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The basics of VAT in Germany

The basic VAT system in Germany

VAT could also be called end consumer tax (or: private consumption tax), because the government only wishes to charge private end consumers, i.e. the buyer of a product/a service. If, for example, an artist liable to VAT buys a folder at a store, he/she only needs to pay the tax if he/she purchases said folder as a private individual. The government does not intend to apply VAT to goods and services purchased in a professional context. It would be too complicated, however, to collect the tax from private consumers. Therefore, the state collects the tax not from the artist but the seller. Accordingly, in addition to the total, the receipt also shows the underlying net price and the corresponding VAT. When making the purchase, the artist initially pays the VAT and the seller forwards it to the tax authorities.

If the artist uses the folder for private purposes, he/she winds up paying the VAT for the item. If he/she purchases the folder for professional reasons, however, the tax office reimburses the VAT (which, as we have learned, is listed on the receipt).   

VAT is thus based on two main principles: 

  1. VAT is intended to tax only private consumption, not consumption in a professional or business context.

  2. Anyone – whether a private individual or business – must initially pay VAT. A VAT-registered business owner will later be reimbursed by the tax office. 

Example: 
A German gallery owner sells a painting to a private customer for 2,000 euros. This amount includes a VAT of approximately 130 euros (at the current reduced VAT rate of 7% in Germany). The gallery owner must pay the 130 euros to the tax office, thus leaving him/her with a (net) revenue of 1,870 euros. He/She must then pay a share to the artists – let us say they had agreed on half of the net price, i.e. half of 1,870 euros = 935 euros. At the end of the day, the gallery owner's income from the sale is 935 euros (liable to income tax). Since the customer was a private individual, he/she pays 2,000 euros.  

If the customer had bought the photograph for professional reasons, for example for his/her shop or law firm, the purchase would have qualified as a business transaction and the buyer would have been reimbursed for the VAT paid.

Conversely, for the selling artist (provided that he/she is subject to VAT) this would mean that the VAT must be added to the sales price on his/her invoice as a seller, which the artist must then collect from the customer (the gallery owner), and pay to the tax office. Professional artists (i.e. not amateurs practicing the trade as a hobby) thus find themselves in a dual role, just like all other business owners: For their sales, they must calculate the VAT, collect it, and pay it to the tax office; for their professional purchases, however, artists initially pay the VAT to the seller, but are later reimbursed by the tax office.  

Example: 
The artist receives his share of 935 euros for the painting. Since the work is then sold to the gallery, he/she must add VAT to the net amount of 935 euros, in this case 7%, equaling 65.45 euros. The artist thus issues the gallery a bill for 935 euros + 65.45 euros = 1000.45 euros and forwards the 65.45 euros to the tax office. 

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Total exemption from VAT

Outside the normal taxation of turnover, it must be noted that individual organizers or individual events can be completely exempt from VAT (see § 4 Nr. 20 to Nr. 22b UStG – Kulturförderung (English: Promotion of culture)). Among other things, this requires an official certificate of which the invoicing party should request a copy. Under this provision, the services of stage directors and choreographers at theaters, opera houses, music and dance halls, etc. have been exempt since 1st of July 2013.

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Artists and creatives as entrepreneurs

Many artists and creatives do not see themselves as entrepreneurs. This self-perception can become expensive, among others because of VAT liability. A person who regularly appears as a seller (for example, of his/her own design objects or art works) or participates in business dealings involving services, or who tries to sell services is an entrepreneur.   

Important:

Like any other entrepreneurs, artists and creatives are responsible for collecting VAT. They must monitor closely, when and in what amount VAT must be calculated and paid. 

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Exception: “Kleinunternehmerregelung” (English: small business regulation)

Special rules, the "Kleinunternehmerregelung", apply to so-called small businesses. They may opt to remain outside of the VAT system, unless they declare to the tax office that they waive this right. Total revenue may not exceed 17,500 euros per year.

