The 2024 Annual Tax Act - Many details and the reform of small enterprise taxation
The 2024 Annual Tax Act (Jahressteuergesetz 2024, JStG 2024) was approved by the Bundesrat [upper house of parliament] on 22.11.2024, therefore it will come into force as planned. The changes include, among others, the harmonisation of the tax-exempt threshold for all types of buildings for small photovoltaic systems to a maximum permissible gross output of 30 kW (peak) per residential or commercial unit. In addition, the VAT exemption for educational services has been extended. Moreover, important new VAT rules for small enterprises were adopted and these are outlined below.
Small enterprise VAT exemption
In future, businesses resident in the EU will be able to claim the small enterprise exemption for the turnover that they generate elsewhere in the European Union. The background to this is that, under EU Directive 2020/285 of 18.2.2020, a comprehensive reform of the small enterprise exemption had to be implemented in German tax law by 1.1.2025. In order to enhance the competitive conditions for small enterprises and to prevent further distortions of competition the intention is that small enterprises that are resident in Member States other than the one where the VAT is due should likewise be allowed to claim the tax exemption.
Definition of residency
Under the aforementioned Directive, moreover, a uniform EU-wide understanding of the concept of residency for VAT purposes needed to be developed. Accordingly, a business is resident at the main office for its economic activities. This would be the place where the functions of its central administration are exercised. In cases of doubt, the place where the decisions are made would be the primary criterion. A postal address on its own would not make it possible to draw an inference about the main office for the economic activities and thus about the residency for VAT purposes.
New turnover thresholds
Under the new rules in the JStG 2024, transactions effected in Germany would be exempt from VAT if the overall turnover of the business that is resident in Germany had not exceeded €25,000 in the previous year and does not exceed €100,000 in the current calendar year. The new rules constitute a change in the system of taxation from the previous one of ‘not levying VAT’ to one where turnover is exempted from tax. In the future, small enterprises will be treated as businesses with output transactions that are ineligible for the deduction of input VAT.
Small German enterprises
From 2025, if a business that is resident in Germany wishes to claim the tax exemption for small enterprises for goods supplied or services performed elsewhere in the European Union then it will have to participate in a special reporting procedure for small enterprises. This reporting procedure will allow Member States to exchange turnover data on the goods supplied or services performed in the European Union; as a result, it will be possible to monitor, in particular, that the respective turnover thresholds of the individual Member States and the EU threshold are being complied with. In order to participate in the reporting procedure businesses will have to apply online at the Federal Central Tax Office (Bundeszentralamt für Steuern, BZSt) and the business may not be registered in any other Member State to use the small enterprise exemption. The application would notably have to specify the Member States where the exemption is intended to be claimed. Furthermore, all the turnover from the previous year and the current year up to the date of the application would have to be separately declared for each individual Member State. The BZSt will issue a new small enterprise identification number with the suffix ‘EX’ for exemptions elsewhere in the European Union.
Small enterprises in other EU Member States
The German tax exemption will accordingly apply to businesses resident elsewhere in the European Union if, firstly, the EU threshold of €100,000 was not breached in the previous year and will not be breached in the current year and, secondly, if the Member State in which the enterprise is resident has issued it with a valid small enterprise identification number. The enterprise also has to comply with the German turnover threshold of €25,000 in the previous year and €100,000 for the current year. In the case of start-ups, the EU rules and the German rules on the previous year’s turnover are still contradictory. It is anticipated that the fiscal administration will still take a position on this.
Simplified invoice
Furthermore, the JStG 2024 provides for a simplified invoice for a small enterprise. The recently defined minimum information requirements include a reference to the VAT exemption. The delivery/performance date and an invoice number are non-essential. Small enterprises will still be free to issue a ‘complete’ invoice.
