What is the VAT rate

VAT: what is it?

Whether it is an invoice or a receipt: when you buy goods or services in Germany, you usually always pay sales tax as well. However, most Germans do not even know the tax under this name, which is correct under tax law, because it is called VAT much more colloquially.

Value added tax, or VAT for short, is a community tax. This means that the federal, state and local governments are jointly entitled to the revenue from value added tax. As early as 1973 the Bundesfinanzhof, Germany's highest tax court, admitted that value added tax had no deeper meaning than bringing money to the state. And it does. In 2019, the state took in at least 183 billion euros from VAT.

What is VAT?

Every entrepreneur who offers goods or services in Germany adds VAT to the net price - the only exceptions here are small businesses. The end consumer pays the gross price including VAT. However, VAT does not flow into the entrepreneur's pocket. For him, this tax is just a transitory item, because he pays it directly to the tax office.

That is why VAT is also an indirect tax. The tax debtor - namely the entrepreneur - collects the VAT and pays it to the tax office, but it is actually paid by the end consumer. Say: The one who owes the tax is not the one who pays it. Hence the term "indirect tax".

BY THE WAY:

If an entrepreneur buys material for the manufacture of a product from another entrepreneur, he of course also has to pay sales tax. In this case it is called input tax. What this means is explained in detail in our article What is input tax deduction?

What is the VAT rate?

There are different VAT rates. The amount of VAT ultimately depends on the type of turnover. Products that cover basic needs come with a discounted rate of seven percent taxed. These include:

  • Food (excluding beverages, alcohol, and luxury items such as lobster or caviar)
     
  • Various medical products such as body replacements
     
  • Cultural goods such as magazines, books or theater tickets
     
  • Public transport tickets

For most other products and services, the regular VAT rate is 19 percent due.

A few professional groups, such as doctors, are generally exempt from sales tax.

BY THE WAY:

According to a publication by the Federal Ministry of Finance on May 2, 2019, the state would collect 30 billion euros more in taxes every year if only the regular rate of 19 percent were in place.

Why is VAT so complicated?

Time and again there are considerations of how one could reform the value added tax so that it becomes less complicated. One possibility would be to simply abolish the reduced VAT rate. But that would be a heavy blow for many low-wage earners. Because around 75 percent of the discounted items are groceries.

So it remains complicated for the time being. And to give a little example of how complicated the subject of VAT rates actually is, let's take a look at the VAT madness when it comes to Christmas trees.


In principle, the reduced VAT rate of seven percent applies to a real Christmas tree.

If the tree is artificial, 19 percent VAT is stated on the sales receipt.

It's still easy up to this point, isn't it? Now it's getting exciting. If the tree accidentally grew in the forest and is sold by a flat-rate forester - comparable to a small business owner - the VAT is only 5.5 percent. However, if the flat-rate forester has created a special culture for Christmas trees, the VAT rate increases to 10.7 percent.

So, believe it or not, there are four different VAT rates when buying a simple Christmas tree.

BY THE WAY:

The subject of coffee is similarly bizarre. When buying coffee beans, the sales slip says seven percent VAT. A quick coffee to go on the way to work? Gladly, for 19 percent VAT. Unless it's a Latte Macciato with a milk content of over 75 percent. Then the reduced VAT rate of seven percent applies.

Breakfast in the hotel also offers a lot to discuss. Because hotel accommodation is seven percent VAT, while breakfast is 19 percent. However, the European Court of Justice ruled on January 18, 2018 that there should be no different sales tax rates for a uniform service. The tax rate is based on the main component. A final solution has not yet been found here.

How long has VAT existed?

Value-added tax, as we know it today in Germany, was introduced on January 1, 1968. The value-added tax rate at that time was 10 percent, the reduced tax rate was 5 percent.

Is VAT increased regularly?

Yes, VAT has been increased several times since 1968. However, the reduced tax rate of 7 percent has been unchanged since 1983. The development of VAT at a glance:

FromRegular VATReduced VAT
01.01.196810 percent5 percent
01.07.196811 percent5.5 percent
01.01.197812 percent6 percent
01.07.197913 percent6.5 percent
01.07.198314 percent7 percent
01.01.199315 percent7 percent
01.04.199816 percent7 percent
01.01.200719 percent7 percent
01.07. until December 31, 2020
(temporarily due to the Corona crisis)
16 percent5 percent

By the way:

If an entrepreneur is entitled to separate VAT identification, he must of course make sure to provide the correct information. For example, if he enters seven percent on the invoice, even though it should have been 19 percent, it is an incorrect tax statement.

Where does Germany stand in a European comparison?

Each EU member state decides for itself how high the VAT will be. With 19 percent of the regular VAT rate, Germany tends to be in the lower third. Many EU neighbors such as the Czech Republic, Latvia, Belgium and the Netherlands rely on 21 percent. The front runners are Denmark and Croatia with 25 percent.

By the way:

In English-speaking countries you keep stumbling across the term VAT. VAT stands for value added taxes.

This is an editorial text from the VLH editorial team. There is no advice on topics that are outside the tax advisory powers of an income tax aid association. Consulting services in specific individual cases can only be provided within the framework of the establishment of a membership and exclusively within the advisory authority according to ยง 4 No. 11 StBerG.