Dear Clients,

the new Annual Tax Act 2024 introduces important VAT changes that may affect companies and sole traders.

Below is an overview of the key points:

Changes to the small business regulation

From 2025, the turnover limits for the small business regulation will increase to €25,000 for the previous year and €100,000 for the current year.
This regulation will also apply to entrepreneurs from other EU countries who register there. 
There is an additional rule for start-ups: if the €25,000 limit is exceeded in the first year, VAT must be paid on the excess amount.

Abolition of tax exemptions for tax warehouses from 2026

As of January 1, 2026, the tax exemption for so-called “tax warehouses” under § 4 No. 4a VAT Act (hereinafter referred to as the UStG), which was included in the national VAT legislation in 2004, will be abolished without replacement. Until now, the provision on tax warehouses allowed the delivery of tax-free goods to a tax warehouse registered with the tax authorities. VAT was only charged on the final removal of the goods from this tax warehouse.

This provision will be abolished, so there will no longer be a preferential tax warehouse.

Changes in actual taxation (Ist-Versteuerung) and input tax deduction

Actual taxation under § 20 UStG allows some entrepreneurs to pay VAT to the tax office only after receiving payment from the customer. Previously, however, customers could claim input tax when the service was performed and the invoice received, regardless of whether payment had been made.

Effective January 1, 2028: 

According to the new wording of § 15 para.1 sentence 1 no. 1 UStG, the deduction of input VAT will only be possible when services are purchased from an actual taxable person, only if and to the extent that payment for the service rendered has been made. Thus, the recipient of the service can only claim input VAT after actual payment has been made.

In addition, a new invoicing obligation is introduced (§ 14 para. 4 sentence 1 no. 6a UStG). Actual taxpayers must indicate on their invoices that they apply actual taxation. This change will apply as of January 1, 2028 and must be applied for the first time to invoices issued after December 31, 2027.

Example: A freelance law firm (actual taxable company) invoices entrepreneur A for consulting services totaling €10,000 plus €1,900 VAT. The entrepreneur receives the invoice on January 15, 2028 and pays on February 28, 2028.  

Previous provision: Entrepreneur A could already claim input VAT of €1,900 in the advance tax return for January 2028, even if he paid the invoice later.
New provision from 2028: Entrepreneur A can only deduct input tax in the advance declaration period in which he made the payment to the lawyer, i.e. in the advance declaration period for February 2028.

Partial payments: if the entrepreneur paid only part of the invoice, e.g. 50%, he can only claim a pro-rata amount of input tax of €950 (50% of €1,900). The remaining amount of input tax can only be claimed on final payment.

Adjustment in the event of incorrect tax invoicing from January 1, 2025

Previously, § 14c (2) UStG provided that a entrepreneur who issued an incorrect VAT in an invoice was obliged to pay the corresponding amount to the tax office. This provision now applies to credit notes as well. 

On the other hand, this incorrect VAT is no longer payable to the tax office if the invoice was issued to the final consumer, i.e. customers who cannot claim VAT (usually private individuals or entrepreneurs acting as private individuals).

Change in location of performance of certain services (§ 3a UStG) effective January 1, 2025

For cultural, artistic and similar services that are provided virtually (e.g. via streaming), the place of taxation for non-commercial customers is changing.

In the future, the residence of the customer, rather than the location of the supplier, will be decisive. This means that VAT will often be payable abroad if the customer lives outside Germany.

Example: an artist based in Germany records a song on behalf of his client and individuals abroad can listen to it on a streaming portal. In connection with streaming, the residence of the recipient, who is located abroad, becomes decisive for taxation. 

This also applies, for example, to online seminars, distance learning and online concerts.

Similar services are the admission permits for entrepreneurs to cultural and artistic events and fairs, if the admission permit allows virtual participation.

Corresponding changes will be made to § 3a Abs. 3 no. 5 UStG. In the case of other admission authorizations without the possibility of virtual participation - e.g. via streaming - in cultural and artistic events, the domicile of the supplier will still be decisive for determining the place of supply of service.

Example: If entrepreneur ‘A’ from Berlin receives access to an event from entrepreneur ‘B’ (based abroad), which is offered via a streaming portal, the place of supply of services is also determined by the place where the recipient of the service - entrepreneur ‘A’ - operates his business, i.e. Berlin.

Extension the tax credit for educational service providers effective January 1, 2025

The tax exemption for educational services (§4 No. 21 UStG) is extended. In the future, all educational institutions that prepare students for general or vocational qualifications will be exempt from paying VAT. The previous certification procedure under §4 No. 21 letter a (double letter bb) UStG remains in force.

Other important changes

Public Sector: The VAT provisions for the public sector should not be mandatorily applied until January 1, 2027. Thus, public organizations have two more years to adapt. More information can be found here.

Differential taxation: from 2025, differential taxation will only apply to goods that were not purchased at a reduced tax rate.

Reduced tax rate for works of art: from 2025, a reduced tax rate of 7% will apply to the sale of works of art. However, it will not apply to renting or leasing of works of art.

Adjustment to the flat rate of input tax for farmers and foresters: the flat rate for calculating input tax for farmers and foresters will be gradually reduced to 8.4% from 2024 and 7.8% from 2025. farmers should take this into account in their calculations.

Conclusion:

The Annual Tax Act 2024 brings with it many changes that may affect companies. It's worth researching their impact on your company ahead of time and making the necessary adjustments. Don't hesitate to contact us for assistance!