Input VAT – What Every Business in Germany Should Know
Input VAT is one of those topics that sooner or later affects every company operating in the German market. It seems straightforward, yet it’s full of hidden traps. In this guide, I’ll explain how it works in practice — when you can deduct it, what’s not worth trying, and why even a perfectly issued invoice can fall into a black hole if you misinterpret the rules.
When Can You Recover Input VAT in Germany?
If your company provides services or sells goods subject to German VAT, you can recover the VAT paid on purchases related to that activity. It’s quite logical: you pay VAT as a buyer, but since you also charge VAT on sales, the state has no issue letting you deduct what you’ve already paid.
The problem starts with businesses engaged in VAT-exempt activities. In that case, deduction is generally not allowed — at least not in the standard way. There are exceptions, but they must be properly understood and well documented. Mixed businesses (those with both taxable and exempt supplies) must apply a pro-rata method — part of the VAT can be recovered, part cannot.
There’s no room for guesswork here. If you don’t handle it according to the rules, the German tax office will notice quickly. And that’s when the trouble begins.
Recovering VAT and the Invoice – The Core of the System
In practice, everything revolves around one document — the VAT invoice. It’s the foundation of any deduction. It must be issued correctly, containing your company’s data, precise details of the purchase, and the tax amount.
An invoice simply marked “for the company” isn’t enough. It must be for your company, properly registered for VAT in Germany. Otherwise, the tax authorities will reject it. And don’t expect any VAT deduction if the document is illegible, contains errors, or the data doesn’t match the tax register.
German tax officers aren’t fond of creative accounting. The document must be clear, specific, and reflect reality.
Imports from Outside the EU – How Import VAT Works
Importing goods from non-EU countries always involves paying VAT. However, this isn’t based on an invoice, as you typically don’t receive one. The tax is collected by the customs office, and you receive the corresponding customs documents — these form the basis for deduction.
But note: not every company can deduct this VAT. To be eligible, you must have actual control over the goods at the time of import. This isn’t just a formality — it means physical control, not just invoicing.
In other words: if you’re acting as an intermediary and your company doesn’t actually import the goods, forget about recovering the VAT. That could mean significant losses.
Purchases from the EU – Reverse Charge in Practice
When you buy from a supplier in another EU country, things work a bit differently. The supplier doesn’t charge VAT, but that doesn’t mean you’re exempt. You must self-account for VAT in Germany as the buyer. This is the Reverse Charge mechanism — you charge yourself VAT, report it in your return, and — if eligible — immediately deduct it.
It’s simple arithmetic, but only if your documentation is in order.
Again, the key document is the invoice — this time without German VAT, but confirming the intra-EU transaction.
Services from Abroad – Also Reverse Charge
If you receive a service from a foreign contractor outside Germany without VAT, you still have to account for VAT in Germany. The mechanism is the same — reverse charge. You declare the VAT due in your German VAT return and, if everything checks out, deduct it.
Again, proper documentation is crucial: the invoice must be correctly issued, even without VAT. Without it, you have no legal basis for deduction.
And again: if the service is linked to VAT-exempt activity, you cannot deduct the VAT. Simple as that.
When You Can’t Deduct VAT – Common Pitfalls
Not every business expense gives you the right to deduct input VAT, even if it’s related to taxable activities in Germany. Here are several common exceptions that often surprise entrepreneurs:
Luxury goods and services – Even if bought for business purposes, if they’re classified as luxury, the VAT is lost.
Business gifts – If the value exceeds €35, you cannot recover any VAT on them — not partially, not proportionally.
Company cars – You can deduct VAT, but you must also declare output VAT for private use. This means more paperwork and potential audits.
The 10% Rule – A Small Number, Big Consequences
If an asset, product, or service is used for business purposes less than 10%, you cannot deduct VAT at all. Only companies that use something at least 10% for business can apply for VAT recovery. This isn’t about your opinion — you must provide solid evidence and documentation. The German tax office works on proof, not trust.
When Something Is Used Privately – The Lennartz Method
Sometimes you buy something “for the company,” but in reality use it privately. In such cases, your company is treated as if it had “sold” the item to you privately, and you must account for output VAT.
If, at the time of purchase, you already know the item or service will be mainly for private use, the law forbids any VAT deduction. In short: if you buy it for the business, use it for the business — otherwise, you pay.
Special Cases: Tourism and Second-Hand Goods
The tourism industry and used-goods traders operate under special VAT schemes. They often can’t deduct input VAT because their business is subject to the margin scheme, where VAT is charged only on profit, not on total sales value.
This is an advanced topic and definitely requires professional tax advice, especially since mistakes can be costly.
VAT and Income Tax – A Complex Relationship
In Germany, much depends on how you treat an expense for income tax purposes. If something is deductible as a business expense, it often also gives the right to deduct VAT — but not always. There are cases where a cost is deductible for income tax but not for VAT. That’s why consulting a tax advisor is highly recommended, especially for unusual cases.
Want to Recover VAT in Germany? Play by the Rules
Deducting input VAT in Germany isn’t a game of chance. There’s no room for “I think it’s fine” or “it’ll probably work.” If you do it wrong, a tax audit will eventually find you — and then the fun ends.
The key is good documentation, understanding the rules, and knowing the exceptions. It’s also worth working with an accounting office familiar with German tax law, as details can vary depending on the industry, region, or type of activity.
If you run a business in Germany, guessing doesn’t pay off. Input VAT can save your company significant money — but only if you know exactly what you’re doing.