Value Added Tax Act (UStG)

Basics and systematics

As the most important consumption tax, the VAT Act regulates the taxation of deliveries and services in Germany. The regulations are based on the EU VAT system directives and are harmonized throughout Europe. The law follows the principle of value added tax with input tax deduction. The tax is levied at every economic level, but is only charged to the end consumer. The standard tax rate is 19%, the reduced rate is 7%. The system distinguishes between taxable, taxable and tax-free transactions. The reverse charge procedure regulates the tax liability of the recipient of the service. The input tax enables tax neutrality for entrepreneurs. The international dimension is taken into account by special regulations. The complexity requires precise knowledge of the regulations. The significance is reflected in the annual tax revenue of several hundred billion euros.

Taxable transactions and taxable entities

The UStG covers deliveries and other services in Germany. Entrepreneurial activity is a prerequisite for tax liability. The term entrepreneur is interpreted broadly and includes any sustainable activity. Intra-Community acquisitions are subject to special regulations. Imports from third countries are subject to import VAT. Taxability requires an exchange of services and consideration. The place of taxation is determined according to complex regulations. The basis of assessment is the net consideration. The tax arises when the service is provided. Invoicing is subject to strict formal requirements. The documentation requirements are extensive. The distinction from non-taxable sales is important.

Tax exemptions and tax rates

The UStG provides numerous tax exemptions for certain transactions. Export deliveries and intra-Community deliveries are generally tax-free. Financial services and insurance services are exempt. Letting and leasing of real estate are also exempt. The tax exemptions can be structured with or without input tax deduction. The reduced tax rate applies to basic foodstuffs and cultural services. The option of tax liability is possible in certain cases. It is often difficult to differentiate between the tax rates. The exemptions are interpreted narrowly. Case law continues to develop the criteria. The economic significance is considerable.

Input tax deduction and invoicing

Input tax deduction is the central element of the VAT system. The requirements for input tax deduction are strictly formalized. The invoice must contain all legally required information. The allocation to the company must be clear. The input tax allocation for mixed use is complex. The correction of the input tax deduction follows its own rules. Electronic invoices are equivalent to paper invoices. The retention period is ten years. The documentation must be complete. Checks are carried out as part of tax audits. The error rate is high. The consequences can be considerable.

Special procedures and reporting obligations

The UStG has various special regulations for certain sectors. Actual taxation is based on the receipt of payment. The small business regulation simplifies the taxation of small businesses. The OSS regulation simplifies cross-border services. The recapitulative statement covers EU turnover. Intrastat declarations supplement the system. The record-keeping obligations are extensive. The deadlines must be strictly adhered to. Electronic transmission is mandatory. The controls are intensive. The sanctions can be severe. The compliance requirements are increasing.

Procedural law and legal protection

The advance VAT returns must be submitted monthly or quarterly. The annual return summarizes the financial year. The limitation period for assessment is four years. The possibilities for amendments are defined by law. Appeals are governed by the German Fiscal Code. Suspension of enforcement is possible. Interest is regulated by law. The tax audit is very important. Tax evasion is strictly prosecuted. Fines can be high. The procedures are complex.

International aspects and future prospects

VAT is increasingly shaped by EU law. Digitalization requires new regulations. The fight against VAT fraud is being intensified. Harmonization is progressing. Simplification remains a challenge. Technical requirements are increasing. Cross-border aspects are gaining in importance. The reform of the EU VAT system is planned. Case law is developing dynamically. Compliance costs remain high. The future brings new challenges.