As an expat entrepreneur in Germany, you might have encountered the terms Vorsteuer, Umsatzsteuer, and Mehrwertsteuer while learning about the German tax system. These terms, all relating to the Value Added Tax (VAT), can be a source of confusion.
Getting familiar with some relevant German terms is a great place to start. Still, sometimes, it takes more work to understand the slight differences. In this article, we explain the differences between the terms Umsatzsteuer, Mehrwertsteuer, and Vorsteuer, all of which refer to the concept of Value Added Tax (VAT), each with a slight difference in use. End the confusion and gain confidence so you can become a tax-savvy self-employed foreigner in Germany! Let's break them down.
What is “Umsatzsteuer”?
Like many German words, "Umsatzsteuer" (USt) is a compound word—two or more words pushed together to make one. Let's first break down the word: "Umsatz", meaning sales revenue, and "Steuer", meaning tax. Sales tax, as the name suggests, or Value Added Tax (VAT), as it is often called in English, is a tax applied to every product sold or service provided. As a freelancer, your products or services are subject to a sales tax, or Umsatzsteuer, that you must charge your clients and then pay to the state. This tax is usually calculated at 19% or 7%, depending on the service you provide.
⚠️ This is the official term for VAT in Germany. This is the word tax authorities (Finanzamt) use.
You must add the applicable VAT rate to your invoices. If, for example, you issue a customer an invoice for 100 €, your invoice should show the following:
Net total: 100 €
VAT rate: 19 € (19% of the net total)
Gross total: 119 €
What about “Umsatzsteuervoranmeldung”?
You may have started to see a pattern here with another long compound word. "Umsatzsteuer" (sales revenue) and "voranmeldung" (advance notification). Combined, this term refers to a preliminary or advance VAT declaration.
You are required to report the VAT amount due to tax authorities. There is an annual "final" filing after the year ends. Depending on the size of your business, you can also be obligated to report "intermediary" VAT reports during the year. They can either be quarterly or monthly. These intermediary reports are called Umsatzsteuervoranmeldung.
What is “Mehrwertsteuer”?
The term "Mehrwertsteuer" (MwSt) is identical to "Umsatzsteuer"—both refer to VAT or sales tax. While it may not be any easier for English speakers to pronounce, "Mehrwertsteuer" is considered a more slang or casual term for VAT than Umsatzsteuer. "Mehrwert" means additional value. Therefore, it translates directly to Value Added Tax.
If you want to express yourself correctly in terms of tax law, you should always speak of "Umsatzsteuer" when referring to sales tax or VAT. Nevertheless, "Mehrwertsteuer" or MwSt are frequently used on receipts and invoices. You will often find the abbreviation "MwSt" on restaurant or retail store receipts, also referring to VAT.
Origin of Value Added Tax
The formulation of "Mehrwertsteuer", or Value Added Tax, was first introduced in Germany in the late 1960s. The "value added" tax principle means that companies and self-employed individuals only have to pay sales tax on the additional value they generate when selling a product or service. This allows the tax on expenses to offset the tax paid on income generated, so you only pay sales tax on the surplus, i.e., your added value.
Let's stick with our example from earlier:
You buy equipment worth 100 € (+ 19 € VAT).
You can claim the 19 € sales tax paid for the purchase back from the tax office, so your actual cost is 100 €.
Using the equipment, you created a product, which you then sell for 150 € (+ 28.50 € VAT).
Since the expenses were 100 €, and your sale price was 150 €, the additional value you created is 50 €. You pay 28.50 € in VAT to the tax office and claim 19 € back:
28.50 € – 19 € = € 9.50.
So, in the end, you pay 9.50 € in VAT, which is also the equivalent of 19% of the 50 € in additional value you created. This is why it's more often called Value Added Tax rather than Sales Tax, although the two are interchangeable.
What is “Vorsteuer”?
The term "Vorsteuer" refers to input tax and only differs from VAT from the perspective of the client or the party paying for an invoice for a product or service. Companies and self-employed individuals report sales tax on their products and services and, in turn, have to pay sales tax on the products and services they buy. (In other words, Vorsteuer is yet another word that refers to VAT.
Let's return one more time to the fashion designer example:
The equipment is worth 100 € to the manufacturer. The manufacturer has to add 19% sales tax to the price of 100 €, making the total amount 119 €.
The 19% tax the manufacturer pays can be called "Vorsteuer", or input tax.
The difference
Taxes can be complicated, even when you're a native speaker. Umsatzsteuer and Mehrwertsteuer both translate to "sales tax" in English, while Vorsteuer, in practice, implies a customer perspective. We hope this article gives you a basic overview of the different terms so you can confidently use (or at least understand) each one in the proper context.