Claiming Input VAT in Germany: The Complete Guide to Deductible Expenses

Reading time: 12 minutes

Introduction to German VAT System
Understanding Input VAT Basics
Fully Deductible Business Expenses
Partially Deductible Expenses
Non-Deductible Expenses to Avoid
The Claiming Process: Step-by-Step
Documentation Requirements
Common Challenges and Solutions
Conclusion
Frequently Asked Questions

Introduction to German VAT System

Ever found yourself staring at German tax forms, wondering which expenses qualify for input VAT deduction? You’re not alone. The German VAT system—Umsatzsteuer or Mehrwertsteuer as locals call it—is notoriously complex, yet mastering it can significantly impact your business’s financial health.

The German VAT landscape operates with three primary rates: the standard 19% rate applying to most goods and services, the reduced 7% rate for essentials like food and books, and the 0% rate for specific exempt categories. While this might seem straightforward at first glance, the devil—as with most tax matters—lies in the details.

Here’s the straight talk: Input VAT reclamation isn’t just an administrative task—it’s a strategic financial opportunity. Companies operating in Germany leave millions of euros unclaimed each year simply because they don’t fully understand what’s deductible. According to a 2022 study by the German Chamber of Commerce, businesses recover only about 78% of eligible VAT on average—meaning 22% of legitimate deductions remain unclaimed.

Understanding Input VAT Basics

Before diving into specific deductions, let’s clarify what input VAT actually is. Input VAT (Vorsteuer) refers to the VAT you pay on goods and services purchased for your business. The fundamental principle is simple: businesses act as tax collectors, charging output VAT on sales and paying input VAT on purchases, then settling the difference with tax authorities.

To qualify for input VAT deduction, an expense must meet three essential criteria:

The expense must be directly related to your business activities
The expense must be properly documented with a valid VAT invoice
The business activity must be subject to VAT (meaning your outputs are taxable)

Quick Scenario: Imagine you run a small marketing consultancy in Berlin. You purchase a new laptop (€1,200 + €228 VAT), office supplies (€500 + €95 VAT), and take a client to lunch (€100 + €19 VAT). Which of these expenses qualify for full VAT reclamation? Let’s examine each through the lens of German tax regulations.

The Pre-Tax Deduction Principle

At its core, German VAT law follows the “pre-tax deduction principle” (Vorsteuerabzugsprinzip), allowing businesses to deduct input VAT to prevent cascade taxation. This principle ensures that VAT is ultimately borne by the end consumer, not businesses in the supply chain.

Dr. Klaus Müller, tax advisor at BDO Germany, puts it succinctly: “The input VAT deduction mechanism is the cornerstone of the entire VAT system. It prevents tax cascading and ensures neutrality for businesses. However, businesses must be vigilant about compliance with formal requirements to secure their deduction rights.“

Who Can Claim Input VAT?

Not all entities can claim input VAT. To qualify, you must be:

A registered business for VAT purposes in Germany
Conducting taxable business activities (those subject to VAT)
In possession of proper documentation for claimed expenses

Importantly, if your business conducts both taxable and exempt activities, you’ll need to apportion your input VAT claims accordingly—a process known as partial exemption.

Fully Deductible Business Expenses

Let’s dive into expenses where the input VAT is fully recoverable. These represent the straightforward claims that businesses should never miss.

Office-Related Expenses

The VAT paid on standard business operational costs is typically fully deductible:

Office supplies and equipment: Computers, printers, stationery, furniture
Digital services: Software subscriptions, cloud services, website hosting
Utilities: Electricity, water, internet, and phone services for business premises
Professional services: Legal fees, accounting services, consulting

Real-world example: A Hamburg-based graphic design studio purchased new design workstations, software licenses, and ergonomic furniture during their office renovation. All these expenses qualified for full input VAT recovery, resulting in a €4,200 reclaimed amount that significantly offset their renovation costs.

