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Value-added tax - VAT

In contrast to personal taxes (e.g. income tax), value-added tax is a tax on transactions. As a transaction tax, value-added tax is designed such that financially it has to be borne by the end consumer. In technical terms though, it is not possible to charge the value-added tax to the consumer, and so it is owed by the entrepreneur actually doing the trade. The entrepreneur passes the value-added tax on to the customer by including it in the sales price.

Entrepreneurs whose turnover is not generally tax-free have the possibility of deducting from their own value-added tax bill the value-added tax they have been openly charged by other businesses, so-called input tax (Vorsteuer). This way, value-added tax is only charged on the “value added” (i.e. the difference between the net cost price and the net sales price) of the product or service. For that reason VAT is often called Mehrwertsteuer.