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EXPLAINED: How Germany’s “Small Business” Rule Could Affect Your Tax Returns

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The deadline for personal tax returns may have been extended this year due to Covid-19 (it’s now due October 31, in case you’re wondering), but it’s still a good idea. to clarify your tax situation as soon as possible.

If your business is a one-man or one-woman show, or if you are new to freelance life, you are likely to be classified as a small business (or ‘Kleinunternehmer‘), which means you can choose whether you want to charge VAT to your German customers.

Here is an overview of the so-called “small business rule”, when it applies, and the pros and cons of charging customers VAT.

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What is the “small business rule”?

Starting in 2021, anyone who made less than $ 22,000 in the last fiscal year and is on track to earn less than $ 50,000 this year can be considered a small business owner. This means that invoicing VAT in addition to your customer services is optional.

READ ALSO: Tax conditions every expat in Germany should know

If you decide to charge VAT you can opt out of the small business rule, but be aware that the decision you make is valid for five years – or until your circumstances change – so be sure to take a good look at it. .

The advantages and disadvantages of VAT

If you don’t charge customers VAT, it could help make your services more competitive than large companies. The current VAT rate in Germany is 19% – a figure that can make a significant difference on your bill, especially if your customers are also small businesses who cannot deduct VAT from their expenses.

Another major advantage is that this type of freelance writer has to complete much less paperwork than larger companies. While large businesses must file monthly or quarterly VAT returns, those that fall under the small business rule simply need to file a tax return each year.

This makes it the much easier option for people who are new to Germany or otherwise nervous about filling out tons of German forms.

According to Martin Gundermann, founder of the expatriate tax advisory service Intertax Consult, taking advantage of the small business rule can also have one or two downsides, depending on your situation.

READ ALSO: EXPLAINED: German tax filing rules and deadlines in 2021

The first is that if you don’t charge customers VAT, neither can you deduce VAT on your expenses, so in years that you make major investments in your business or have significant overheads, you could find yourself at a loss.

“Businesses that choose this option cannot claim VAT refunds on their expenses,” Gundermann told The Local. “This means that the VAT they pay on their own business expenses is not refundable to them because they are small entrepreneurs.”

Using the small business rule can help reduce your paperwork, but some clients may prefer to work with larger companies. Photo: picture alliance / dpa / dpa-tmn | Benjamin Nolté

Lexware, a small business software company, also suggests that categorizing your business as a “small business” might be off-putting for some customers who prefer to work with larger, more established companies.

In some cases, they may even consider dealing with smaller companies as a riskier financial transaction.

“Potential customers are reluctant to do business with companies with very low sales because they can go bankrupt faster and so down payments … can be lost,” explains Lexware.

Work for international clients

According to Gundermann, people who deal primarily with international clients are in a unique position when it comes to this part of German tax law.

This is because the amount you can earn is within the scope of the small business rule. does not include income from outside Germany, so in theory you could earn € 100,000 per year from a customer in UK or Australia, but you only earn € 10,000 from German customers you would expect always like a “small business” in the eyes of the tax authorities.

Of course, it’s up to you to determine if this really makes sense from a business or tax perspective, in light of the pros and cons mentioned above. A tax advisor or other type of financial advisor may be able to help you further with your decision.

Registration and invoicing as a “small business”

Now on to the really fun part: putting all your new tax knowledge into practice.

If you’re starting a business this year – or any year – it’s critical to be transparent with the tax office from the start, says Gundermann.

“When starting a business in 2021, you need to register with the local tax office,” he explained.

READ ALSO: What not to do when you are a freelance in Germany

“On the registration form, you must tick the box that describes you as a ‘small entrepreneur’ if you expect your income will not exceed € 22,000 in 2021. Then you must issue an invoice without VAT to your customers and add a line in the invoice that indicates why you are not adding VAT.

The line to add, in German, is “The gem of Keine Umsatzsteuer. § 19 UStG “, meaning “no VAT due under § 19 of the VAT law”.

Submit your first tax return

If you are filling out your own tax returns, the most common forms you will need on ELSTER (the official government portal for submitting your German tax return) are Est 1A 2020 (a general form), Anlage EÃœR (for your benefit / loss calculations) and Anlage Ust (for your VAT calculations).

Be aware, however, that there are countless other forms for people with specific financial circumstances, such as investments, child-related expenses, or child support payments, so you may need to submit other forms if your situation is more complex.

Although you do not collect VAT as a small business, it is important to complete the VAT form to clarify Finanzamt that you are below the German income threshold and that you are therefore exempt from collecting this type of tax and paying it to the government.


If you complete your tax return yourself, you can use the ELSTER online portal or one of the many expat tax form apps. Photo: picture alliance / dpa | Marijan Murat

If this all sounds a bit too complicated, remember that you don’t have to do it alone. For your first tax returns, you can always call on a Steuerberater (tax advisor) to help you navigate the bureaucracy, with the added bonus that you’ll have a few extra months to submit your tax return if it’s done by a third party.

In addition, they should be able to advise you on your tax situation and the applicability of the small business rule.

If that sounds like overkill, there are also a number of English language apps that have popped up in recent years to help expats complete their German tax returns. At around $ 30 or so, these services tend to be a bit cheaper than a tax advisor and are quick to do online at your convenience.

READ ALSO: Five Simple Steps to Getting Your German Tax Refund

Rightly so, services such as tax advisers to help you submit your tax returns are also – you guessed it – a tax deductible expense. So they may not cost as much as you might initially think.

Please keep in mind that this article, like all of our guides, is intended to provide assistance only. It is not intended to replace formal legal or financial advice.

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