Circular letter dated 18 March 2025 on SMEs

The new regulation

Previously, VAT was not levied on SMEs (so-called non-genuine VAT exemption), but now the regulation has become a genuine VAT exemption provision.

The turnover limits have been raised: Total turnover in accordance with § 19 (2) of the German VAT Code may not have exceeded € 25,000 in the previous calendar year (previously: € 22,000) and may not exceed € 100,000 in the current calendar year (previously: € 50,000). The limit for the current year is no longer a forecast; the first € 100,000 of turnover is always VAT exempt. The transaction exceeding the limit is VAT taxable. As before, certain VAT exempt supplies are not included in the total turnover, nor is turnover with permanent assets. SMEs can issue simplified invoices in accordance with § 34a VAT Implementing Regulation. They are not obliged to issue e-invoices. Those who make use of the SME regulation are not entitled to deduct input VAT. The SME regulation can be waived, whereby the waiver binds the taxable person for five years.

The SME regulation in Germany is now also available to taxable persons from other EU Member States. To make use of it, they must comply with both the aforementioned German and EU-wide turnover limits: they may not have generated or generate more than € 100,000 in turnover in the entire EU, in either the previous or the current calendar year. Here, too, the first excess turnover ends the SME regulation. In contrast to German taxable persons, the VAT exemption does not automatically apply if it is not waived. Instead, EU-based taxable persons must apply to the competent authority in their country of residence to participate. They then receive a SME identification number and must submit quarterly turnover reports to this authority. Preliminary and annual VAT returns in Germany are then no longer required. If they exceed the turnover limit, they must notify the competent authority in their home country within 15 days.

Correspondingly, § 19a UStG contains new regulations for German taxable persons who wish to utilise the SME regulation in another EU member state. The competent authority here is the Federal Central Tax Office (BZSt). 

Information from the BMF (Federal Ministry of Finance) circular (selection)

• If an SME shows VAT on the invoice, this is no longer a case of § 14c (2) of the German VAT Code (unauthorised tax statement), as was previously the case, but of § 14c (1) of the German VAT Code (incorrect tax statement) due to the VAT exemption. The change from one form of taxation to the other can lead to input VAT corrections in accordance with § 15a UStG.
• A waiver declared before 1 January 2025 is also binding for the new SME regulation.
• Opting out of a VAT exemption in accordance with § 9 of the German VAT Code is not permitted if the recipient provides supplies that are VAT-exempt in accordance with § 19 of the German VAT Code.
• If the SME issues invoices for small amounts, a reference to the SME regulation must also be included. If no reference is made to the SME regulation, the SME is liable for VAT in accordance with § 14c (1) of the German VAT Code, as § 34 (1) No. 4 of the implementing regulation states that failure to disclose the VAT rate applied is deemed to be disclosure of the reduced VAT rate.
• The exclusion from input VAT deduction applies not only if the SME uses the input supply for domestic VAT-exempt transactions in accordance with § 19 of the German VAT Code, but also if it is used for VAT-exempt transactions abroad in accordance with a corresponding provision and for non-exempt transactions abroad.
• In the year of the legal change from the SME regulation to the standard taxation, the tax office does not automatically grant an exemption from filing preliminary VAT returns.
• Only supplies of goods and services, including transactions deemed to be made for consideration, are VAT-exempt in accordance with § 19 of the German VAT Code. Imports and intra-Community acquisitions are not exempt.
• If the taxable person is commencing activity in Germany (i.e. there is no previous year), the limit of € 25,000 applies in this year, not € 100,000.
• Advance payments are recognised as part of total turnover at the time they are received.
• The waiver of the SME regulation is not subject to any formal requirements. The submission of preliminary or annual VAT returns is considered a waiver. The binding effect of the waiver of 5 years only applies to the first waiver.

Practical impacts

Every new business founder in Germany can start as a SME and realise the first € 25,000 VAT-exempt. If they have already realised sales of no more than € 25,000 in the previous year, then even the first € 100,000 are VAT-exempt in the following year. However, it is important to check whether this is advantageous in view of the actual input tax incurred.

The SME regulation is also interesting for taxable persons whose turnover is excluded from the total turnover, e.g. rental companies. Even if they generate high VAT-exempt rental turnover, other, otherwise taxable turnover is eligible for the SME regulation. If these other transactions do not require large investments and therefore no significant input VAT is incurred, VAT can actually be saved here.

It should be noted that the national regulation is independent of the EU-wide regulation. Therefore, the exemption under § 19 (1) of the German VAT Code can remain in place for Germany if the German threshold is not crossed, even if the SME regulation in other EU Member States that is utilised at the same time has to be terminated due to the EU-wide threshold being exceeded.