Business Travel and Transportation

Travel expenses often cause confusion, but many qualify for full VAT recovery:

Business travel accommodations: Hotel stays for business purposes
Vehicle expenses: Purchase/lease of business vehicles, maintenance, fuel
Public transportation: Train, taxi, and airplane tickets for business travel

However, be aware that personal use components of these expenses may trigger partial deductibility adjustments, which we’ll cover shortly.

Partially Deductible Expenses

This is where German VAT rules get particularly nuanced. Certain expenses are subject to specific limitations or percentage-based reductions.

Entertainment and Meals

Business meals and entertainment are classic examples of partially deductible expenses:

Business meals: Only 70% of the input VAT is deductible
Client entertainment: Similarly restricted to 70% deductibility

Practical tip: Always document business meals with attendee names, business purpose, and establishment details. This documentation is crucial during tax audits.

Mixed-Use Assets

For assets used for both business and private purposes, VAT deduction must be proportionally allocated:

Company cars: Input VAT deduction based on business use percentage (requiring a logbook)
Home office equipment: Deductible proportional to business usage
Mobile phones and electronic devices: Requires documentation of business vs. personal use

Case study: A Frankfurt consultant purchased a company car for €50,000 plus €9,500 VAT. Documentation showed the vehicle was used 80% for business purposes. The consultant was able to reclaim €7,600 (80% of €9,500) as input VAT, but needed to maintain detailed mileage logs to substantiate this claim during the subsequent tax audit.

Non-Deductible Expenses to Avoid

Despite being legitimate business expenses, certain categories are explicitly excluded from input VAT recovery under German tax law:

Representation gifts exceeding €35 per recipient annually
Luxury items not necessary for business operations
Expenses related to exempt supplies (banking, insurance, healthcare)
Fines and penalties
Certain accommodation and catering costs unrelated to business travel

As Sofia Richter, tax partner at KPMG Germany notes: “Many businesses mistakenly claim VAT on expenses that are statutorily blocked. This creates unnecessary audit risk and potential penalties. Understanding the explicit exclusions is as important as knowing what qualifies.“

Comparative Deductibility Matrix

Expense Category	Deductibility Rate	Documentation Required	Common Pitfalls
Office Supplies & Equipment	100%	Regular VAT invoice	Failure to segregate personal-use items
Business Meals & Entertainment	70%	Invoice with business purpose & attendees	Missing documentation of business context
Company Vehicles	Proportional to business use	Logbook, business use documentation	Inadequate tracking of private vs. business mileage
Client Gifts	100% if under €35 per person annually, 0% above	Invoice, recipient records	Exceeding the €35 threshold without tracking
Exempt-Related Purchases	0%	N/A	Claiming VAT on inputs related to exempt outputs

The Claiming Process: Step-by-Step

Understanding which expenses qualify is only half the battle. The claiming process itself requires careful attention to procedural details.

VAT Return Filing Timeline

German VAT returns follow a regular schedule:

Monthly returns: Required when annual VAT liability exceeds €7,500
Quarterly returns: For businesses with lower VAT liabilities
Annual reconciliation return: Required for all businesses by May 31 of the following year

Input VAT claims must be made within the relevant filing period. Late claims can generally be included in subsequent returns within the same calendar year, but once the annual return is filed, amendments become more complex.

ELSTER Electronic Filing System

Since 2013, electronic filing via the ELSTER system has been mandatory. The process includes:

Registering for an ELSTER account (www.elster.de)
Compiling all eligible input VAT for the period
Completing the appropriate VAT return form (typically “Umsatzsteuervoranmeldung”)
Submitting electronically with appropriate authentication

Practical roadmap:

Establish a systematic expense categorization system
Implement real-time invoice verification procedures
Create a calendar for filing deadlines with appropriate reminders
Consider automating data extraction from invoices to minimize errors

Documentation Requirements

The German tax authorities are notoriously strict about documentation. To successfully claim input VAT, you need proper supporting evidence.

Valid VAT Invoice Requirements

A deductible VAT invoice must contain:

Full name and address of the supplier and recipient
Supplier’s tax identification number or VAT ID
Invoice date and sequential invoice number
Description of goods/services provided
Date of supply (if different from invoice date)
Net amount, VAT rate, and VAT amount separated
Any special VAT treatment notes (e.g., reverse charge)

Pro tip: For invoices under €250, simplified requirements apply—but these still must include the supplier’s name/address, date, description, gross amount, and applicable VAT rate.

