Small Business Exemption: Trade in Goods and Services Abroad
As your tax advisor in Düsseldorf and Oberhausen, we’ve already discussed the small business owner status in a previous blog post. The small business owner rule is a special form of taxation under sales tax law. If you’d like to learn more about the basics of small business status, we recommend reading our article “Small Businesses: Everything You Need to Know.” Smaller companies in particular benefit from these advantages. Many small business owners limit themselves, at the start of their operations, to trading goods and services within the German market. However, due to advancing globalization, it is not uncommon for small business owners to deal with goods and services abroad at an early stage. Special rules apply to small business owners regarding trade abroad. In this article, our tax advisors from Düsseldorf and Oberhausen explain the specific considerations to keep in mind.
Purchasing Goods and Services from Abroad
First, we would like to examine the procurement of goods and services from abroad. It can easily happen that a small business owner needs to source products or raw materials from abroad. A distinction is always made between a third country and another EU country. The specific aspects of both scenarios are explained below.
- Purchasing goods from a third country
If goods are purchased in a third country, import sales tax is generally due. In this case, the small business owner is not entitled to a tax credit. Any applicable customs duties must also be taken into account. Who is responsible for paying the duty depends on the delivery terms agreed upon with the seller.
Small business owners must also generally pay taxes when purchasing other services from a business in a third country. Input tax deduction is also excluded in this case.
- Purchasing Services from Other EU Countries
If a small business owner wishes to purchase goods from another EU country, the so-called acquisition threshold must be observed. Only if the acquisition threshold of €12,500 is exceeded must the small business owner pay tax on a so-called intra-Community acquisition and pay the foreign VAT. Input tax deduction is not allowed. If a small business owner purchases goods subject to excise tax or a new vehicle, the tax must generally be paid.
It is also possible to voluntarily pay acquisition tax even below the acquisition threshold. In practice, the small business owner’s VAT identification number is used for this purpose at the time of purchase. This option is particularly useful if the foreign VAT is higher or if a liquidity advantage can be achieved. It is best to seek advice from a qualified tax advisor on this matter.
If services are purchased from an EU business, the small business owner becomes liable for the tax without the possibility of claiming a tax credit. As a small business owner, you are exempt only if the seller is also a small business owner and therefore does not owe sales tax. Small business owners should prove their business status using their VAT identification number. Failure to do so may result in double taxation.
Providing Services Abroad
Most small business owners initially sell their goods or services only in Germany. However, it also happens that particularly ambitious small business owners want to sell abroad at an early stage. Just as with the purchase of goods and services, special considerations must be taken into account.
- Provision of services to a third country
If a small business owner sells goods to private individuals in a third country, this must be recorded as taxable revenue in Germany. However, as with all sales by the small business owner, no tax is levied. If the customer is a business owner, a tax-exempt export delivery may be applicable. Proof of export must be provided for this. For small business owners, the delivery is ultimately not taxed even without proof.
For services provided to private customers in a third country, the rules mentioned above for goods apply. Services provided to businesses are not taxable in Germany. Taxability and liability for tax depend on the laws of the respective country.
- Provision of Services to Other EU Countries
For goods deliveries to other EU countries, small business owners must note that tax-exempt intra-Community deliveries are not possible. Accordingly, the small business owner may not include their VAT identification number on the invoice. The delivery is taxable in Germany, and therefore no tax is levied.
Services provided to private customers are taxable domestically. No sales tax is levied. If services are provided to another business in the EU, this is not taxable in Germany. Under German law, the service is not subject to the recipient’s tax liability.
Impact on the VAT Threshold
As you already know from our other post, small business owners must stay below a revenue threshold of €17,500 to maintain their small business status. If goods are purchased from abroad (whether from the EU or a third country), this is not counted toward this revenue threshold.
If revenue is generated through the export of services, the following aspects must be considered:
- Deliveries to an EU country must be counted toward the turnover limit as ordinary domestic sales.
- The same applies to deliveries to a third country. It is irrelevant whether proof of a possible tax exemption has been provided or not.
- Turnover taxable in Germany must be included. Non-taxable turnover is not included.
Value-Added Tax Identification Number (VAT ID No.)
Small business owners can apply for a VAT identification number. A foreign VAT ID can be verified via the portal of the Federal Central Tax Office. Verification may be advisable in certain cases. However, please always note that small business owners are generally not permitted to include a VAT ID No. on invoices.
Questions as a small business owner? Trimborn . Partner has the answers!
Perhaps you are already a small business owner or would like to become one. Do you have any questions about running a small business abroad? We look forward to answering your questions during a detailed consultation in Düsseldorf or Oberhausen. Our team of tax advisors looks forward to your visit. Contact us today!
