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VAT Exemption under the Small Business Regulation
As a startup founder, you will receive a tax registration questionnaire from the tax office in the year of founding your business, where you will need to indicate whether you wish to opt for the small business regulation.
In this form, you must estimate your revenue for the year of founding and the following year. Keep in mind that if your first fiscal year does not start in January, you will need to project your expected revenue for a full year!
You can use the so-called small business regulation if your revenue (gross) is expected to be a maximum of €50,000 in the current year (from 01.01.2025: € 100,000) and did not exceed €22,000 (from 01.01.2025: € 25,000) in the previous year (§ 19 of the German VAT Act. Revenue in the context of § 19 VAT Act refers to the total revenue measured by received payments, minus the revenues from the sale of fixed assets.
Advantage of the Small Business Regulation: You do not need to charge VAT, which naturally makes your offered services and products significantly cheaper.
Note:
According to § 4 VAT Act, certain revenues are exempt from tax from the outset, such as services provided by insurance agents or within the scope of a healthcare profession (e.g., doctor, dentist, alternative practitioner, physiotherapist, midwife...). It is worth checking whether your own activity might also fall under these (very extensive) provisions.
When should you use the Small Business Regulation?
The small business regulation offers advantages when dealing with private customers, as the goods can be offered at a lower price to the end consumer, or the profit margin is higher since VAT does not need to be charged or paid. Additionally, the monthly VAT advance declaration to the tax office is also not required.
When should you opt out of the Small Business Regulation?
However, if you have planned larger investments, or primarily deal with VAT-liable companies, it might be advisable to forgo the small business regulation. In such cases, the input tax you pay on products or services may be higher than the VAT you need to pay to the tax office. As a small business owner, you might even expect a "refund" in this scenario. However, if you are exempt from VAT, you are not entitled to claim the input tax refund.
Important in making your decision:
While you can switch from the small business regulation to regular taxation at any time, the reverse is only possible after 5 years! If your revenue exceeds the threshold values, you will automatically fall under the standard taxation rules.
Tip
If you use the small business regulation, to avoid confusion for the invoice recipient, you should at least note on your invoices that no VAT is included in the invoice amount due to the provisions of § 19 VAT Act.
You can find more information on the small business regulation on the Gründerplattform website.
By the way:
According to § 38 of the German Fiscal Code, even small business owners are technically subject to VAT. However, despite this tax obligation, the tax office waives the collection of the legally due VAT.
