Input Tax Credit: Requirements, Invoices, and Small Amounts

How does the input tax credit work?

You make sales and charge VAT. You make purchases and pay VAT to other businesses. The tax on your purchases is called input tax. You only report the difference—the tax liability—to the tax office: VAT from your sales minus input tax from your purchases.

What are the requirements for claiming a tax credit?

The law makes the deduction subject to four conditions, all of which must be met simultaneously (Section 15(1), first sentence, No. 1 of the German Value-Added Tax Act (UStG)). Payment of the invoice is not one of these conditions; it is relevant only in the case of advance payments.

What information must the invoice include for input tax deduction?

"Proper" means that the invoice contains the mandatory information specified in Section 14(4) of the German Value-Added Tax Act (UStG). These include the name and address of both parties, the tax number or VAT ID number of the service provider, the date, the invoice number, a description of the service, the date of service, the amount charged, as well as the tax rate and the tax amount. The complete list can be found in the article on the mandatory information required on an invoice.

How does the input tax credit work for small-amount invoices up to €250?

Invoices whose total amount does not exceed €250 require fewer details (Section 33 UStDV): the name and address of the service provider, the date of issuance, the quantity and type of service, as well as the total amount due and the tax amount, including the tax rate. The recipient’s name, tax ID number, invoice number, and date of service do not need to be included.

The limit applies to the total amount, i.e., the gross amount. The invoice lists only this total. You must separate the consideration and the tax yourself, and this is a prerequisite for the deduction: At 19%, the input tax is gross amount × 19 ÷ 119. This simplification does not apply to distance sales to non-business customers (Section 3c of the German Value-Added Tax Act [UStG]), intra-Community supplies (Section 6a UStG), or services under Section 13b UStG (Section 33 of the German Value-Added Tax Implementation Regulation [UStDV]).

A small-amount invoice may always be issued as a simple invoice, either on paper or as a file. A structured electronic invoice is never required for this purpose.

How does the input tax deduction work for mixed-use items?

An item that you use for business purposes less than 10% of the time is not considered to have been used for business purposes: In that case, there is no input tax deduction (Section 15(1), second sentence, of the German Value-Added Tax Act (UStG)).

If business use is 10% or more, you have a choice. If you allocate the item entirely to your business, you can deduct the full amount of input tax. The personal use is then treated as a service provided for consideration and is subject to tax (Section 3(9a)(1) of the German Value-Added Tax Act (UStG)). If you allocate only the portion used for business purposes, you may deduct only that portion, and the personal use remains untaxed.

Private use is taxed based on the expenses, to the extent that they qualified for an input tax credit. Expenses without input tax are not included. For a laptop, this means: full input tax credit on the purchase, but VAT on the portion attributable to private use.

This option does not apply to real estate. In such cases, input tax is limited to the portion used for business purposes from the outset.

When is the input tax deduction not allowed?

The deduction does not apply in the following cases:

Small business owners do not deduct input tax. Their sales are tax-exempt under Section 19 of the German Value-Added Tax Act (UStG), and Section 15(2), first sentence, No. 1 of the UStG excludes the deduction for services that support tax-exempt sales. This also applies to input tax related to sales made abroad, even if those sales are subject to tax there. A tax statement does not change this: If a small business owner nevertheless charges VAT, they owe it and are still not entitled to a deduction. On a small-amount invoice, simply stating a tax rate such as “19%”—even without specifying an amount—is sufficient for this purpose.

The same applies to other business owners to the extent that they use services they have purchased for tax-exempt transactions. Examples include the rental of residential property (Section 4 No. 12 of the German Value-Added Tax Act (UStG)) and medical treatments provided by a physician, alternative practitioner, or physical therapist (Section 4 No. 14(a) of the German Value-Added Tax Act (UStG)). If you use a service for both purposes, the input tax is apportioned (Section 15(4) of the German Value-Added Tax Act (UStG)).

Finally, the law does not allow deductions for certain expenses that are not deductible for income tax purposes (Section 15(1a) of the Value-Added Tax Act). There are five categories. Income tax law reduces other costs, but the input tax remains intact.

If it is not yet clear at the time of purchase that an item will be a gift, you should initially deduct the input tax. If the threshold is exceeded at the time of delivery, you should then adjust the deduction.

When can you deduct the input tax?

The law specifies two conditions: The service has been performed, and you have received the invoice. Whether and when you paid is irrelevant. The rules are different for advance payments: If tax is due on a payment made before the service is rendered, it is deductible as soon as the invoice is received and the payment has been made (Section 15(1), sentence 1, no. 1 of the German Value-Added Tax Act (UStG)).

For services provided under Section 13b of the German Value-Added Tax Act (UStG), no tax is shown on the invoice. In such cases, the tax that you yourself owe under Section 13b is deductible (Section 15(1), first sentence, No. 4 of the UStG).

For a corrected invoice, it depends on what was already included in the original invoice. If it contained the five required details, the correction is retroactive to the date the invoice was first issued. You can then deduct the input tax at the time the service was received and do not have to wait for the correction.

The information does not have to be error-free. It just cannot be so vague, incomplete, or obviously incorrect that it is treated as missing information. If these conditions are met, the correction always takes effect retroactively, whether it works in your favor or to your disadvantage.

If any of the five key pieces of information are missing, you are not entitled to the deduction until the issuer has corrected the invoice and provided you with the missing information.