TL;DR: Transactions involving countries outside the EU (third countries) are generally VAT-free but require careful documentation and invoicing.
What is VAT?
Value Added Tax (VAT) or Sales Tax (Mehrwertsteuer or Umsatzsteuer) is a consumption tax placed on products and services at each stage of production or distribution. In Germany, the standard VAT rate is 19%, with a reduced rate of 7% applying to certain goods and services.
What is a third country (Drittland UStG)?
In VAT terminology, a third country is any country outside the European Union (EU). Common examples include the USA, UK, Switzerland, China, Japan, and Australia.
Knowing the difference between EU and third-country VAT rules is important because they differ significantly in treatment and compliance.
💡 Regularly update your knowledge about the classification of countries, as geopolitical changes (like Brexit) may affect VAT status.
VAT rules for third countries
When dealing with third countries, freelancers must follow specific VAT regulations:
Exporting goods: Typically VAT-free if documented correctly (e.g., export proof).
Providing services: Usually VAT-free when invoiced to businesses in third countries but requires specific invoice notations.
Key points to remember:
Generally, no German VAT for exports to third countries.
Invoices should state clearly the VAT exemption reason.
💡 Always retain proof of export and service delivery documentation to ensure VAT compliance during audits.
VAT for intra-EU transactions and reverse charge
For services or goods traded within the EU:
No German VAT if the client provides a valid VAT-ID.
Recipient is responsible for VAT in their home country (reverse charge).
✍️Invoices should indicate: "Reverse Charge - art. 196 VAT Directive 2006/112/CE."
💡 Always verify your client's VAT-ID using the EU’s VIES system to avoid compliance issues.
VAT on invoices to third countries
✍️ Invoices for clients outside the EU must clearly state the VAT exemption: "According to §3a Abs. 2 UStG taxable at the recipient location." for providing services and "Tax free export delivery." for exporting goods
The following table provides an overview of VAT treatments and special considerations for invoicing clients in various common third countries and EU member states, helping you navigate international VAT compliance:
Country | VAT Treatment | Special Notes |
|---|---|---|
United States | VAT-free; local taxes may apply | Tax regulations vary by state; confirm local rules. |
United Kingdom | VAT-free; UK import VAT applies | Post-Brexit, import VAT applies to UK buyers. |
Switzerland | VAT-free; Swiss import VAT applies | Special reverse-charge agreement between Germany and Switzerland. |
Australia | VAT-free; local GST may apply | Clearly state VAT exemption |
Canada | VAT-free; GST/HST may apply | Clearly state VAT exemption |
Japan | VAT-free; local consumption tax may apply | Clearly state VAT exemption |
China | VAT-free; Chinese import VAT applies | Strict customs documentation required for imports. |
Austria (EU) | Reverse charge if valid VAT-ID provided | Indicate reverse charge clearly |
Poland (EU) | Reverse charge if valid VAT-ID provided | Indicate reverse charge clearly |
VAT for triangular transactions with third countries
Triangular transactions involve three parties in different countries. VAT exemption typically applies when:
All participants confirm their business status.
VAT exemption reasons are clearly indicated on invoices.
Ensure proper documentation to avoid compliance issues.
💡Clearly document each party's VAT identification and business status.
VAT on imports from third countries
When importing goods into Germany:
German Import VAT (Einfuhrumsatzsteuer) typically applies (19% or 7% reduced).
Import VAT can be reclaimed as input VAT (Vorsteuer) via VAT returns.
Accurate record-keeping is vital for reclaiming this VAT.
💡 Keep detailed records of customs declarations and import documents.
Formula for reclaiming import VAT
To reclaim import VAT, use this formula:
Example: For an imported item worth €1,000 with a VAT rate of 19%, the reclaimable import VAT is:
€1,000 × 19% = €190
💡 Keep detailed customs documentation to reclaim this VAT.
Why no VAT for third countries?
Germany exempts third-country transactions from VAT to avoid double taxation, as local taxes typically apply in the buyer's country.
💡Confirm local VAT obligations with international clients.
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Conclusion
Understanding VAT for third-country transactions and intra-EU exchanges is important for freelancers in Germany. Proper invoicing, compliance with documentation requirements, and clarity about VAT exemptions help you stay tax-compliant and avoid unnecessary penalties. Using automated solutions like Norman can simplify these tasks significantly, enabling you to focus on your business growth.
FAQ: VAT for third countries
1. Do I charge VAT for services to third-country businesses?
No. Generally, services billed to third-country businesses are VAT-free.
2. How do I prove exported services?
Maintain detailed invoices, payment confirmations, and delivery receipts (if applicable).
3. What if VAT is mistakenly included on an invoice?
Immediately issue a corrected invoice clearly stating the VAT exemption.
4. Can import VAT be reclaimed?
Yes, import VAT can typically be reclaimed in your regular VAT return with correct documentation.