The advantage of an exemption is that one does not have to add VAT to one’s invoices. This is beneficial if one has primarily private customers (for example, in case of sales to private collectors or performances at weddings), or if one performs services for certain public entities that are VAT exempt, because these customers would otherwise pay the VAT without getting reimbursed by the tax office. For customers making purchases in a professional capacity, it is irrelevant whether they are charged VAT or not, as they are later reimbursed by the tax office.  

The downside: Even in case of work-related purchases, exempt artists and creatives are not reimbursed for the VAT they have paid, because they are not entitled to input tax deduction. Whether the exemption is worth it or not depends on the customer structure and the planned expenditures.

Example: 
The ZDF (translator’s note: German TV channel) is looking for a director for one day for a recording. The budget amounts to 2,000 euros. Director A is a small business owner according to the above definition and may invoice the 2,000 euros without adding VAT and keep the full amount. Director B is not a small business owner and must pay about 131 euros VAT (7%) to the tax office. He/She therefore only earns a net amount of 1,869 euros. Director A may thus offer his/her services cheaper than Director B or pocket a higher net amount.   

cf. sample invoice small business

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VAT procedures

Those liable for VAT participate in the VAT procedure with advance VAT return and input tax deduction. Here, the VAT paid on purchases is subtracted from the invoiced VAT amounts. The remainder is paid to the tax office.   

Example: 
An independent musician has earned a total net amount of 19,000 euros in one year of freelance activity. She properly charged 7% VAT, in the amount of 1,330 euros, on this net sum of 19,000 euros. She spent a total of 3,980 euros on a computer, train tickets, and flights. As shown by the receipts, this sum includes 19% VAT in the amount of 635.46 euros. The net expenditure (i.e. excluding VAT) amounted to only 3,344.54 euros (because 3,344.54 euros + 635.46 euros = 3,980 euros). She therefore has to pay 1,300 euros VAT to the tax office and will receive back 635.46 euros input tax. Both amounts can be offset against each other to avoid unnecessary bank transfers. At the end, the musician must therefore pay 1,330 euros - 635.46 euros = 694.54 euros to the tax office.

The VAT collected by the musician (as a provider of services) is considered the VAT, while the VAT paid by her in advance is called input VAT. Reimbursement of the input VAT by the tax office is called input tax deduction. The difference between VAT and input tax is the tax payable. This tax must be reported and paid to the tax authorities on a regular basis (annually, quarterly, or even monthly), depending on the amount of revenue. The process used for this is the so-called advance VAT return.

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When must VAT be charged?

Supplies of goods (for example, paintings, design objects, photo prints, sculptures) and miscellaneous services (such as a performance as a dancer, musician or actor/actress) that an entrepreneur performs domestically for a fee and as part of his/her business activities are subject to VAT.  

The term “supplies” refers to the “procurance of the power of disposition over on object” (cf. § 3 Abs. 1 UStG), for example, the purchase of a photograph or a design object. Miscellaneous services include all transactions that are not supplies.

Three questions need to be addressed if one wants to find out if and how VAT must be charged for sales in Germany:  

  1. Should VAT be charged at all? Is a sale taxable or VAT-exempt? 

  2. If so: Are there any exceptions (VAT exemption)? 
    Certain supplies and services are exempt from VAT according to § 4 UStG (this, however, usually does not concern the art market).

  3. Which tax rate is to be applied – the standard rate of 19% or the reduced rate of 7% (§ 12 Abs. 2 UStG)? The appendix to § 12 Abs. 2 UStG (German only) contains a list of the items subject to the reduced rate.

The fundamental question for determining VAT liability is that concerning the place where the supplies or miscellaneous services are provided. The case is simple if one sells a good or a service within the Federal Republic of Germany: VAT must be collected unless an exemption applies (for example, as a small business). Matters become more complicated when cross-border supplies and services are concerned

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