VAT Exemption in Germany – More Than Just a Formality
VAT exemption in Germany is not just a formality – it has a real impact on your costs and how you run your business. In short: if you provide certain types of services or supply specific goods, you may be exempt from charging VAT. Sounds good? Not always. The exemption comes with limitations – especially regarding the ability to deduct input VAT on business-related purchases. And the German tax office doesn’t like “gut feeling” interpretations.
German VAT Law – Similar to EU Law, but More Detailed
German VAT law is based on the EU VAT Directive, but the German tax authorities go one step further. The regulations are more precise, and their interpretation often depends on the local tax office. So what seems simple in theory can turn out to be quite… complicated in practice.
VAT exemptions in Germany are divided into two categories: those that allow input VAT deduction, and those that don’t.
What does that mean for you? If you supply goods or services that are VAT-exempt without the right to deduct, you have to cover the VAT on your purchases and expenses out of your own pocket.
VAT Exemption – Practical Implications
If you provide only VAT-exempt supplies or services, you are not required to register for VAT in Germany. You do not issue invoices with VAT, nor do you file VAT returns – but, and this is important – you also have no right to reclaim input VAT on your purchases.
On the other hand, if you run mixed activities – some subject to VAT and others exempt – you become a partially exempt business. In that case, you must apply a special method of VAT calculation. And that’s where things get interesting.
Partially Exempt Businesses – How It Works
If your company provides both taxable and VAT-exempt services, the German tax office requires you to use the partial exemption method. This is a way of calculating input VAT when not all purchases can be directly attributed to taxable business activities.
Input VAT on expenses related exclusively to exempt activities – not recoverable.
Input VAT on expenses related to taxable activities – fully recoverable.
Shared costs, such as rent or accounting – subject to pro-rata allocation, calculated based on the proportion of exempt vs. taxable turnover or another economically justified method.
Special rules apply to real estate, where German VAT law imposes a stricter approach to input VAT allocation.
VAT Refunds – When and to Whom?
Germany grants VAT refunds to foreign businesses – both from EU and non-EU countries. But not to everyone, and not under all circumstances.
EU Companies
If your company is based in an EU member state, has no permanent establishment in Germany, and does not make taxable supplies there, you may apply for a VAT refund.
An exception applies to certain services subject to the reverse charge mechanism – in such cases, the customer accounts for the tax, and VAT does not apply to your side of the transaction.
The refund application is submitted electronically via your home country’s tax portal.
Deadline: by 30 September of the following year.
The application must cover a period of at least three months (unless it’s the end of the year) and include scanned invoices for amounts exceeding €250 (for fuel).
Refunds are granted only for correctly invoiced VAT. No refund will be granted if:
the invoice was issued incorrectly,
the purchase was for private use,
the expense related to VAT-exempt activities.
Non-EU Companies
If your company is based outside the EU, the process is more complex. You’ll receive a refund only if your country has a reciprocity agreement with Germany (i.e., it also refunds VAT to German companies).
The list of such countries is published by the German Federal Ministry of Finance.
The refund application must be submitted directly to the Federal Central Tax Office (Bundeszentralamt für Steuern – BZSt).
You must attach original invoices and a certificate from your home tax authority confirming your company’s registration.
Copies are not accepted.
There is no fixed processing time, and no interest is paid on delays. If your claim is rejected, you have the right to appeal.
When VAT Exemption Becomes a Problem
A VAT exemption may seem advantageous – no need to charge tax, fewer formalities. But that’s only on the surface.
The problem starts when your purchases are significant and you cannot deduct input VAT. Or when you have shared expenses that must be divided proportionally – often to the company’s disadvantage.
In addition, the German tax authorities tend to scrutinize even minor refund applications – especially from foreign businesses – which can turn into a full-scale accounting exercise.
When VAT Exemption Does Not Mean Losing Input Tax Deductions
In the German VAT system, there are cases where you can still retain the right to deduct input VAT, even if the transaction is VAT-exempt.
This applies, for example, to:
export of goods,
intra-Community supplies,
certain cross-border services,
transactions related to aviation and maritime transport.
These transactions are technically exempt but treated as taxable, which grants the right to deduct input VAT.
This is an important exception – especially for companies engaged in international trade.
Examples of VAT-Exempt Categories – With or Without Input VAT Deduction
VAT-Exempt with Input Tax Deduction:
export of goods,
intra-Community supplies,
certain cross-border services,
brokerage in export transactions,
supplies to NATO forces or diplomatic organizations.
VAT-Exempt without Input Tax Deduction:
medical and care services,
insurance and financial services,
rental of real estate (with exceptions),
cultural and educational activities,
charitable and religious activities.
All of the above share one feature – the VAT on their related expenses remains with you. There is no refund.
Key Takeaways
VAT exemption in Germany is not just a clause in the law – it’s a specific business model.
Sometimes it pays off, sometimes it doesn’t. It requires a solid understanding of the regulations and the practical approach of the local tax office.
If your business performs both taxable and exempt activities, it’s wise to consult a tax advisor familiar with German regulations.
VAT registration, partial exemption decisions, cost allocation, refund claims – each of these choices affects your business.
And your bottom line.