Modern VAT law in online trading

FAQs on the 2020 Annual Tax Act Modern VAT law in online trading

In future, value added tax in cross-border online trading is to be simpler, less vulnerable to fraud, and more business-friendly. The 2020 Annual Tax Act (Jahressteuergesetz) adopted by the Cabinet translates into law important EU directives, as well as launching additional new rules and regulations.

The 'Buy now' button in an online shop is shown.

The Annual Tax Act regulates how value added tax will be charged centrally for all EU-wide online sales.

Photo: Bundesregierung/Stutterheim

What is the Annual Tax Act?

The 2020 Annual Tax Act is typical of what is termed an "Artikelgesetz" or a compilation of amendments to existing legislation. The Act contains over 100 individual regulations covering the entire spectrum of fiscal law and amending a large number of items of legislation. It translates into law EU directives and court rulings, as well as regulating technical matters and correcting editorial errors.

What does the Act regulate?

The 2020 Annual Tax Act modernises the rules governing value added tax between businesses and private customers in cross-border online trading. It translates EU directives into German law.

In future, businesses with EU-wide operations will no longer have to pay taxes in every individual member state, but only once in the home state of the business through a web portal, which will act as a one stop shop. It will handle value added tax centrally for all EU-wide online sales. The internal revenue service in the home state of the business will then transfer the tax to the other member states. Businesses based in states outside the EU can decide for themselves which member state should handle their VAT for all EU sales.

Other amendments are designed to prevent VAT fraud committed by traders from outside the EU. This involves notionally including operators of online marketplaces in the supply chain and thus forcing them to act more responsibly. In future they will be liable for the value added tax payable by traders using their platforms.

What else is important to know?

  • The regulations currently in place, under which employer payments in addition to reduced hours compensation benefit are tax-free, will be extended until the end of 2021. The governing parties agreed on this in the coalition committee.
  • In future data will only be shared electronically between health insurance and long-term care insurance schemes, the tax office and employers. Non-German insurance schemes are an exception to this rule. 
  • Tax regulations governing exceptionally low rents are to be improved to prevent landlords raising rents purely for tax reasons.
  • Tax exemption for the interim accommodation of refugees from civil war zones and asylum seekers in housing belonging to tax-exempt cooperatives and associations will in future apply to all homeless people.
  • The investment deduction amount is to become more flexible, making it easier to finance planned investments.