Differences Between VAT Refund Procedure and VAT Registration for Foreign Companies in Germany

Navigating the VAT system in Germany can be complex, especially for foreign businesses. There are two primary processes for dealing with VAT: The VAT Refund Procedure (Vorsteuervergütungsverfahren) handled by the Federal Central Tax Office (Bundeszentralamt für Steuern, BZSt) and the VAT registration with a local tax office. This article by WW+KN, a Baker Tilly Company, explains the differences between these two processes and when each is applicable.

VAT Refund Procedure (Vorsteuervergütungsverfahren)

The VAT Refund Procedure is designed for foreign businesses that are not required to be VAT registered in Germany but incur VAT on goods and services purchased within the country. This process allows such businesses to reclaim the VAT paid.

Key Points:

1. Eligibility: Non-EU businesses and EU businesses that are not VAT registered in Germany.
2. Application: Must be submitted to the BZSt.
3. Requirements: Detailed invoices showing VAT, proof of payment, and a certificate of taxable status from the business’s home country.
4. Legal References:
   1. UStG (German VAT Act): §18 (9) – Details the VAT refund process.
   2. EU VAT Directive (2008/9/EC): Outlines procedures for VAT refunds within the EU.

Process:

• Non-EU Businesses: Apply directly to the BZSt.
• EU Businesses: Apply through their local tax authority, which then communicates with the

VAT Registration

Foreign businesses engaged in taxable activities within Germany must register for VAT with the local tax office (Finanzamt) where the business activity occurs. This registration is necessary for businesses that make supplies of goods or services in Germany and need to collect and remit VAT.

Key Points:

1. Eligibility: Any business conducting taxable sales or services in Germany.
2. Application: Directly to the local tax office where the business activity is conducted.
3. Requirements: Submission of various documents, including proof of business activities, identification, and possibly a bank guarantee.
4. Legal References:
   1. UStG (German VAT Act): §27a – Details the VAT registration process.
   2. EU VAT Directive (2006/112/EC): General rules on VAT registration for businesses.

Process:

• Initial Registration: Complete the application form and submit necessary documents to the local tax office.
• Ongoing Compliance: File regular VAT returns and payments.

Differences and Applications

1. Purpose:

• VAT Refund Procedure: For businesses not required to register for VAT but seeking to recover VAT paid on expenses.
• VAT Registration: For businesses required to charge VAT on their sales and remit it to the tax

2. Authority:

• VAT Refund Procedure: Handled by the BZSt.
• VAT Registration: Managed by the local tax offices.

3. Scope:

• VAT Refund Procedure: Only for recovering VAT on expenses.
• VAT Registration: Involves ongoing VAT compliance, including filing returns and making

Practical Examples

Example 1: VAT Refund Procedure

A US-based software company attends a trade show in Germany and incurs VAT on hotel and travel expenses. Since the company does not sell products in Germany, it applies for a VAT refund through the BZSt.

Example 2: VAT Registration

A French company sells goods online to German customers and stores its inventory in a German warehouse. The company must register for VAT in Germany, charge VAT on its sales, and file regular VAT returns.

Conclusion

Understanding the differences between the VAT Refund Procedure and VAT Registration is crucial for foreign businesses operating in or with Germany. Each process serves a distinct purpose and involves different requirements and authorities. For tailored advice and support on VAT matters, contact us at WW+KN, a Baker Tilly Company, via email at info@vat-germany.com.