Entrepreneurs are exempt from some taxes

Sales tax exemption: who can benefit from it?

Services that an entrepreneur provides in Germany are usually subject to sales tax. This means that companies are obliged to value added tax to pay. Sales tax represents the largest share of total German tax revenue. In certain cases, however, the legislature makes exceptions and exempts companies from tax liability. This procedure is mainly used for Avoidance of double taxation. Find out now who they are for VAT exemption applies to what advantages and disadvantages it brings and how you can take advantage of it. In addition, you should know which sales are taxable and which VAT-exempt services there are.

What is sales tax?

Sales tax is one of the most important types of tax for all entrepreneurs. Sales tax is levied on almost all services that companies provide in Germany and shown separately on the invoice. Companies are only allowed to use the Net price of the products sold to keep. They collect sales tax from their customers and manage it as part of the Advance VAT return directly to the tax office. One speaks therefore of one transitory tax. The legal requirements are regulated in the Value Added Tax Act (UStG). German tax law distinguishes between two Tax rates:

  • The Standard tax rate is 19 percent
  • The reduced tax rate is 7 percent

The products and services for which the reduced tax rate applies is regulated in Section 12 (2) of the UStG. For example, he intervenes

  • Books and newspapers
  • Medical aids
  • Conveyance lines
  • Plants and a variety of foods

The sales tax, which is incurred by companies as part of business expenses, is also paid by the companies that are subject to sales tax. This so-called Input tax you can do so as part of the advance VAT return offset against the sales tax collected. If the operating expenses exceed the operating income, this leads to a VAT refund by the tax office.

Sales tax or sales tax?

The term sales tax is colloquially used synonymously for sales tax. From a tax point of view, the term sales tax is correct. Accordingly, the regulations follow the sales tax law. There is no VAT law.

Who is liable for sales tax?

In principle, all entrepreneurs in Germany are one or more Sales limit of 22,000 euros per year subject to sales tax. If the turnover of a company is below this limit, it is called a small business. Small businesses but also freelancers can use the so-called Small business regulation and thus avail of the VAT exemption. The small business regulation serves as a simplification regulation, which is supposed to facilitate the bookkeeping and the preparatory tax tasks for founders. However, if you do not collect sales tax and pay it to the tax office, you cannot claim input tax either.

The legal basis for the VAT exemption is created in Section 19 (1) of the UStG. There it was stipulated that entrepreneurs whose turnover last year was less than 22,000 euros and will probably be less than 50,000 euros in the current year are exempt from VAT If small businesses and freelancers exceed this turnover limit, this becomes noticeable in the following year: They then switch toStandard taxation and accordingly have to add sales tax to their products and services and show them on their invoices.

The small business regulation

The aim of the small business regulation is, above all, to keep the bureaucratic effort caused by sales tax as low as possible for small businesses. After all, thanks to the VAT exemption, small businesses can do without the monthly VAT return and do not have to deal with double bookkeeping. As a small business ownerYou don't have to show sales tax on your invoices. However, the recipient must go through a Reference to the VAT exemption be made aware.

Although you meet the requirements to take advantage of the small business regulation, in some cases you may economically reasonable be to waive the VAT exemption. If you would like to waive the VAT exemption when founding your company, you can select the appropriate option in the tax registration questionnaire when registering your company with the tax office. Alternatively, you can submit an informal written application to the tax office to cancel the VAT exemption.

Difference between small business owners and small businesses

Small business is a term from sales tax law that describes companies with an annual turnover of up to 22,000 euros. The term small business from commercial and industrial law. Due to the limited scope of business, small businesses do not have to comply with the demanding provisions of the Commercial Code such as double-entry bookkeeping. However, small businesses do not automatically benefit from the VAT exemption.

Possible disadvantages of the small business regulation

As a small business owner, you can too, thanks to the VAT exemption no input tax deductions assert. However, this can be a significant disadvantage, especially in the start-up phase, as there are many purchases to be made here. Accordingly, companies to whom your offer is aimed cannot claim input tax either. Thanks to the VAT exemption, you can have a Competitive disadvantage arise: For invoices between companies without sales tax, companies prefer to buy from other providers.

In addition, you must be aware that the decision in favor of small business status cannot simply be reversed. If you opt for VAT exemption, you areat least five calendar years bound by your decision.

How to apply for VAT exemption

The VAT exemption does not require a lot of effort. If you register your company, you have to use the Questionnaire for tax collection State your expected sales. If this does not exceed the turnover limit of 22,000 euros, you have automatically the small business status and are with it VAT exempt.

As an alternative to the VAT exemption, you can also choose the option of regular taxation. If your sales drop sharply or you find that your forecast for sales development was too optimistic and you thus meet the requirements for the small business regulation again, you can apply for sales tax exemption with an informal letter from the tax office.

