In a decision made on 12 June 2020, the Cabinet of Germany approved cuts to VAT rates as part of a COVID-19 economic stimulus package. German Chancellor Angela Merkel announced the proposal on 3 June, which temporarily reduces the German VAT rates from 19% to 16% (regular VAT rate) and from 7% to 5% (reduced rate) for the period from 1 July 2020 to 31 December 2020.

The government’s plans were revealed after economic data showed that industrial production fell to record lows in April as the coronavirus pandemic forced manufacturers in Europe’s largest economy to shut down. Further, unemployment has risen to 6.3% from 5.8% over the past month

Given the short deadline of 1 July 2020, there is an immediate need for action by companies to ensure that sales are correctly recorded and especially that their ERP systems are up to date with the rate changes.

The VAT rate changes are as follows:

  • The standard rate is to be reduced from 19% to 16%
  • The discounted rate is to be reduced from 7% to 5%

The proposed reduction of rates is to become valid from 1 July 2020, and continue to be reduced until 31 December 2020.

The classification from the standard 19% rate to the reduced 7% VAT rate for catering food services was announced by the government earlier in May.  The reduced rate will also become effective from 1 July 2020 and run until 1 July 2021. Take-away and delivered food are already liable to 7% VAT.

Early economic reports suggest that the coronavirus crisis will hit German tax revenues by nearly €100 billion in the year 2020. The hope is that their generous €130 billion stimulus package, which includes the temporary reduction of German VAT rates and the child bonus, will help reboot the country’s economy.

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