The reverse charge mechanism is an important concept for VAT compliance in Germany.
It shifts the responsibility for paying VAT from the supplier to the recipient of the goods or services.
This system plays a critical role when foreign businesses provide services or goods in Germany.
At WW+KN and www.vat-germany.com, we support international companies in understanding and applying the reverse charge mechanism correctly according to German VAT law.
1. Legal Basis: Reverse Charge in Germany
The reverse charge mechanism in Germany is regulated primarily under § 13b Umsatzsteuergesetz (UStG).
It applies when specific transactions are carried out by foreign suppliers or under particular business conditions.
Relevant transactions include:
- Supplies of certain services by a non-resident entrepreneur to a German business
- Certain construction services (even between German businesses)
- Supplies of gas, electricity, heating, and cooling under specific conditions
- Deliveries involving emissions allowances
- Transfer of certain rights (e.g., patents, licenses)
According: § 13b UStG – Umsatzsteuergesetz
2. When Does the Reverse Charge Apply for Foreign Companies?
The reverse charge applies when:
- The supplier is not established in Germany (§ 13b Abs. 7 UStG)
- The customer is a taxable person (i.e., an entrepreneur or a legal entity registered for VAT in Germany)
- The service is taxable in Germany
Typical examples include:
- Consultancy services provided remotely by a US or UK company to a German GmbH
- Installation services by an Italian company for a German customer without having a permanent establishment in Germany
If these conditions are met, the German recipient must:
- Self-assess and pay the VAT (input and output VAT simultaneously)
- Report the transaction properly in their VAT return (Umsatzsteuervoranmeldung)
3. Important Exceptions
Reverse charge does not apply when:
- The supplier has a permanent establishment in Germany that participates in the supply
- The recipient is a private individual (non-business customer, “B2C”)
In such cases, the foreign supplier may need to register for VAT in Germany and charge German VAT on their invoices.
4. How to Properly Invoice under Reverse Charge
If the reverse charge mechanism applies:
- The foreign supplier must issue an invoice without German VAT
- The invoice must clearly state that the German customer is responsible for VAT (“VAT due by the recipient” / “Steuerschuldnerschaft des Leistungsempfängers”)
Suggested reference on invoice:
“VAT liability of the recipient according to § 13b UStG.”
5. Penalties for Misapplication
Incorrect application of the reverse charge rule can lead to:
- Fines for both the supplier and the recipient
- Denial of input VAT deduction
- Additional tax assessments by German authorities
How WW+KN and www.vat-germany.com can Help
We assist foreign companies with:
- Analyzing whether reverse charge applies
- Correct invoice wording
- Advising on VAT registration obligations in Germany
- Ensuring full VAT compliance
Get in Touch
For individual advice on VAT and reverse charge in Germany, please contact us at info@vat-germany.com.
