Reverse Charge Invoice in Germany
Reverse charge invoice and rules in Germany
The reverse charge procedure is referred to as the reverse charge. It is a special regulation in VAT law. It is not the entrepreneur who provides the service who pays the VAT, but the recipient of the service who must pay the VAT. Thus, since 30.06.2013, a corresponding invoice must be marked with the statement “Tax liability of the recipient of the service”.
Basics for Reverse-Charge in Germany
VAT law in Germany is based not only on national requirements, but also on international EU legislation. These were first introduced in 1967 with the First Directive on the Harmonization of the Laws of the Member States Relating to Value Added Tax. This brought the VAT system in all member states into line. The Sixth Directive has been in force since 1977. This also gave rise to the reverse charge procedure, which means the reversal of the tax liability in accordance with § 13 b UStG. This means that the recipient of the service pays the tax liability to the tax office.
The VAT law states that companies providing the service must pay the VAT to the tax office. The recipient of the service can deduct the VAT as input tax if he is an entrepreneur and has not opted for the small business regulation. The conditions for deducting input tax must be met.
If the VAT liability is reversed, the recipient of the service must pay the VAT to the tax office for certain services. In this way, the tax procedure is simplified for the tax authorities, and there are also simplifications for the provider of the service. Tax fraud in the context of VAT will be avoided with this regulation. For the recipient of the service, the obligation to pay VAT can offer advantages, because he does not have to pre-finance the VAT he pays to the provider of the service until it is refunded by the tax office.
Unfortunately, the regulation also has disadvantages, because it facilitates VAT fraud, not only in Germany, but throughout the EU. This is because the customer can offset his input tax with the tax office and be reimbursed, while the supplier does not pay his VAT to the tax office.
Third country reverse charge in Germany
However, the reverse charge is not only mandatory for EU member states, but also for some cross-border transactions to third countries. Often these are import/export transactions with the United States or China.
In both cases, the sales tax must be offset between the buyer and seller in the countries concerned. Therefore, when a product is sold, the invoice is issued net and the tax amount is reported to the tax authorities. The customer receives the goods and adds the sales tax applicable in his country on top on his commercial invoice.
Risks associated with reverse charge in Germany
When opting for the reverse charge procedure, the supplier of the service bears the risk of being liable for the reversal of the tax liability if the creditor does not pay the VAT to the tax office. There is also a risk for the recipient of the service if he pays the VAT to the service provider. He is not allowed to deduct input tax in case of reverse charge.
Application of the reverse charge procedure in Germany
Typical errors are, on the one hand, all errors that can also occur in other invoices and which make them incorrect, for example, if the time of performance is missing or the address details or tax number are incorrect or missing.
In addition, there are incorrect invoice corrections, i.e. cancellation invoices and newly issued invoices. The problem with all these possible errors is that incorrect invoices are not recognized by the tax office and could ultimately lead to the loss of the input tax deduction.
However, it is even more common for an invoice to inadvertently (or not at all) refer to the reverse charge procedure. If the tax liability is incorrectly assigned to the recipient, but the recipient is not liable for tax because there is no case of § 13 b UStG, the recipient does not owe the tax. The recipient will then have problems if he wants to claim input tax from this invoice at the tax office. In any case, the error must be corrected as soon as possible! A reverse charge invoice template can be helpful in this case.
How reverse charge works in Germany
In the reverse charge procedure, the provider of the service may only charge his customer the net fee. In order to receive the service, the customer must pay his VAT to the tax office. If he is entitled to deduct input tax, he can deduct the sales tax himself as input tax. There is no difference between the reverse charge procedure and the normal sales tax with regard to the economic burden.
Advantages of the procedure
Reverse charge simplifies matters for the tax authorities and for the service provider, because the transaction does not have to be declared to the tax office. The reverse charge procedure is particularly useful for saving administrative costs in cross-border transactions. A foreign company is saved a lot of effort with reverse charge because it does not have to go to a German tax office. For the tax authorities, there is no risk of having to have tax claims enforced abroad.
What are reverse-charge services?
§ Section 13b (1) of the German Turnover Tax Act (UStG) states: “For other supplies of services by a trader established in the rest of the Community that are taxable in Germany in accordance with Section 3a (2), the tax arises at the end of the advance notification period in which the services were performed.” These supplies are listed in § 13 b (2) UStG.
The services that must be accounted for using the reverse charge procedure include, for example, work services, intra-Community transport services or catalog services.
Further examples are listed below under “Areas of application of the reverse charge procedure”.
