Definition and legal basis
In VAT law, opting refers to the waiver of VAT exemption and the voluntary decision to become taxable. Legally, this is regulated in § 9 UStG and enables entrepreneurs to treat tax-free transactions as taxable. The primary motivation lies in the possibility of deducting input tax. The prerequisite is that both contracting parties are entrepreneurs and the turnover is made to the recipient’s company. The option only applies to certain transactions in accordance with Section 4 UStG, in particular for rentals, real estate transactions and financial services. The option is exercised by means of an open tax statement on the invoice. In principle, the decision can be made for each individual transaction. The flexibility of the option enables tax optimization.
- Opting is the waiver of VAT exemption and the decision to become liable for tax.
- Legally regulated in § 9 UStG, it allows entrepreneurs to treat tax-free transactions as taxable.
- The motivation lies in the input tax deduction and requires that both parties are entrepreneurs.
- Only applies to specific sales in accordance with § 4 UStG, including rental and financial services.
- Opting in allows input tax deduction; tax rate is 19 percent, in exceptions 7 percent.
- Small businesses are excluded from opting out; specific restrictions for rentals.
- The decision to opt requires economic analysis and can be revoked.
Requirements and areas of application
Opting out requires several specific conditions. Both contracting parties must be entrepreneurs within the meaning of the German VAT Act. The turnover must be taxable and performed within Germany. Not all transactions can be opted for, but only certain ones in accordance with Section 4 UStG. Typical applications are property sales, rental services and financial services. Notarization is required for property transactions. The option can be exercised for individual transactions or services. There is no obligation to opt for all similar transactions. The decision must make economic sense and offer tax advantages.
Tax effects
Opting out allows input tax to be deducted, which can be financially attractive for entrepreneurs. Due to the tax deduction, the turnover is treated as taxable. The regular tax rate is 19 percent, in exceptional cases 7 percent. The option leads to an increase in the final price for the customer. This can bring tax advantages if the recipient of the service is entitled to deduct input tax. For farmers and other flat-rate taxpayers, the option can be interesting in order to claim actual operating expenses. The decision requires a careful economic analysis.
Legal restrictions
Not all entrepreneurs can opt out. Small businesses are excluded from the option. Specific restrictions apply to letting and leasing. The option is only possible if the recipient of the service generates turnover with input tax deduction. For agricultural and forestry businesses, a commitment period of at least five years after opting applies. The decision can generally be revoked as long as the tax assessment is not yet final. The complexity requires careful tax advice.
