You have decided to start a business in Germany and want to make the right decisions right from the start? Then taxes should be at the top of your priority list. The tax regulations in the Federal Republic of Germany are considered to be complicated, but they are not inscrutable. This guide will give you the necessary overview so that you can orientate yourself more quickly and start successfully as a company in Germany.
The most important things in a nutshell:
- At the beginning of the commercial activity in Germany is always the business registration.
- On your invoice you have to show the sales tax and pay the income from it to the tax office.
- If you are a trader („Gewerbetreibender“), the trade tax is also relevant for you.
- You should know the inflow and outflow principle so that you know to which calendar year your income and expenses are to be attributed for tax purposes.
If you want to run a business in Germany, you must first register it. This gives your business activity a correct formal framework.
You always register your trade at the place where you open your business. The registration takes place at the responsible trade office, at the public order office or at the city or municipal administration in the city hall. These are the so-called notifications of gainful employment („Anzeigen über die Erwerbstätigkeit“, § 138 AO).
You pay a fee for the registration. The required documents include your identity card or a passport. Depending on the type of business, further documents may be required. If you have successfully completed the registration, you will receive a trade license.
Registration with the tax office
The idea behind registering a business is that the tax office wants to know that you are starting a commercial activity. This is because there are many tax issues associated with this process, since tradespeople have to pay trade tax, for example. Conversely, you also have to deregister your business when you end your commercial activity.
You register your business with the tax office electronically. For example, you can use the ELSTER platform. You fill out a questionnaire and provide information about yourself that is crucial for further tax treatment. You must submit this questionnaire to the relevant tax office within one month without individual request.
Tradesmen and self-employed persons: what is the difference?
In separating these two terms, we need to distinguish their use in everyday language and in tax law. Self-employed people are colloquially referred to when someone is not employed.
Tax law, on the other hand, is more differentiated and, in the case of non-employees, is interested in whether their income comes from a business, self-employment or agriculture and forestry.
In Germany, those who derive their income from self-employed work are usually freelancers. And they do not have to register their business or pay trade tax. This is why this distinction is important in tax law. In Germany, it is the tax office that decides who is a freelancer.
Freelancers are often so-called solo self-employed. They work alone and have no employees. For them, the treatment as self-employed is often prejudicial. Because with a commercial enterprise there is additional effort. It is subject to the trade supervisory authority, for example, and must take trade law into account.
Value added tax
Anyone who generates sales in Germany is generally subject to sales tax. In addition to the amount of net sales, the invoice must therefore also show the sales tax that your customer must also pay. Depending on the type of service provided, different tax rates apply:
- Standard VAT rate: 19 percent
- Reduced VAT rate: 7 percent
No tax rate may apply to business customers outside Germany.
If your customer pays the invoice amount, he also transfers the sales tax to you. You must pay this sales tax to the tax office. This is done as part of the so-called advance return for sales tax („Umsatzsteuervoranmeldung“). You do this monthly or quarterly. This depends on how high your sales are. The transmission takes place electronically.
From the sales tax that you have received from your customers, you deduct the sales tax that you have paid yourself. This deduction is called input tax deduction („Vorsteuerabzug“). This reduces the amount that you have to pay to the tax office as part of the advance payment. This payment is always made no later than the 10th day after the end of the monthly or quarterly advance return period.
Example: You have to submit a monthly advance return for sales tax. In this case, you must submit the advance return for the month of January no later than February 10.
In addition, you must submit a VAT return for the past year, in which the total VAT received and paid by you is summarized once again. This gives you the opportunity to make corrections.
Small business regulation
Not every entrepreneur has to show sales tax on his invoices. If you have only a small turnover, you will benefit from the small business regulation („Kleinunternehmerregelung“), which is a significant simplification. This can be found in § 19 UStG. If your sales in the previous year were less than 22,000 euros and are not expected to exceed 50,000 euros in the current year, you can make use of this regulation.
If the requirements are met, you do not have to show VAT on your invoices. This also means that you do not have to submit your monthly advance VAT return. In principle, this means that you operate like a private individual.
All tradesmen in Germany must pay trade tax to the municipality. Freelancers are an exception to this. The amount of tax to be paid depends on your income.
The calculation of the trade tax depends on the tax rate („Steuermesszahl“) and the assessment rate („Hebesatz“). The municipalities determine the amount of these two ratios themselves. Therefore, the tax burden can differ from municipality to municipality. Here, the rule of thumb is that you will have to pay more in cities and metropolitan areas than in the countryside.
Revenue and operating expenses: How the inflow and outflow principle works
The inflow and outflow principle has its meaning in taxation. It states that income and expenses must always be taken into account for the calendar year in which they were received or paid.
For example, if you send an invoice to a customer at the end of 2023 and the customer does not pay until January 2024, the inflow of funds took place in 2024. Even if you performed the service and issued the invoice in 2023, the income is only taken into account for taxation in the next calendar year.
A deviation from this principle takes place in the case of recurring payments. A typical example of this is salary payments. In this case, the so-called 10-day rule applies. Even if the income is not received until the following year within ten days, it is still attributable to the previous year for tax purposes.
These are the most important expenses
Some expenses are typically faced by all companies. The following is a list of the most important items to consider:
- Input tax: This is the sales tax that you have to pay to other companies. From your point of view, these are expenses because you have to pay the tax to the tax office.
- Personnel costs: These include the salaries that you pay to your employees. Since these are recurring expenses, the inflow and outflow principle is not relevant.
- Acquisition costs: This includes the purchase of assets.
- Loan interest: If your company has taken out loans, you can take the interest payments into account as operating expenses. To do so, the interest must be business-related.
- Current depreciation for wear and tear („laufende Absetzung für Abnutzung“): This type of business expense involves allocating the acquisition costs of depreciable fixed assets over their useful life.
Do you want to do everything right from the start when it comes to taxes in Germany? Then contact us and benefit from our expertise as tax consultants! (P.S.: We also speak fluent English)