In contrast to personal taxes (e.g. income tax), German Value Added Tax (“VAT”) is a tax on transactions. VAT is a sales tax which is levied at all levels of taxable supplies of goods and services made by a taxable person in the course of any business activity carried on in Germany and on the importation of goods from other states.
The German VAT Act (“VATA”) is harmonised under the EU-wide VAT system. Therefore, decisions of the European Court of Justice have an important impact on the interpretation of the VATA.
Due to the possibility for entrepreneurs to deduct VAT (input tax) paid for received services or goods if these are related to taxable output transaction or certain VAT-exempt transactions, the tax payment is generally neutral for the business of the entrepreneur. This means that VAT is not an expense item but it is only a pass-through item. Only for private individuals or certain tax-exempt entrepreneurs, VAT paid to customers is a final expense.