What Are Your Steps in Understanding the VAT System

Sales tax is also described as consumption tax. The reason for this is that sales tax is always offset as soon as goods or services are consumed. This means that consumption is indirectly taxed. This explanation also shows who ultimately pays the VAT, the consumer or end consumer. The sales tax varies depending on the goods or services consumed. Therefore, 19, 7 or 10.7% VAT is added to the net value of the goods. There is one exception, however: some goods or services are exempt from sales tax. Therefore, consumers do not pay sales tax for the consumption of such goods. 

Sales tax rates in Germany

Due to the COVID-19 pandemic, the German government has announced that it will reduce the standard VAT rate from 19% to 16% and the reduced VAT rate from 7% to 5%. These changes will come into effect on July 1, 2020 and will apply until December 31, 2020.

As already explained, sales tax varies depending on the services provided or the goods sold. The specific sales tax rates are defined in the Sales Tax Act §12 UStG. As you calculate sales tax you need to keep in mind these details.

Sales tax 19%: standard tax rate 

In Germany, sales tax of 19% applies to all goods and service groups that are not subject to any special regulations – reduced sales tax. Accordingly, it can be assumed that the goods and service groups that are not separately mentioned below are taxed at 19% sales tax. 

Sales tax 7%: The reduced tax rate 

In principle, the reduced sales tax rate applies to:

• Food, excluding drinks and luxury foods such as caviar. 
• Transportation of people via the rail network (Deutsche Bahn tickets), but also for cultural events. 
• Showman activities such as circus performances.
• Accommodation, for example, in hotels or on campsites.
• Reading such as books or magazines.

Sales tax 10.7 or 5.5%: average tax rates for agricultural and forestry operations

According to §24 of the Sales Tax Act, the activities of farmers and foresters are taxed differently. Therefore, the following sales tax rates apply:

Products from farmers are taxed at 10.7 sales tax

Forestry products are taxed at 5.5% sales tax

It is important to note that the sale of food such as strawberries or asparagus by farmers is taxed with 10.7% sales tax and not with the reduced tax rate of 7%. 

VAT-exempt services and goods

Sales tax is neither charged by the company nor paid by the consumer for the following services: 

• Insurance
• Credit brokerage
• Medical services subject to co-payment
• Sales tax rate changes from 2020 

Since 2020 the sales tax rates have changed for the following goods or services:

The sales tax for hygiene articles such as tampons and sanitary towels was reduced from 19 percent to 7 percent VAT. The reduced sales tax rate also applies to e-books. This equates them to magazines and books and is therefore taxed at 7 percent VAT instead of 19 percent VAT.