Small business (freelancers) in Germany and VAT
§ 19 UStG Kleinunternehmer / Art. 19 German VAT Act Small Entrepreneur
All businesses are obliged to invoice their clients. If the clients are located in Germany, they will have to be invoiced with VAT. However, the law gives some relief to small businesses with the Art. 19 I UStG (VAT Act).
VAT-exemption for small businesses in Germany
If the business does not make more than 17.500,00 EUR in annual turnover, the entrepreneur can write invoices to German clients without VAT. Instead, into the invoice the following sentence has to be placed:
“Ich bin Kleinunternehmer i. S. d. § 19 I UStG und weise daher keine Umsatzsteuer aus.”
(“I am a small entrepreneur according to the Art. 19 I German VAT Act and, therefore, tax-exempt.”)
Duration of the VAT-exemption for small businesses
First year or business start
If you start a business in Germany in the beginning or in the middle of the year, you must make an estimation of your expectations for the turnover of the whole year. If you expect a turnover of no more than 17.500,00 EUR, you can make use of the Art. 19 I UStG.
Even if you start your business in August, and you expect every month a turnover of 1.000,00 EUR from then on, your estimation of the annual turnover should not be August to December = 5.000,00 EUR, but you have to extend it over the whole year:
1.000,00 EUR (per month) * 12 (months) = 12.000,00 EUR
If this expected turnover should be below 17.500,00 EUR, you can make use of the regulations of Art. 19 I UStG (German VAT Act).
Should you expect a monthly turnover of, say, 1.800,00 EUR, though you would be expecting in the first business year as actual income only 9.000,00 EUR, you still have to declare to the tax office:
1.800,00 EUR (per month) * 12 (months) = 21.000,00 EUR
In this case, you must invoice with VAT from the very start.
In case you underestimated your business skills, and your annual turnover should turn out to exceed the limit of 17.500,00 EUR, you would not have to correct your past invoices. You simply start invoicing at the beginning of the next year with VAT.
Second Year and Following Years
At the end of the year, you have to check your actual annual turnover. If it exceeds the amount of 17.500,00 EUR, you must start the new year with invoicing with VAT.
Turnover tax-exempt, mixed income
Some businesses or freelancers have a mixed annual turnover with VAT and without VAT, under the exemption under the Art. 4 UStG. The part of the annual turnover which is tax-exempt is not to be included in the total annual turnover of the business in regard to the invoicing options.
A physiotherapist has an annual turnover of 30.000,00 EUR from physiotherapeutic work. As a profession in the health sector, it is tax-exempt under Art. 4 number 14 a UStG.
However, sales of therapeutical appliances are not tax-exempt. Our physiotherapist has an annual turnover of 10.000,00 EUR from sales of therapeutical appliances.
The actual annual turnover is then in total 40.000,00 EUR.
Yet, under the regulations of the Art. 19 I UStG (VAT-invoicing), our physiotherapist has to consider only the turnover from sales of appliances, not the tax-exempt part of the total annual turnover. If the annual sales turnover does not exceed the limit of 17.500,00 EUR, then they can continue to invoice their clients (or patients) without VAT under the rules of Art. 19 I UStG. Bug if the annual sales turnover does exceed the limit of 17.500,00 EUR, then they have to invoice with VAT for the sales of therapeutical appliances. The typical physiotherapeutic work stays VAT tax-free under Art. 4 number 14 a UStG.
Tax-exempt income and Income Tax
The tax-exemption of the Art. 19 I UStG is valid for VAT (sales tax) matters only.
However, there is also a tax-exemption for income tax in Germany. The limits are: for singles, an annual income of 8.652,00 EUR, for couples, 17.304,00 EUR.
I hope you see the difference:
You might be invoicing without VAT with an annual turnover short of 17.500,00 EUR, but as a single person with annual income of something below 17.500,00 EUR, you have to pay income tax in Germany.