How to Make the Choice Between “Kleinunternehmer” or “Unternehmer”

Those of you who want to run your own business in Germany might have already heard the term “Kleinunternehmerregelung” (small business entrepreneur ruling). But what exactly does it mean and what are the advantages or disadvantages vs. choosing to be a normal “Unternehmer”?

In this blog post, Christian Schmidt (Founder, Tax Advisor, and Lawyer at Rechts- und Steuerberatung Schmidt in Düsseldorf) is addressing all self-employed expats in order to help them make a decision as to whether they fall under the “Kleinunternehmer” or “Unternehmer” category for tax purposes.

A few of Christian’s other posts may also be of interest to you:

• Understanding Fixed Assets and How to Claim Them in Germany
• When Can You Claim Child Expenses in Your Income Tax Return?
• What Expenses You Can Deduct as an Employee in Germany
• Do You Have to File a Tax Return While Living in Germany?

What exactly is the meaning of „Kleinunternehmerregelung“

According to Art. 19 German VAT law the “Kleinunternehmerregelung” is a simplification rule for self-employed workers having low turnover.

The following requirements have to be fulfilled to be a „Kleinunternehmer“:

• Turnover in the preceding year was not exceeding an amount of 17.500 €
• Turnover in the actual year will not exceed an amount of 50.000 €

The total turnover limit of 17.500 € always relates to an entire calendar year. In case you start your business during the year, the expected turnover has to be extrapolated to 12 months i.e. when you start your business in April, the maximum turnover for this year should not exceed 13.125 €.

Calculation: 17.500 € : 12 months x 9 months = 13.125 €

Estimation of Turnover Limit

With regard to the turnover limit of 50.000 €, the estimation at the beginning of the year is important. If the forecast is less than 50.000 €, the “Kleinunternehmerregelung” is applicable for the current year, although the actual turnover might differ at the end of the year. 

Example:

A graphic designer started a business in October 2014. He estimates a monthly turnover of 1.200 €. His turnover for the entire year is 14.400 €. With this being said, as his turnover does not exceed 17.500 €, the “Kleinunternehmerregelung” is still applicable.

In 2015, the second year of his self-employment, his turnover was 16.000 €. The “Kleinunternehmerregelung” is applicable for this year as well.

In 2016, at the beginning of the year, the graphic designer estimated a possible turnover for the current year of 30.000 €. At the end of the year, he realized that his total turnover in 2016 was 35.000 €. This amount is still less than 50.000 € so, for 2016 the “Kleinunternehmerregelung” is applicable.

But: Even if the turnover would have exceeded the total turnover of 50.000 €, the “Kleinunternehmerregelung” would still have been applicable. Only in the case, that he had known at the beginning of the year that his total turnover would exceed the limit of 50.000 €, would the “Kleintunternehmerregelung” not have been applicable. In that case, he would be subject to VAT for 2016.

And what about 2017? This year the graphic designer is subject to VAT so he has to show VAT on his invoices and pay VAT to the tax authorities on a monthly basis.  

Tax obligations for a „Kleinunternehmer“

• A „Kleinunternehmer“ has to register their business with the tax authorities by completing a tax questionnaire.
• A “Kleinunternehmer” running a trade and business also needs to register their trade at the trade office.
• A „Kleinunternehmer“ has to report their earnings and expenses to the tax authorities once a year.
• A „Kleinunternehmer“ has to submit an income tax return, a cash method of accounting, a VAT tax return, and a trade tax return (when they have a trade and business). 

The submission of a yearly VAT return is mandatory although “Kleinunternehmer” is not paying VAT. The tax authorities check by means of the VAT tax return whether the requirements for being a „Kleinunternehmer“ are fulfilled.

Invoicing

„Kleinunternehmer“ are not allowed to show VAT on their invoices but they also have to keep the requirements for legally correct invoices.  In addition, they have to add a sentence about why they are not subject to VAT. In the German language, the following sentence can be added: „Umsatzsteuerfrei aufgrund der Kleinunternehmerregelung gem. § 19 UStG.“ In the English language: “No VAT according to the small business entrepreneur ruling according to Art. 19 German VAT law.”

Advantages for “Kleinunternehmer”

• No obligation to submit monthly VAT tax returns
• Simplification of accounting by submitting only a yearly tax return (no double-entry accounting and no balance sheet required)
• For private clients, services can be offered at a more favorable price as the clients do not have to pay VAT

Disadvantages for “Kleinunternehmer”

• It is not possible to deduct input VAT on your own expenses. This is especially unfavorable when you have a large number of expenses.  

Can I waive the “Kleintunernehmerregelung”?

It is possible to waive the “Kleinunternehmerregelung” and decide against the application of it. In this case, VAT has to be shown on the invoices and has to be paid to the tax authorities by submitting monthly VAT tax returns. It could be favorable to decide against the “Kleinunternehmerregelung” in case having high costs for investments, purchase of goods, etc. so that it is possible to deduct the VAT on expenses.

Nevertheless, this decision should be well thought out because you are bound by this decision for five years and the decision cannot be undone.