§13 Turnover Tax Act
Who pays which taxes under the reverse charge procedure and when?
In §§ 13 ff. UstG you will find all important information
-how the tax liability arises (i.e. from when the tax must be paid (§ 13 UStG)
-the tax debtor (§ 13a UStG)
-the recipient of the service (§ 13b UStG)
-on liability issues (§ 13c UStG)
According to this, the tax liability according to § 13 (1) arises at different times depending on the delivery/service/object. Mainly at the end of the advance tax return period, if it is a payment for a delivery or service. In the case of individual transport taxation, the calculation starts from the moment the bus enters the country. In addition, in the case of services, counting starts from the date of performance of the service, and in the case of invoice corrections under Section 14c, it starts from the date of issuance of the invoice. In the case of purchase of vehicles, the day of purchase counts.
Apart from VAT, § 13 UStG contains a reference to the necessary import VAT, for which § 21 (2) UStG is applicable. This is a consumption tax in the sense of the tax code, which is handled according to customs regulations. This is important, for example, for companies that require inward or outward processing for their products.
The person liable to pay the tax is also either the entrepreneur, the acquirer, the recipient, the issuer of the invoice, the last recipient or the person who takes the goods out of storage.
The confirmation of arrival / the proof of shipment
It is important for the performance of the service and the subsequent tax calculation that the goods have actually arrived at the recipient. Until the end of 2013, the proof of shipment was necessary for this purpose. This could be issued by the German freight forwarder or, in the case of collection by foreign freight forwarders, the receipt of the freight could be acknowledged.
The rules have been tightened since 2014, when the proof of arrival became necessary. Since then, it has to be proven that the goods have actually arrived at the recipient. The recipient must acknowledge that he has received the delivery.
The proof can theoretically be provided by receipt, proof of delivery, signed duplicate invoice or electronic tracking and tracing. Which options apply in which case is regulated by § 17a UStDVO:
-Duplicate invoice (Section 17a (2) No. 1 UStDVO)
-Confirmation by the recipient that the delivery item has reached the rest of the EU (§ 17a (2) no. 2 UStDVO)
Examples for the rest of the EU and a third country
A simple example would be the purchase of a product in another EU country, for example Spain. The product then arrives in Germany together with an invoice.
The net invoice is posted here (posting software usually has its own tax keys for correct posting here). The correct tax rate is taken into account (19%, possibly 7%). Thus, the sales tax and the input tax are automatically taken into account in the booking program. Depending on the product or service and the chart of accounts used, the entry will go to an account with the reference “company located in another EU country.”
When purchasing a product imported from a third country such as America, the goods also arrive here with the net invoice. Here, the sales tax must be shown separately on the advance sales tax return, since it relates to a different country. The entry must therefore be made via an account with the reference “company resident abroad”.
Requirements for the incoming invoice (Section 14 (4) in conjunction with Section 14a (5) UStG)
The same mandatory information applies to the invoice from abroad in the EU as for us in Germany. It is also important
-that the invoice explicitly mentions the reverse charge procedure
-that the invoice contains the VAT ID (value added tax identification number) of the buyer and seller, i.e. the issuer of the invoice and the recipient of the service.
For the invoice from the third country, it is also important that no VAT is shown and a reference to the application of the reverse charge procedure is included. For example, with the sentence “Tax liability of the recipient of the service”.
To ensure that the recipient in Germany can also successfully claim input tax, the following information on the invoice is essential:
-Name and address of the invoicing party (seller) abroad.
-name and address of the invoice recipient (customer) in Germany
-USt-ID or tax number of the supplying company
-USt-ID of the recipient of the service
-Invoice date (= date of performance)
-A consecutive invoice number
-Type and scope of the service
-The date or period of performance
-A reference to the reverse charge procedure
Prerequisite of reverse charge
The reverse charge procedure is to be applied if a domestically taxable transaction is carried out by one company to another company and the transaction can be subordinated to one of the following circumstances, for example:
-A company based in another EU country provides a B2B basic service.
-A work supply or other service is provided by a company based abroad.
-Transactions covered by the Real Estate Transfer Tax Act.
-Supply of gas via the natural gas network or of electricity by companies domiciled abroad.
Contracts with companies based abroad
If German companies enter into contracts with foreign companies, the obligation to assume liability for tax on supplies of work and services in Germany generally applies to them. (The service is provided here by the foreign company).
This means, for example, that the tax liability for the construction of halls or buildings on the client’s property (in Germany) by a Polish construction crew must be borne by the German company.
