Taxes

Transitioning from Kleinunternehmer to VAT liable: a step-by-step guide

Peter

Founder & CEO

Updated on:

Jul 17, 2023

You can register as a Kleinunternehmer if you don't make more than €22,000 in revenue in the first year of self-employment and don't exceed €50,000 in the following year. Being a Kleinunternehmer (small entrepreneur) in Germany has its perks – the main one being that you're exempt from charging VAT (Value Added Tax or Umsatzsteuer) on your invoices.

However, it is possible that you, for example, receive more orders than expected and exceed this turnover limit. What to do now? If this happens in the first year of self-employment, you'll retain your status as a Kleinunternehmer for the rest of the year. However, from the second year onwards, you will have to switch to standard taxation. This means you are subject to VAT and need to charge and pay VAT.

It's crucial to know that you must keep an eye on your finances yourself. The Finanzamt (tax office) will not notify you if you exceed the Kleinunternehmer limit. If you exceed the limit, you are subject to VAT in the following year. The Finanzamt will then automatically expect you to charge VAT. So be careful because even if you didn't realize that you exceeded the limit, the Finanzamt will demand the VAT payments. In the worst case, the Finanzamt may demand high additional fines if you don't notice in time that you are subject to VAT and don't start charging VAT on your invoices.

Making the transition

Understanding how to make this transition is essential for maintaining tax compliance and optimizing business processes. Let's walk you through the steps:

1. Assess Your Eligibility

The first step is to assess whether you've exceeded the revenue threshold for Kleinunternehmer status. If your sales were more than €22,000 in your first year of business, or if you expect to earn more than €50,000 in the following years, you should transition to VAT liability.

2. Notify Your Tax Office

Once you've determined that you're no longer eligible for Kleinunternehmer status, you should inform your local tax office (Finanzamt). Usually, this is done by filling out the Fragebogen zur Steuerlichen Erfassung (Tax Registration Questionnaire) with updated revenue details and submitting it to the tax office.

3. Understand the Implications

Transitioning to VAT liability means you'll now have to add VAT to your invoices. The standard VAT rate in Germany is 19%, while the reduced rate is 7% for certain goods and services. Don't worry! You can now claim input tax deductions on your business expenses as well!

4. Adjust Your Accounting

You need to adjust your accounting and invoicing systems to accommodate these changes. This involves updating your invoices to include VAT and maintaining detailed records of your sales and purchases for VAT return purposes.

5. File VAT Returns

Being VAT liable means you must file VAT returns (Umsatzsteuer-Voranmeldungen). Depending on your annual VAT liability, these can be monthly, quarterly, or yearly.

Voluntary change from Kleinunternehmer to standard taxation

It can also make sense to waive the Kleinunternehmer rule, even though your turnover is below €22,000. For example, if many of your clients are located abroad, or you have high business expenses at the beginning.

You don't even have to prepare a specific application for this. When you submit a VAT return and pay it to the Finanzamt, it already counts as an official waiver of the Kleinunternehmer rule. However, this waiver binds you for five years. You cannot return to the Kleinunternehmer rule during this time, even if your turnover remains below the limit. Also, note that a change is always possible only with the new year. You cannot change the status during the year.

You can also inform your Finanzamt with a letter that you waive the Kleinunternehmer rule. We attached an informal template as a sample letter to the bottom of the article to inform your Finanzamt of the change.

Takeaways

Transitioning from a Kleinunternehmer to being VAT liable is a significant milestone that signals your business growth. By understanding the steps involved and the implications of this change, you can confidently navigate this transition and ensure your business remains tax-compliant.