The frequency with which entrepreneurs must submit their advance VAT returns is generally determined by the amount of VAT owed for the previous year. Until now, the procedure for determining this was unfavorable for founders. Now, for the time being, the advance VAT return no longer has to be submitted monthly, which is a great relief for founders. We provide detailed information.
Up to now: obligation to pay monthly tax for new entrepreneurs
Until now, the line of the tax authorities has been unfavorable for new entrepreneurs. Pursuant to Section 18 (2) Sentence 4 of the German VAT Act, entrepreneurs who take up a professional or commercial activity are obliged to submit advance VAT returns on a monthly basis. This was the case even though a monthly submission obligation is generally only provided for in the event of an annual VAT surplus (= payment obligation to the tax authorities) of more than 7,500 euros. For this reason, entrepreneurs first had to prove that they were not obligated to pay monthly VAT by submitting monthly advance VAT returns in the year of foundation and, if applicable, in the following year.
Because this obligation often entails high time and monetary expenses for founders, the tax authorities have now reacted (provisionally):
For now, no more monthly advance VAT returns – anticipated ratios replace the flat-rate solution
Now there is a decisive change for founders. The basis for the innovation is the “Third Bureaucracy Relief Act” and a change in § 18 para. 2 UStG. A new sentence 6 has been added, which will initially apply to the taxation periods from 2021 to 2026.
This eliminates the flat-rate monthly obligation to submit an estimate of the VAT burden.
What is the relevant period for founders?
Because the general principles are also applied to start-ups as a result of the change in the law, the advance VAT returns must initially be submitted on a quarterly basis.
After the end of the first (pro rata) taxation period, the relevant advance VAT return period must be determined again. Two cases are distinguished here:
- The beginning of the activity was already proportionately in the previous calendar year, i.e. in 2020:
For the determination of the advance return period from 2021, the VAT actually due in 2020 must be extrapolated to the full year.
- The activity started during the year ( for now 2021 to 2026): The anticipated VAT payment burden for the entire calendar year is to be estimated.
The previous limits will then continue to apply to the values determined:
Please note that, for reasons of simplification, the presentation only contains the basic cases. If you have any questions, please consult your tax advisor.
To whom does the new regulation apply?
In addition to normal company formations, new formations also include the establishment of business splits, business disposals, the dissolution of VAT fiscal unities and certain cases of conversion in the event of a change of legal form.
Are you wondering whether your case involves incorporation within the meaning of the aforementioned regulations? Please feel free to contact us.
What must founders do and consider now?
If you have already established your commercial or professional activity in the course of 2020, you were previously obliged to submit advance VAT returns on a monthly basis. At the beginning of 2021, it is therefore essential that you make an extrapolation of your VAT payment burden for 2020 and compare it with the above limits. If this results in a filing period other than the calendar month, i.e. the calendar quarter, or even no obligation to file advance VAT returns (= annual VAT return), file a corresponding application with your competent tax office.
The same applies to start-ups from 2021 onwards. Ideally, you should already calculate the expected VAT payment burden for the current calendar year when planning your start-up so that you can submit a corresponding application to the relevant tax office as soon as you commence your professional or commercial activities.
For this purpose, you are welcome to contact your tax advisor when he or she prepares your advance VAT returns.
Our assessment of “No longer submitting advance VAT returns on a monthly basis for now”
We consider the new regulation to be a correct and practice-oriented step. Founders are already burdened with an enormous amount of time and bureaucracy in the initial phase, which is reduced by the new regulation – it thus makes it easier for entrepreneurs to start their own business. Whether the new regulation will be valid beyond 2026 is currently uncertain. It is to be hoped that the tax authorities will maintain their practice-oriented approach.
You have founded a company and now have questions on this topic? Then please do not hesitate to contact us!