Record Retention Periods

German law requires VAT-relevant records be kept for:

General invoices: 10 years
Real estate-related documents: 10 years
Supporting documentation: 6-10 years depending on type

Both paper and electronic storage are acceptable, provided certain requirements for authenticity and accessibility are met.

Common Challenges and Solutions

Even well-informed businesses encounter obstacles when claiming German input VAT. Let’s examine some frequent challenges and practical solutions.

Cross-Border Transactions

International business activities add complexity to VAT reclamation:

EU cross-border supplies: Often subject to reverse charge mechanism
Import VAT: Paid at customs but recoverable as input VAT
Foreign VAT recovery: Requires separate EU refund procedure or 13th Directive claims

Case study: A Munich-based software company regularly incurred VAT on business trips across the EU. Rather than using the complex cross-border refund procedure, they implemented a VAT credit card solution that automatically tracked foreign VAT and streamlined the recovery process, increasing their reclaim rate from 45% to 92% within one year.

Handling VAT Audits

German tax authorities conduct regular VAT audits, particularly for businesses with:

Recurring VAT refund positions
Significant fluctuations in reported turnover
Cross-industry comparative deviations

When facing an audit:

Ensure all documentation is readily accessible and organized
Be prepared to demonstrate business purpose for claimed expenses
Consider engaging a tax professional for audit support
Address preliminary findings promptly to minimize adjustments

Well, here’s the straight talk: Audits aren’t necessarily about finding fraud—they’re often about verifying compliance with technical requirements. Many negative audit findings stem from formal documentation issues rather than substantive violations.

Conclusion

Navigating the German input VAT system requires diligence, but the financial benefits make it worthwhile. The key takeaways for successful VAT reclamation include:

Understanding which expenses qualify for full, partial, or no deduction
Maintaining meticulous documentation that meets formal requirements
Implementing systems to track mixed-use assets accurately
Filing claims within designated timeframes
Being prepared for potential audits with organized records

Remember, input VAT reclamation isn’t just an administrative burden—it’s a legitimate cash flow opportunity. With German VAT rates at 19% for most business expenses, effective reclamation directly impacts your bottom line.

By establishing robust processes, staying informed about regulatory changes, and potentially leveraging specialized VAT recovery services, your business can maximize legitimate deductions while maintaining full compliance with German tax authorities.

Frequently Asked Questions

Can I claim input VAT if my business is not registered in Germany?

If you’re not registered for German VAT but incur VAT on business expenses in Germany, you can’t claim through the standard input VAT process. Instead, non-EU businesses must use the 13th Directive refund procedure, while EU businesses should use the electronic EU VAT refund procedure. Both have specific requirements and deadlines—typically requiring claims by June 30 of the year following the expense. These processes are more restrictive than domestic claims, with longer processing times typically ranging from 4-8 months.

What happens if I discover unclaimed input VAT from previous periods?

You can generally claim overlooked input VAT within the current calendar year by including it in your next regular VAT return. However, once the annual VAT return is filed, you’ll need to submit a formal amendment request. The absolute deadline for such corrections is typically 4 years from the end of the calendar year in which the VAT became deductible. For substantial amounts, consider consulting a tax advisor, as the correction process may trigger additional scrutiny and should be properly documented to explain the original oversight.

How does the input VAT treatment differ for leased versus purchased assets?

For purchased assets, the entire input VAT amount is deductible upfront (assuming 100% business use). With leased assets, you deduct the VAT on each lease payment as incurred. This creates different cash flow patterns: immediate larger deductions for purchases versus distributed smaller deductions for leases. Additionally, vehicle leases with service components may have restrictions on VAT recovery for the service portion. The decision between leasing and purchasing should consider not just VAT implications but also broader tax treatment, balance sheet impact, and business needs for asset flexibility.

Claiming input VAT in Germany: What expenses are deductible?