Planned VAT changes in Germany – mandatory e-invoicing

The German Federal Ministry of Finance (Bundesministerium der Finanzen – BMF) has published a draft of several changes in German tax law with the Act to Strengthen Growth Opportunities, Investment and Innovation, Tax Simplification and Tax Fairness (Growth Opportunities Act). Among other things, the draft bill provides for numerous changes under VAT law. This article provides an overview.

Mandatory e-invoicing

The key amendment to German VAT law is the introduction of mandatory electronic invoicing for supplies of goods and services between taxable persons (B2B). According to the current draft, electronic invoicing will be mandatory from 2025 for B2B supplies in Germany.

The e-invoicing obligation is not really surprising, as the European Commission’s “VAT in the Digital Age” (ViDA) draft published in December 2022 already contains such an obligation. The BMF also published a related discussion draft in April 2023 with regard to the intended introduction of an electronic reporting system. This does not make the e-invoicing obligation any less explosive, however, because it requires – in the relatively short term – major changes in the invoicing processes of the affected enterprises. This will pose considerable challenges for small and medium-sized enterprises in particular.

It is not just a matter of discontinuing invoices on paper and issuing them only in electronic form in future. Rather, invoices must be transmitted in certain data formats, which should enable the tax authorities to carry out quick checks and prevent VAT fraud/losses.

As envisaged in the discussion draft, the draft of the Growth Opportunities Act removes the priority of paper invoices and sets a new definition of an electronic invoice. According to this, an e-invoice is an invoice with a structured electronic format that enables electronic processing. It must meet European legal requirements to which the legislative draft now explicitly refers.

All other invoices are referred to under the generic term of “other invoices”. This includes all invoices that do not meet the requirements for electronic invoices, i.e. not only paper invoices but also invoices in electronic formats (e.g. PDF) that deviate from the requirements for e-invoices.

Relief through transitional regulations and exceptions

Industry associations that were consulted on the discussion draft criticised the short transition period. The new rule is set to apply from 1 January 2025, which leaves businesses only about one year to ensure compliance with it.

In response to this criticism, the new legislative draft now proposes two transitional arrangements: until the end of 2025, enterprises can continue to issue invoices on paper and, subject to the consent of the recipient, also in an (other) electronic form.

During an extended transition period from 2026 until the end of 2027, enterprises must issue invoices in an electronic format, transmitting them via an EDI channel. However, with the consent of the invoice recipient, they can still choose a format that does not yet meet the requirements for the e-invoice.

Finally, the new draft of the German VAT Implementing Regulation proposes an exception for small-value invoices and transportation tickets which, in our view, is necessary. Here, the issuing of invoices of any kind remains permissible. This will prevent everyday transactions from being made disproportionately difficult by inconvenient digital processes.

It is nevertheless unfortunate that there is no EU-wide coordinated procedure and system. The result is that internationally active businesses face dealing with numerous different specifications and cannot establish a uniform standard.

Clarifications on tax relief for non-profit organisations

The legislative draft clarifies that the analysis of the competitive relevance for the reduced VAT rate (7%) in the case of goods and services provided by a special-purpose entity of a non-profit organisation is only to be carried out if it is a special-purpose entity within the meaning of sections 66 to 68 of the German General Tax Code.

In accordance with Federal Fiscal Court (Bundesfinanzhof) case law, the draft also clarifies that the organisations themselves achieve the tax-privileged statutory purposes with their special-purpose operations if the recipients of the supplies or persons involved in the supplies of goods or services are covered by the tax-privileged purpose of the organisation.

Further amendments to the German VAT Act as of 1 January 2024

In addition to some editorial changes, the following amendments to the VAT Act are notable:

1. Under certain conditions, a tax exemption is provided for institutions that are appointed as guardians of proceedings.
2. For agriculture and forestry, in addition to adjustments to the tax exemption, the legislative draft also proposes changes to the flat-rate compensation percentages.
3. The reverse charge procedure will apply to transactions with emission, gas and electricity certificates if the traders involved are in agreement that VAT is payable by the taxable person who acquires the certificate, even if the conditions for the reverse charge are not objectively met.
4. The threshold amount for cash accounting will be increased to a total turnover of 800,000 euros.

Finally, a number of changes are planned that will primarily affect smaller businesses. For example, the exemption limit for the obligation to file (quarterly) advance returns will be increased to 2,000 euros in the previous year. Small enterprises will also be exempted from the obligation to file returns. The deadline for waiving the small enterprise regulation is also extended: It can be declared until the end of the second calendar year following the tax period.

Conclusion

Businesses will now need to check which of the legislative changes may affect them. Almost all taxable persons are likely to be affected by the mandatory e-invoicing. Since the application of the extended transitional period until the end of 2027 depends on the consent of the invoice recipient, businesses that cannot switch over their invoicing in time should endeavour to obtain this consent when concluding the contract.

Apart from this, enterprises should initiate the transition to electronic invoicing as soon as possible in accordance with the European requirements. A reform is also on the horizon at the European level with the ViDA initiative. Enterprises can therefore safely assume that electronic invoicing – and consequently an electronic reporting system – will become the standard in the European business world.