What Is the Small Business Regulation?
The Kleinunternehmerregelung under section 19 of the German VAT Act (UStG) exempts self-employed individuals and small business owners from charging and remitting value-added tax (VAT). Since January 1, 2025 it applies when revenue in the previous year was at most EUR 25,000 and does not exceed EUR 100,000 in the current year. The EUR 100,000 limit is hard: exceeding it means standard VAT rules apply immediately from that transaction. In the founding year the EUR 25,000 limit applies to the current year.
The regulation is voluntary – you can opt out (option for standard taxation). However, this opt-out is binding for at least 5 calendar years.
Requirements in Detail
The EUR 25,000 threshold refers to total net revenue (not profit) from the previous year. Total revenue includes all income from business activity including ancillary transactions. It does not include asset disposals or certain tax-exempt revenues under section 4 nos. 8-28 UStG. Since 2025, revenue in the founding year is no longer extrapolated to 12 months; actual revenue must not exceed EUR 25,000.
Advantages
The primary benefit is simplification: no VAT advance returns (monthly or quarterly), no annual VAT return, and no obligation to show VAT on invoices. For consumers (B2C business), prices without VAT are more attractive – EUR 100 instead of EUR 119 for the same service.
Disadvantages and Risks
The biggest drawback: no input VAT deduction. A small business owner who buys software for EUR 119 gross pays the full amount. A standard-taxed business pays only EUR 100 net because the EUR 19 input VAT is refunded by the tax office. For business clients (B2B), the regulation is less attractive because they can deduct input VAT anyway.
When Does Switching to Standard Taxation Make Sense?
The switch is worthwhile when you have high startup investments (computers, equipment, website development), primarily business clients (B2B) where VAT is neutral, you are about to exceed the EUR 25,000 threshold and want to prepare early, or your ongoing business expenses with VAT are high (office rent, materials, subcontractors).
Calculation Example
Freelance designer with EUR 18,000 annual revenue and EUR 4,000 business expenses (net). As a small business: Revenue EUR 18,000, Expenses EUR 4,760 (gross), Profit EUR 13,240. With standard taxation: Revenue EUR 18,000 (net), VAT EUR 3,420 (pass-through), Expenses EUR 4,000 (net), Input VAT EUR 760, Profit EUR 14,000. Advantage of standard taxation: EUR 760 more profit through input VAT deduction.
Transition Scenarios
Exceeding the EUR 25,000 threshold in the current year means losing small business status from the following year. In the current year, the status is maintained as long as the EUR 100,000 threshold is not exceeded – above it, standard VAT rules apply immediately. From January 1 of the following year, VAT must be charged. Monitor your revenue development from mid-year and adjust your accounting in time.
Conclusion
The small business regulation is ideal for side activities with low operating costs and primarily private end customers. Writers, teachers, tutors, and musicians benefit most. Those planning major investments or serving business clients should seriously consider opting out. Our calculator helps you compare both options for your situation.