VAT in the European Union: Reverse charge and the ZM report

If you are a self-employed professional in Germany and sell or buy anything from other businesses based in the European Union, you have probably heard about reverse charge and the Zusammenfassende Meldung reports.

Reverse charge

What is reverse charge?

Normally, when you have a business registered in Germany and you are subject to Value added tax (VAT), you owe the VAT written on your invoice minus the VAT you paid on expenses to the tax office.

In the case of the reverse charge, it is your client who has to pay the VAT to his or her tax office. Your client can then simultaneously deduct the same VAT amount and the two are balanced out, resulting in a total sum of zero.

In short, the tax liability transferred from you, the supplier, to your client, the recipient of the services.

For who is the reverse charge procedure for?

One common case is that you sell your services to another business registered in the European Union (EU) who has a valid VAT-Identification number (VAT-ID). As a self-employed professional in Germany this would fall under the reverse charge regulation.

Why was the reverse charge procedure introduced?

Even if the regulation may seem confusing to you firsthand the main goals and advantages of reverse charge are for simplification and avoidance of tax fraud as the procedure saves a great deal of administrative work.

The tax authorities do not have to settle their claims abroad and you also do not have to deal with the foreign tax offices.

The background for the latter are so-called carousel frauds which can be easily prevented through reverse charge. Carousel frauds were often committed when the service provider did not pay the VAT but the service recipient nevertheless claimed the VAT deduction.

What to watch out for when using reverse charge with customers from the EU?

There are many regulations and different national laws worldwide for the reverse charge procedure. Therefore, problems can occur easily.

Typical mistakes when using the reverse charge procedure are:

• VAT is shown in the invoice, even if the transaction is subject to reverse charge.

• There is no reference in the invoice indicating the reverse charge procedure.

• The VAT-IDs or the address details are missing or incorrect.

Thus, with all transactions it is very important to determine in advance whether a reverse charge is involved and if you have all the necessary information.

Good to know

When selling goods to other businesses within the EU it is called intra-community supply.

Freelancers or sole-traders making use of the small business regulation may also be subject to reverse charge when selling anything in other European Union countries.

Zusammenfassende Meldung

What is a Zusammenfassende Meldung?

In Germany, the so-called "Zusammenfassende Meldung" (ZM) is a report in which businesses (including freelancers) report their cross-border sales within the EU.

The tax authorities use it to check whether the sales between businesses in the EU have been registered correctly.

Who has to prepare a ZM?

ZM reports have to be prepared by anyone who is subject to VAT in Germany and sells products or services to businesses in other EU countries.

Businesses under the small business regulation do not have to hand in ZM reports even if they sell anything in other European Union countries.

What do you need to prepare a ZM?

The amount of your total sales to be reported, the VAT-ID of your business and the one of your client. If you had sales to different EU clients within the reporting period you will need each one's VAT-ID.

When do you have to submit a ZM?

In case your total sales to be reported do not exceed 50.000,00€ per quarter you usually are allowed to prepare the ZM on a quarterly basis. Otherwise the reports have to be submitted monthly. If no sales to other EU businesses were made no ZM must be submitted.

The ZM must be submitted by the 25th day after the end of the reporting period. That means e.g. if your total sales to be reported are 10.000,00€ and were made in January only you have to report this by the 25th of April.

Good to know

Do not confuse the ZM with the advance VAT registration reports (Umsatzsteuer-Voranmeldungen). However, the advance VAT registration report and the details in the ZM report must match.

There is no option to apply for a permanent extension to the deadline, unlike the the advance VAT registration.

If your total VAT payment for the previous year was below 1.000,00€ it is possible to hand in the ZM on a yearly basis.

Looking for a solution to simplify your ZM reports?
Sorted helps you to send your ZM reports directly to the financial authorities.

Sorted tax guides are provided without liability and do not replace a tax advisor.
To get an accurate answer for your specific case, please consult a tax advisor.
You can get additional help from your dedicated tax advisor on Sorted.