What Does It Mean in Practice?
Businesses pay VAT when purchasing goods or services. At the same time, they charge VAT on their own sales. With the input tax deduction, they can subtract the VAT paid from the VAT collected.
Example:
A company buys office supplies for €1,000 and pays €190 in VAT. Later, it sells products for €5,000 and charges €950 in VAT.
Thanks to the tax deduction, the company only needs to transfer the difference of €760 (€950 – €190) to the tax office.
Legal Basis
The input tax deduction is regulated by Sections 15 and 15a of the German VAT Act (UStG). It ensures VAT neutrality and prevents double taxation for businesses.
Requirements for Input Tax Deduction
To claim the tax deduction, the following conditions must be met:
- Business Status: Only businesses are eligible. Private individuals and small businesses that do not charge VAT are excluded.
- Correct Invoice: The invoice must include all mandatory details, such as the VAT identification numbers of both supplier and recipient.
- Business Use: Purchased goods or services must be used for business purposes. Items for private use are not deductible.
Common Challenges and Solutions
Incorrect or incomplete invoices can jeopardize the input tax deduction. Missing documentation is another risk.
Pro Tip: A modern document management system (DMS) helps businesses comply with regulations:
- Automated checks ensure invoices contain all required details.
- Digital workflows prevent steps from being overlooked.
- Secure archiving provides transparency and legal certainty.
The result: fewer errors, more efficient processes, and significant relief for accounting teams.
Want to learn more?
Check out our comprehensive guide on digital invoice processing for practical tips and best practices.