Nowadays it has become customary to operate internationally. An exclusive activity in Germany is not very lucrative for larger companies in times of globalization and foreign trade with member states of the European Union. Trading with customers based abroad has therefore become indispensable. It is therefore necessary to discuss the influences of VAT liability in different countries and to what extent the concept of tax residence plays a role in this. In particular, the place of delivery or performance plays a decisive role in sales tax abroad.

1st place of performance for VAT abroad – Introduction

From a sales tax perspective, cross-border sales are subject to certain conditions and have considerable tax consequences in the event of small differences between the recipient – both for the recipient and the provider of the services. What an entrepreneur who provides services abroad must pay attention to in certain cross-border transactions and to what extent this can be a risk, we treat in the following.

2nd system of VAT: taxable and non-taxable transactions

2.1 Basic system of the controllability of sales in Germany

In order to better understand the sales tax, it is necessary to understand the basic system. This is based on the controllability of sales. Taxable transactions are regulated in § 1 UStG. It describes three basic cases. On the one hand, taxable supply or other service, on the other hand, importation and intra-Community acquisition.

All these cases have one thing in common, namely the place in the country. So it can be said that the controllability of the turnover is linked to the location in the country.

Consequently, the opposite conclusion applies that transactions with a place of performance abroad are not taxable, at least as far as German tax law is concerned.

2.2 Examples of non-taxable sales in Germany:

Another common example is construction performance, also called work performance. In such a comparable case, it is a construction work by a German entrepreneur on land abroad. As a result, the location of the service is where the property is located.

Deliveries of items are always taxable in Germany, as it is either an immovable delivery or a moving one. In the case of a moving delivery, the place is where the delivery begins. In the case of an immovable delivery, on the other hand, where the power of disposal passes to the purchaser. So these two places are basically in Germany with a German entrepreneur.

3.Consequences and risks of non-taxable transactions

3.1 Consequences for VAT when the place of supply is relocated abroad (EU):

If the place of service is abroad, the turnover in Germany cannot be controlled. Therefore, Germany cannot impose VAT in such a case. However, this leads to controllability in the respective abroad. To return to the example from above, the provision of the other service in the Netherlands leads to a taxable turnover there. This does not mean a mandatory VAT registration in the Netherlands, but that you have to make a different invoicing. The EU VAT Directive obliges all EU Member States to apply the reverse charge procedure. This tax simplification consists in the reverse charge mechanism on the recipient of the services. The contributor must record this on his invoice and additionally name his VAT ID and that of the recipient. Thus, a tax registration can be avoided.

The same also applies to the construction services mentioned above.

3.2 Consequences for VAT on a place of performance abroad (third country)

For other services in a third country, it is necessary to check to what extent the foreign country applies a procedure similar to the reverse charge procedure or does not even record the services. In principle, however, in such cases a consultation with a tax consultant applies, since such services may lead to a sales tax registration abroad. Since such a registration for sales tax abroad is accompanied by further tax obligations and thus considerable administrative effort, such a step should be considered very well.

3.3 Deduction of VAT

The VAT deduction shall be refused if the input turnover is used for a duty-free turnover. After all, foreign sales are not tax-free but non-taxable transactions. Therefore, in the case of foreign sales, the deduction of input tax is excluded only if that domestic turnover would have been tax-free. If this would not have been the case, the deduction shall not be refused and shall be applied as usual.

3.4 Sales tax: risks in a place of performance abroad

For entrepreneurs who are not tax-savvy, there is a risk of a tax liability mechanism according to § 14c UStG. This is about an incorrect, because inadmissible calculated VAT on invoices. Especially in cases where entrepreneurs provide other services to a place abroad, it often happens that they withhold an invoiced sales tax, which is not owed according to the law. Because even on such incorrectly collected sales taxes, the state has a legal right according to § 14c UStG (at least the BRD).

Thus, this would be a tax trap for entrepreneurs who are not aware of it and charge tax even though they are non-taxable transactions. Therefore, it is important for every entrepreneur in Germany to consult his tax advisor on such transactions.

4th place of performance and VAT abroad – Conclusion

In conclusion, there are some risks and special regulations that have to be observed for sales tax purposes. Even in the case of small matters, tax legal consequences can change and lead to other reporting obligations. A bill can therefore also prove wrong, although you were sure as an entrepreneur to always do everything right. Therefore, it can be said: Better consult a consultant once too much than once too little!