What is the difference between Vorsteuer, Umsatzsteuer and Mehrwertsteuer?
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For freelancers, the subject of taxes is typically a lot more involved than it is for those working as employees. The mention of the word taxes alone can strike fear into the hearts of even the most organised among us. Even for German-speakers, navigating the complex German tax system can cause headaches and confusion. Getting familiar with some of the relevant German terms is a great place to start as a foreigner, but sometimes it takes a little bit more work to understand the slight differences.
In this article, we explain the differences between the terms Umsatzsteuer, Mehrwertsteuer, and Vorsteuer, all of which refer to the concept of Value Added Tax (VAT), but each with a slight difference in use. End the confusion and gain the confidence to know which is which so you can become a tax-savvy self-employed foreigner in Germany!
What is “Umsatzsteuer”?
Like many German words, “Umsatzsteuer” is a compound word—that is, two or more words pushed together to make one. So, let’s first break down the word: “Umsatz”, meaning sales revenue, and “Steuer”, meaning tax. Sales tax, as the name suggests, or Value Added Tax (VAT), as it is often called in English, is a tax applied to every product sold or service provided. As a freelancer, your products or services are subject to a sales tax, or Umsatzsteuer, that you must charge your clients and then pay on to the state. This tax is usually calculated at 19% or 7%, depending on the service you provide.
In order to compensate for the economic losses caused by the global COVID-19 pandemic, reduced Umsatzsteuer tax rates of 16% and 5% apply until December 31, 2020.
You must add the applicable VAT rate to your invoices. If, for example, you issue a customer an invoice for 100 €, your invoice should show the following:
- Net total: 100 €
- VAT rate: 19 € (19% of the gross total)
- Gross total: 119 €
With the current sales tax reduction, the example would look like this:
- Net total: 100 €
- Modified VAT rate: 16 € (16% of the gross total)
- Gross total: 116 €
💡Tip from Accountable: When you create your invoices via our app, the correct VAT rates are automatically calculated.
What about “Umsatzsteuervoranmeldung”?
If you can pronounce this word—congratulations🎉! If you understand it? Even better!
You may have started to see a pattern here, with another long compound word. “Umsatzsteuer” (sales revenue) and “voranmeldung” (advanced notification). Combined, this term refers to a preliminary or advanced VAT declaration.
Since you’re required to pay any VAT (Umsatzsteuer) that you collect through your work on to the tax office, you must also declare to the tax office the amount you collected, less any deductions of sales tax you paid for business-related expenses. The advanced VAT declaration allows you to determine the amount of VAT due, either monthly, quarterly, or annually.
- You are a fashion designer and buy fabric worth 100 € (+ 19 € VAT). This expense is necessary and relevant to the practice of your profession.
- You can claim the 19 € paid in your next advanced VAT return. The 19 € will then be offset against the amount of VAT you collected, to calculate the amount you are obliged to pay.
💡Tip from Accountable: If you are classified as a small business owner, you can be exempt from collecting and paying VAT. In that case, you also can’t claim the VAT that you pay on necessary business expenses.
What is “Mehrwertsteuer”?
The term “Mehrwertsteuer” is identical to “Umsatzsteuer”—both refer to VAT or sales tax. While for English speakers it may not be any easier to pronounce, “Mehrwertsteuer” is considered more of a slang or casual term for VAT than Umsatzsteuer. “Mehrwert” on its own means additional value, therefore it translates directly to Value Added Tax.
If you want to express yourself correctly in terms of tax law, you should always speak of “Umsatzsteuer” when referring to sales tax or VAT. Nevertheless, the term “Mehrwertsteuer” is frequently used on receipts and invoices. On receipts from a restaurant or retail store you will often find the abbreviation “MwSt”, also referring to VAT.
Origin of Value Added Tax
The formulation of “Mehrwertsteuer” or Value Added Tax was first introduced in Germany in the late 1960s. The principle of “value added” tax means that companies and self-employed individuals only have to pay sales tax on the additional value they generate when selling a product or service. This allows the tax on expenses to offset the tax paid on income generated, so that you only pay sales tax on the surplus, i.e. your added value.
Let’s stick with our example from earlier:
- As a fashion designer, you buy fabric worth 100 € (+ 19 € VAT).
- You can claim the 19 € sales tax paid for the purchase of the material back from the tax office, so that your actual cost is 100 €.
- Using the material, you design and tailor a piece of clothing, which you then sell for 150 € (+ 28.50 € VAT).
- Since the material costs 100 € , and your sale price was 150 €, the additional value that you created is 50 €. You pay 28.50 € in VAT to the tax office, and claim 19 € back for your material costs:
- 28.50 € – 19 € = € 9.50.
- So, in the end, you pay 9.50 € in VAT, which is also the equivalent of 19% of the 50 € in additional value that you created. This is why it’s more often called Value Added Tax, rather than sales tax, although the two are in effect interchangeable.
What is “Vorsteuer”?
The term “Vorsteuer” refers to input tax, and only differs from VAT from the perspective of the client or the party paying for an invoice for a product or service. Companies and self-employed individuals report sales tax on their products and services and in turn have to pay sales tax on the products and services they buy. (In other words, Vorsteuer is yet another word that refers to VAT 😉.)
Let’s return one more time to the fashion designer example:
- The fabric merchant sells fabric worth 100 € to the fashion designer. The fabric merchant has to add 19% sales tax to the price of 100 €, making the total amount 119 €.
- The 19% tax that the fashion designer pays can be referred to as “Vorsteuer”, or input tax.
Incoming invoices show Vorsteuer (input tax), whereas outgoing invoices list Mehrwertsteuer or Umsatzsteuer (sales tax). The amount is the same, and both can be referred to as VAT in English.
It’s all German to me! 😰
You are not alone! Taxes can be complicated, even when you’re a native speaker. Umsatzsteuer and Mehrwertsteuer both translate to “sales tax” in English, while Vorsteuer, in practice, just implies another perspective. We hope that this article helps give you a basic overview of the different terms so that you can confidently use (or at least understand) each one in the right context.