Most European self-employed have to deal with Reverse Charge, even those who don't have clients abroad. Let's understand what Reverse Charge is and how to deal with it effortlessly.
What is Reverse Charge?
The Reverse Charge procedure is a tax mechanism that "simplifies" VAT transactions between businesses in different EU countries.
Instead of the seller charging VAT, the responsibility shifts to the buyer.
Simply put, those who buy the product/service must take care of VAT payment.
How does Reverse Charge apply to you?
If you're a freelancer in Germany working with clients in other EU countries, you can benefit from the reverse charge rule. Here's how it works:
Business Clients: When you provide services or goods to a business client in another EU country, you do not include VAT in your invoice. Instead, your client is responsible for reporting and paying the VAT in their country. Remember to add a note about applying Reverse Charge to the invoice.
Private Clients: The reverse charge rule does not apply if your client is a private individual. In this case, you must charge VAT as usual.
Kleinunternehmer: If you're classified as a "Kleinunternehmer" (small business owner) exempt from VAT, the reverse charge rule doesn't apply since you don't charge VAT anyway.
Example scenarios
Providing Services: Suppose you consult a company in the Netherlands. You issue an invoice without VAT and mention the reverse charge rule. Your client will then handle the VAT according to Dutch regulations.
Purchasing Goods: You buy a computer monitor from a Spanish company. You pay the VAT, but since it's a business expense, you can reclaim it in your VAT return.
Invoice requirements
To correctly apply the reverse charge procedure, your invoices must include:
Your VAT ID number.
A statement indicating the reverse charge rule, such as "Steuerschuldnerschaft des Leistungsempfängers" in German or simply "Reverse charge" in English.
This ensures your client can report and reclaim the VAT accurately.
Reporting Reverse Charge transactions
Even though you don't charge VAT, you must report reverse charge transactions in your advance VAT return ("Umsatzsteuervoranmeldung"). To see if Reverse Charge applies to your expenses, look at the invoices from your vendors. They should state if the Reverse Charge was applied and if VAT was charged.
Additionally, you must include your European clients in the summary report ("Zusammenfassende Meldung"), listing each EU client, their country, and VAT IDs.
Non-EU Clients
For clients outside the EU, the reverse charge rule generally doesn't apply, and no VAT is charged. However, some countries may have specific agreements with Germany that follow similar principles.
Summary
If you get an invoice from the vendor, don't second guess - check what is written there.
Reverse Charge applies:
Your client is a business in the EU.
You got an invoice from a business in the EU that states that Reverse Charge was applied.
Reverse Charge doesn't apply:
For clients in Germany.
For purchases of goods and services from companies in Germany.
Your client is a private individual in the EU.
For most clients from countries outside of the EU.