You’re a small fish in a big pond. If you’ll only make a very modest turnover, you can benefit from a simple VAT arrangement: you don’t charge VAT, you don’t claim VAT. Welcome to life as a Kleinunternhemer.
What is a Kleinunternehmer?
Being a small business owner in Germany is about as simple as it gets, from a tax perspective. It’s the simplest of all the business tax constellations out there. As a small-business owner (Kleinunternehmer), you don’t have to charge VAT (Mehrwertsteuer, Umsatzsteuer) on your invoices, but you also can’t claim any VAT back from your business expenses.
Am I a Kleinunternehmer?
If you’re expecting to earn revenue under 22,000 EUR in your first year of business, you can opt to be a small business. Even if your revenue prediction lies above 22,000 EUR, you might still be able to take advantage of the small business classification – e.g. if some or all of your revenue will not be subject to VAT.
How do I become a small business?
If you want to take advantage of the small business rule (Kleinunternehmerregelung), you need to do it when you register your business with the tax authority. The form you fill out to do this and get a freelance tax number (Steuernummer) is called the Fragebogen zur steuerlichen Erfassung. You can fill it out and submit it online in English here, or you can use elster to do it in German.
- When you fill out the form, you have to predict that you will earn a revenue (subject to VAT) of under 22,000 EUR in the current tax year. Otherwise you can’t be a small business.
- Once you’ve made your prediction, tick the box further down the form that says your revenue will most likely fall under 22,000 EUR in your first year of business and therefore, you’d like to take advantage of the small business rule. That’s it.
My revenue is over 22,000 EUR, but not all of it is subject to VAT.
A common example of this is a business with clients that are companies from outside the European Union, for which the revenue would normally not be subject to VAT. Maybe your revenue subject to VAT will only be 10,000 EUR and your revenue from companies outside the EU will be 20,000 EUR. If this sounds like you and you want to be a Kleinunternehmer, talk to a tax advisor or write to your tax office when you fill out the form and give them all the information you have on the situation. They’ll then make a decision on whether you can call yourself a small business or not.
What happens if I earn too much?
Naturally, you’re making a prediction when you set up your business. If your revenue exceeds 22,000 EUR but stays below 50,000 for the tax year in question, that’s OK. In this case, you’d remain a small business until the end of the tax year, and on the 1st January of the year following the one in which you earned between 22,000 and 50,000 EUR, you should start charging VAT. However, if your revenue exceeds 50,000 EUR while you have a small business status, you’ll probably get ordered to charge VAT retroactively from the beginning of that tax year. A nasty surprise indeed, and I have seen it happen to quite a few startups over the years.
How long can I be a Kleinunternehmer?
As long as your economic situation fits the criteria. And then once you find yourself in a tax year with revenue above 22,000 EUR (but under 50,000 EUR), until 31st December of that tax year.
Are there disadvantages to being a small business?
If your clients see your invoice with its small business status, they might make assumptions about you, your business or your economical success. On the other hand, your prices might also be significantly lower than competitors you have who do charge VAT.
A disadvantage of choosing to charge VAT from the get-go (opting not to take advantage of the small business rule despite a revenue prediction of under 22,000 EUR) is that you are locked into this choice for five years.
How can Red Tape Translation help?
- Download our free German and English invoice templates for small business owners (coming soon)
- Book a coaching on setting yourself up as a freelancer in Germany
- Use Life Admin to communicate with the tax office in German
- Use Take a Translator to visit the tax office with an interpreter
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