Working with international clients can be tricky, depending on where exactly they’re located, whether there’s a tax treaty in place, and what sort of foreign exchange and transfer options you have as a freelancer. Not to mention difficult time zones!
Things are much easier if your international clients are still based within the EU. Firstly, your currency remains the same, international payments are easy for your clients, you’re likely to be on the same or a similar time zone, and lastly, you can take advantage of the reverse charge system (“Reverse Charge Verfahren”).
The reverse charge procedure helps to simplify purchases and sales with VAT within the EU, by regulating the transfer of sales tax between sellers and customers who are based in different EU countries. This article explains all you need to know about reverse charge.
When is the reverse charge procedure applied?
The purpose of the reverse charge rule is to simplify free trade within the EU, and it’s been in place for almost 20 years.
As a freelancer in Germany, you are permitted to service a client in another EU country. If that EU country is also subject to VAT, the reverse charge rule applies. It stipulates that it’s the buyer – your client – who is obliged to pay VAT on the goods or services received, and not you. Therefore, you don’t need to charge VAT on your invoices to those clients.
The reverse charge rule, however, does not apply when your customer is a private person. A private person pays VAT on the sale of goods or services that you provide. It also doesn’t apply if you’re a Kleinunternehmer, since the sale of your goods or services is not subject to VAT at all.
Consider these examples of how reverse charge works in practice:
- Let’s say that you, a self-employed individual in Germany, teach a training course for a French company. You do not charge sales tax on the invoice that you issue to your French client. You state the reverse charge procedure as the reason that VAT is not shown. Your French client will then report, pay, and deduct VAT on your services in their country as part of their VAT reporting procedure.
- You buy a monitor for your computer from a company in Poland, which is delivered to you in Germany. You pay the sales tax for it, but you can claim it back as an expense in your VAT return – if it is considered a business expense.
What must be included in an invoice for reverse charge to be applicable?
In order to send a legally compliant invoice as a freelancer in Germany, your invoices must include specific information about you, your client, and the service or product you delivered.
In order to effectively apply the reverse charge rule, your invoice must include your VAT ID number, as well as a clear statement referring to the reverse charge procedure somewhere on the invoice. This ensures that your customer can declare and reclaim the VAT when they complete their own reports. The clearest way to do this in German is by adding the statement “Steuerschuldnerschaft des Leistungsempfängers”. In English, you could simply state “Reverse charge”.
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Make sure to check incoming invoices that you pay as part of your business expenses, too. Any invoices you receive for goods or services you pay for should also include specific information, especially if the reverse charge rule is applied.
Do I have to include reverse charge invoices in my advance VAT return?
Short answer: Yes! You should include all of your freelance income in your advance VAT return (“Umsatzsteuervoranmeldung”), and that includes any sales or expenses that fall under the reverse charge procedure.
Invoices where the reverse charge rule was applied fall under point 3 of the advance VAT return, tax-free deliveries of sales and other services (“Lieferungen und sonstige Leistungen [steuerfreie Umsätze]”). This won’t affect the amount of VAT that you pay, but it can be used by the tax authorities to ensure your client actually pays the VAT due in their own country.
You must also include these transactions when you submit the summary report (“Zusammenfassende Meldung”). In this report, you’ll list all sales made to EU countries, in individual items, broken down by client. You also need the respective VAT IDs for your clients for this, which you can request when you first ask for their address and other details.
Does reverse charge also apply to customers in countries outside of the EU?
In general, if your customer is not in the European Union, no VAT is charged or paid. However, there are some countries that have specific agreements with Germany that regulate the rules of sales tax in a similar way to the reverse charge procedure. You can read more about working with international clients outside of the EU in this article.
Charge ahead!
Go for it! As long as you’re paying taxes and observing VAT rules that apply to you as a freelancer in Germany, you can service or deliver goods to a client anywhere around the world. If you find that you’re still unsure about how the reverse charge rule applies to you, or how to ensure you’re invoicing or reporting VAT correctly, our team is happy to help you. We work closely with experienced tax consultants and can advise you or assist you in finding a certified tax consultant.
