Remember to validate your international B2B customers' VAT IDs and use the reverse charge mechanism.
Register for the OSS if you make B2C sales to customers in other EU countries.
Understand that selling to customers outside the EU is typically VAT-free. Still, your customers may have to pay import VAT or equivalent.
We have created an encompassing VAT guide for general VAT questions and information on filing process. If you need help with VAT tracking and calculation - try Norman AI accounting platform designed for small businesses, not tax advisors.