Home > freelancing > ‘Kleinunternehmerregelung’ in Germany: To apply or not to apply, that is the question!

‘Kleinunternehmerregelung’ in Germany: To apply or not to apply, that is the question!

In this post I’d like to discuss the Kleinunternehmerregelung in Germany and what implications this rule might have for a freelance translator and interpreter who is about to set up his own business in Germany, although things discussed here are valid for any freelancer-to-be. It is of importance latest when you get our first assignment and you wonder what to do with VAT when you write your first bill. Don’t be scared off by the dusty touch of the topic! Bureaucracy as well as economic aspects are an integral part of the freelancing world – and therefore they might haunt us even when we feel safe reading blogs about interpreting.

The Kleinunternehmerregelung (a typical long, bureaucratic German word, isn’t it?) is an amendment to German tax law. It basically states that freelance entrepreneurs have the option of not taxing their customers. Therefore, they can declare everything on the respective bills as net sums without adding any tax. In other words, the freelance income reamains free from VAT tax. Entrepreneurs can apply this option if they fulfill both the following two requirements:

– maximum turnover generated last year: €17.500
– maximum turnover expected for the current year: €50.000

Newbie freelancers are very unlikely to generate more than that in their first year(s) of work. In other words, they are very likely to fulfill both conditions. Therefore, they can opt for not taxing their services (=applying the Kleinunternehmerregelung) once they have had an assignment and write a bill. Hence, they don’t have to declare the tax on the bill and pass on any VAT to the financial authorities, given that both conditions are not breached, of course.

Reason for opting not to tax: This Kleinunternehmerregelung is feasible in my view, if you run a business that sells material goods to an end user. This excludes the freelance translator or interpreter who generates his turnover exclusively through language services. Applying the rule might also make your everyday freelance life a little easier and less complex concerning bureaucracy etc., as the processes of taxing your customer and declaring VAT to the government are eliminated.

Reason for opting to tax : At first sight, opting for taxing your customers from the very start means more bureaucratic work for you: You need to submit your taxes every month for two years as a starting freelancer in Germany (although that might change). It involves some bureaucratic adventures, such as registering as a freelancer with the authorities, applying for a special tax number (Umsatzsteuer-ID), the actual monthly, web-based declaration of VAT etc. However, if your ultimate goal is to become a freelancer you better get used these bureaucratic necessities as early as possible. It always sounds nice not to charge, pay, declare taxes, etc. but why go the easy way?

The most important reason to actually tax your services has a major benefit for you: If you refuse from applying Kleinunternehmerregelung, you are entitled to recieve a VAT tax refund on items you acquire for your own business. An example: you are a translator and you need to buy software or dictionaries. Previously you declared to tax your services. Hence, you will be refunded the VAT paid on your purchases. Sounds quite simple doesen’t it? This sort of VAT tax that you pay in advance for items necessary for your business is called Vorsteuer. When you submit your tax declaration every month, the amount of VAT you are liable for is substituted by the amount of VAT that you will be refunded (Vorsteuerabzug). 

It’s very important to bear in mind that you are only entitled to a VAT refund on bought items if you don’t apply the Kleinunternehmerregelung. Applying it excludes you from any sort of VAT refund. Also have in mind that the VAT your recieve on top of your services is a tax which you hand over to the government, but which is actually “paid” by the customer with you acting as a mediator. Hence, it’s not you who pays this tax. Therefore, a possible VAT refund sounds quite delightful somehow, doesn’t it?

Now, it’s not possible to switch between opting for or against this rule with every bill that you write. Once you decided to refuse, you are bound to your decision for five years. If you apply the rule and your turnover exceeds the previously mentioned maximum turnover, then you automatically have to pay VAT and fill some Federal German cauldrons, which might hurt (literally) if you, for example, generated much more turnover than you expected due to the fact that you had a major breakthrough on the market.

Now what to do? Obviously it’s your own choice! Read up on the subject and make up your own mind once you decided to set up your freelance business! If you have a lot of investment then it might be feasible not to apply the rule, just for the sake of saving VAT. However, applying the rule may make your entrepreneur’s life a little easier concerning bureaucracy – for a little while at least.

For additional information:

Information from the German Ministry for Economics [in German]

Categories: freelancing Tags: , ,
  1. 21/02/2012 at 14:35

    Thank you for this summary!
    I attended a seminar on freelancing some weeks ago, and the coach suggested not to apply for the KURg. Of course, simply judging from the amount earned in first few years it would absolutely make sense to make use of it – and I would maybe do so if I were German citizen.
    But in the beginning of ones freelancing career one has to spend so much on equipment, dictionaries and whatsoever, and VAT is at an incredible 19% in Germany (compare this to 8% in Switzerland!), summa summarum it will be nice to get a fifth of ones expenses reimbursed.
    Afaik there are different regulations as to in which interval one has to delicer the VAT to the Finanzamt. If your turnover is below a certain amount you don’t have to deliver it on a monthly basis, but unfortunatel I forgot about the details… 😉

    • 21/02/2012 at 18:07

      I absolutely agree with you. That’s precisely why I opted against applying the rule!

  1. 26/02/2012 at 21:13

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