Tax exemption for certain transactions

In § 4 Paragraph 1 - 7 UStG there are various facts that lead to the tax-exempt sales With Possibility of advance deduction belong. Mainly these relate to import and export transactions. But some travel services and other special cases can also be found there. Freelancers, traders, public institutions and associations should take a look Section 5 (8) - 28 UStG throw: There, VAT-exempt services that do not entitle to input tax deduction are listed. These include:

  • Various financial transactions
  • Rental and leasing of land
  • Medical treatment
  • Turnover of the facilities for the care of needy people
  • Certain education sales

You do not have to apply for a VAT exemption for the services mentioned, although the tax office may require certain evidence in some cases. However, since the VAT exemption depends on the specific individual case, one is recommendedExpert advice.

In addition, you should also get the sales tax exemption cross-border business note. The importer is liable for tax on imports from other EU countries and non-EU countries. Corresponding tax exemptions are provided in Sales tax law § 4b and 5 regulated.

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Sales tax exemption: useful or not?

Sales tax exemption can be a good decision, but it doesn't have to be worthwhile for every small business owner. Those who do not collect sales tax are not allowed to claim the input tax they have issued themselves, which can affect the liquidity of the business. If you have high initial investments such as machines and materials when you set up your company, as a small business owner you pay the purchase price including sales tax, but are not reimbursed as input tax. These operating expenses only take effect at the Income surplus account (EÜR) and the tax return in the coming year will reduce taxes. If you waive the sales tax exemption, you can offset the 19 percent of sales tax with the next pre-registration - i.e. in the following month.

Whether the VAT exemption is worthwhile cannot be answered across the board and depends on the individual company. If you work as a freelancer in the home office, you probably don't have large business expenses. In this case, the input tax deduction would have little effect. However, if you have to purchase materials, goods or machines to set up a business, input tax gives you a certain amount of liquidity.

Private or business customers?

The decision as to whether you claim the VAT exemption as a small business owner or as a freelancer depends not only on your business expenses but also on the type of your customers. At Private customers it is about Consumer and those who pay the sales tax. So it makes a difference for them whether they only pay the net price or sales tax is added. In this case, you as a small business owner have an advantage thanks to the VAT exemption, as you can offer products at lower prices.

If a large part of the demand comes from business customers, the VAT exemption does not make a big difference for you. For business customers, sales tax is only a transitory item that they pay and can be recovered from the tax office as input tax in the following month.

Client with VAT exemption

If you are dealing with a client who is exempt from paying sales tax, you must definitely note the reason why no sales tax is charged on the invoice. You should also have the certificate of VAT exemptionstore carefullyif the tax office requires more information. If the receipt is missing, a taxpayer cannot prove why a particular order was invoiced without sales tax. In this case, the tax office can claim the sales tax, which would lead to high back payments.

What do you have to consider for sales tax-exempt deliveries and other services?

In Section 4 (8) - 28 are all found VAT-exempt deliveries and other services. The sales tax is therefore not used here, since the majority of these are services for private individuals, which should not be made more expensive by the sales tax. § 9 UStG enables the waiver of the VAT exemption for various issues - and thus also the possibility of input tax deduction. Here, too, an informal notification to the tax office is sufficient. Alternatively, it is sufficient to show the sales tax on the outgoing invoices and to enter the corresponding amounts in the advance notifications and declarations.

Especially when it comes to sales Section 4, Paragraphs 20 and 21 of the UStG VAT exemption can only take place with the corresponding certificates from certain state authorities. § 4 paragraph 20 UStG includes among other thingscultural and artistic achievements like those of choirs, theaters and zoos. However, the sales are only tax-free if the competent state authority certifies that the services are comparable with those of public institutions.

Section 4 (21) regulates the sales tax exemption of certainprivate educational institutions as well as self-employed teacherswho work at public or VAT-exempt educational institutions. A distinction is made between providers of private schools, which are exempt from VAT as substitute schools without a separate certificate, and providers of private schools, which require a certificate from the state authority for the exemption. They must certify that they are properly preparing students for a profession or exams before a public corporation.

Self-employed teachers who are employed as freelance workers in public schools or approved substitute schools do not require a VAT exemption certificate. However, if you teach at a private, VAT-exempt institution, you needa corresponding certificate for each calendar year that his sales are tax-free.

Sales tax exemption: Beware of ill-considered decisions

The application for VAT exemption is associated with little effort and relieves you in your day-to-day business with your bookkeeping. However, you should carefully weigh the advantages and disadvantages in advance in order to make the best decision. After all, you are bound to your decision for five years if you decide against the VAT exemption. You can only file an objection with the tax office after the five years have elapsed. In case of doubt, let your tax advisor advise you which decision will make sense for you and your company in the long term.