Do I need to pay VAT when working as a freelancer in Germany and invoice my agency that sits in another EU-country?
Working internationally as a self-employed consultant
The working world and of course consulting projects, too, are happening on an international level nowadays. The final customer has its office in Austria, the recruiting agency brokering the service transaction comes from Germany and the freelancer from the Netherlands. Normal business today.
That raises questions about what to consider as provider and recipient of consulting services. There are especially two subjects you should have heard of.
What about value-added tax? Must be complicated, right? But already since the 1990s, the European Union created the reverse charge system which regulates the responsibility for remitting VAT. The motivation for this was to simplify the topic of VAT among the member states in the course of creating the European internal market.
In principle, the reverse charge system shifts the responsibility for the VAT from the seller to the buyer of goods or services. So it also relates to the consulting service a freelancer / interim manager provides at a foreign company.
How does that work in practice?
The freelancer is registered in the Netherlands, the end customer in Austria, and the recruiting agency sits in Germany. The freelancer gets paid by the agency on an hourly basis and sends the German company an invoice for those gross for the net, no VAT as intended by the Reverse Charge system. He or she simply puts a reference to the system on the invoice: VAT free – Reverse Charge. The Austrian customer then receives a VAT-free invoice from the German agency. The invoice recipient pays VAT and afterward deducts the tax as input tax. No disadvantage involved.
So you don’t have to register for tax in a country you want to work for. For delivering services in another EU state the application of reverse charge is even mandatory since 2010.
Marking reverse charge on invoices - example and sample
If you, as an entrepreneur, provide a service that falls under the reverse charge procedure, do not forget to mark this accordingly on the invoice - this obligation is expressly stated in Section 14a (5) of the UStG. A hint is sufficient, as in the following example or sample:
Tax liability of the beneficiary
However, it does not have to be exactly the same as in this example; other formulations are also permitted. In the case of non-German-speaking service recipients, it is advisable to refer to the reverse charge procedure in English, as the following example shows: “VAT due to the recipient” or “Recipient is liable for VAT”. You can also make a note of the note in the respective national language. In this table you can find some examples of the term in other languages:
|Country||Hint on invoice|
|Frankreich, Belgien, Luxemburg||Autoliquidation|
|Großbritannien, Irland||Reverse Charge|
|Lettland||nodokļa apgrieztā maksāšana|
|Slowakei||prenesenie daňovej povinnosti|
|Spanien||inversión del sujeto pasivo|
|Tschechien||daň odvede zákazník|
What are the risks of the reverse charge procedure?
In all transactions, it is very important to determine in advance whether there is a possible reverse charge situation. Because mistakes lurk financial risks:
|No sales tax is shown in the invoice because a reverse charge transaction was mistakenly assumed.||The freelancer owes the sales tax even though he did not receive it from his customer.|
|Sales tax is shown in the invoice, although a reverse charge situation exists.||The recipient of the service cannot deduct the sales tax paid as input tax, although it has been paid.|
The three most common mistakes made with reverse charge invoices
The following three errors are typical of reverse charge invoices:
- Sales tax is shown on the invoice
- There is no reference to the reversal of tax liability
- The sales tax identification numbers are missing
Three points to remember: Reverse Charge is that easy
Don't be afraid of the complicated tax law! In principle, everything is very simple. Just make a note of the following three points. Then you can't really go wrong:
- Check-in your business whether there is a case of § 13b Abs. 2 UStG.
- If so, as the customer, you owe the tax office the sales tax, but you can also deduct it as input tax.
- As the supplier, you write out a net invoice without sales tax.
- Don't forget the Reverse Charge note on your bills!
Please note that this article is for information purposes only*