Contracts with companies based in Germany
Since 2004, the reverse charge procedure has also applied to domestic companies that provide construction services within the meaning of the Real Estate Transfer Tax Act. In other words, all companies that perform work deliveries or maintenance that they have subcontractors perform. In addition, since 2011, domestic companies must also bear the tax for services/deliveries of heat, scrap metals, industrial scrap, as well as building cleaning.
As an indication, it must be noted on the invoice for building cleaning services that the tax liability is transferred in accordance with Section 13b (2) No. 8 in conjunction with (5) of the German Turnover Tax Act (UStG) or that the service is a building cleaning service and the recipient of the invoice is liable for the tax.
In the case of scrap deliveries, the legal basis is Section 13b (2) No. 7 in conjunction with (5) UStG.
The informative pages of the Chambers of Industry and Commerce and the Chambers of Commerce provide helpful additional information.
Areas of application of the reverse charge procedure
The reverse charge procedure is mainly applicable to cross-border cases under EC law:
-cross-border catalog services and cross-border intra-Community transport services, intermediary services and work services – under certain circumstances, the reverse charge procedure may be mandatory in all member states
-other cross-border transactions within the EC – introduction of reverse charge is allowed
-other cases within the EC, if the reverse charge procedure can prevent tax avoidance or tax evasion.
The reverse charge procedure can also be applied within Germany. It is possible for supplies of work and other services by companies based abroad if the transactions can be controlled in Germany. Reverse charge can be applied to supplies of goods assigned as security by the guarantor to the guarantor if no insolvency proceedings are in progress.
The reverse charge procedure can be applied to the supply of real estate as well as to supplies of work and services relating to the construction, repair and maintenance, removal or modification of structures. Planning and supervision services are excluded from this option. Reverse charge is possible for supplies of gas and electricity by a company located abroad.
The reverse charge procedure can only be applied if the recipient of the service is an entrepreneur or a legal entity under public law. If the recipient of the service is not an entrepreneur or a legal entity under public law, the service provider must pay the VAT.
Application example Switzerland
Not only EU countries have VAT regulations, but also third countries such as Switzerland. The regulation was renewed as of January 1, 2018. Taxation also depends on the type of supply/service as well as the recipient location principle. However, services are subject to purchase tax.
Therefore, if a German company provides a service in Switzerland, this service becomes subject to VAT for the Swiss company. In accordance with the “Swiss purchase tax”, the reverse charge procedure there, the Swiss company must pay the VAT due on the German company’s invoice to the responsible tax office in Switzerland.
Previously, foreign companies with a turnover of CHF 100,000 or more were subject to tax in Switzerland. Below this amount, VAT-free invoices could be issued, which was a major disadvantage for Swiss companies. Because of this regulation, foreign companies were preferred.
Since 2018, the worldwide turnover of a company is irrelevant. German suppliers, as importers, can issue their invoice with a CH VAT, take over the CH VAT and subsequently claim it as input tax in Switzerland. A sample invoice to Switzerland is helpful.
Further information can be found in 641.20 Federal Law of June 12, 2009 on Value Added Tax (Value Added Tax Act, VAT Act).
Application example USA
In the USA it is similarly difficult and also not uniformly regulated. The legal system there sometimes provides for separate regulations per state. Therefore, it may be that a German company is not subject to tax law at all or that no taxation is provided for the goods themselves.
If a service is rendered there, the German company would theoretically have to pay the sales tax to the responsible tax office in the USA. To do this, however, the company must register in the USA. However, only an American tax consultant can provide reliable information on the tax liability in individual cases.
Small business reverse charge procedure in Germany
Small businesses with annual sales of less than 17,500 euros are not subject to VAT. The reverse charge procedure does not apply to them.
However, small business owners are at a disadvantage if they order goods or services abroad. This is because they must still pay the 19% VAT for the foreign company to the German tax office, even though they cannot claim the amount as input tax.
The reverse is also problematic. This is because not all countries have a comparable small business regulation abroad. A German small business owner who delivers goods or provides services abroad is confronted with a wide variety of tax regulations there. For example, in addition to the local tax law, special reporting or export regulations also apply. It is highly recommended that you consult a tax advisor.
Effects of reverse charge
The obligation to pay sales tax is shifted to the service recipient in the reverse charge procedure. Carousel fraud in sales tax law can thus be prevented. As an entrepreneur, the recipient of the service owes the VAT for his purchases according to the reverse charge procedure, but at the same time he can deduct input tax to the same extent. Input tax amounts no longer have to be paid out by the tax office to a significant extent, as they can be offset.