VAT Exemptions and Zero-Rated Goods/Services in Germany

Not all supplies in Germany attract the standard 19% VAT. German VAT law classifies certain goods and services as VAT-exempt or zero-rated, which determines whether VAT is charged and whether input VAT can be recovered.

Correct VAT classification directly impacts pricing, cash flow, and refund eligibility, while errors can lead to penalties or lost claims. Germany also offers an efficient VAT refund mechanism for eligible EU and non-EU businesses and tourists, ensuring VAT remains a consumption tax rather than a cost.

Key takeaways:

• VAT-exempt supplies in Germany are not charged VAT but usually block recovery of input VAT on related expenses.
• Zero-rated supplies apply a 0% VAT rate while still allowing full input VAT deduction.
• Healthcare, education, financial services, and long-term residential rentals are commonly VAT-exempt sectors.
• Exports outside the EU and intra-EU supplies to VAT-registered buyers are zero-rated to prevent double taxation.
• Certain exempt supplies, such as commercial property rentals, may be voluntarily taxed to allow input VAT recovery.
• Incorrect classification directly affects pricing, cash flow, refund eligibility, and VAT compliance risk.

VAT exemption in Germany [No Input Credit]

Under §4 of the German VAT Act (UStG), certain supplies are VAT-exempt. These exemptions mainly apply to public interest and social sectors. While VAT is not charged on these supplies, input VAT cannot be deducted, making the VAT on costs a real business expense.

Main VAT-Exempt Categories

1. Medical and Healthcare Services: Services by doctors, dentists, hospitals, clinics, midwives, and recognized alternative practitioners are exempt. Core medical treatments and ambulance services are VAT-free. Cosmetic or non-medical treatments may be taxable. Healthcare providers cannot reclaim VAT on equipment, rent, or supplies.
2. Educational Services: School, university, and qualifying vocational or training services are exempt. This applies to many public and private education providers. Non-educational services (e.g. consultancy) remain taxable and must be separated. 
3. Cultural and Artistic Services: Certain cultural activities are exempt when provided by public bodies or approved non-profits. This can include theatres, museums, libraries, orchestras, and similar institutions. VAT treatment may vary depending on provider status and structure. 
4. Financial and Insurance Service:  Loans, payment services, money and securities transactions, and insurance premiums are VAT-exempt. Banks and insurers do not charge VAT but also cannot recover VAT on operating costs. Financial advisory services that do not qualify remain taxable.
5. Real Estate Rentals and Sales: Long-term residential and commercial rentals are generally exempt. Used property sales may also be exempt. Key exceptions include: 1. Short-term accommodation (taxable at 7%) 2. New buildings and building land (taxable) and 3. Option to tax commercial rent to allow input VAT recovery
6. Postal, Betting, and Social Services: Universal postal services (e.g. standard Deutsche Post mail), lotteries, betting, and certain charitable or welfare services are VAT-exempt. Private courier services are taxable.
7. Small Business Scheme (§19 UStG): Qualifying small businesses do not charge VAT and cannot deduct input VAT. This is a status-based exemption rather than activity-based.

Business Impact of Exemptions

• No VAT charged on sales
• No input VAT recovery on related costs
• VAT becomes a real cost (“hidden VAT”)
• Mixed taxable and exempt businesses must apply pro-rata input VAT deduction
• Incorrect treatment can lead to assessments and penalties

Suggested Read: VAT Calculator Germany 2026 Calculate VAT Online

Zero-Rated Supplies in Germany (Exemptions With Right to Deduct)

Germany applies zero-rating only in limited situations. Unlike some countries, most preferential treatment is given through the 7% reduced rate, not a 0% rate. Zero-rated supplies in Germany are legally classified as “exemptions with the right to deduct” (echte Steuerbefreiungen).

Key Zero-Rated Categories

• Exports of Goods Outside the EU: Goods exported from Germany to non-EU countries are zero-rated. No German VAT is charged, provided valid export evidence exists. Input VAT on related costs remains fully deductible.
• Intra-Community Supplies (EU B2B Goods): Supplies of goods from Germany to VAT-registered businesses in other EU Member States are zero-rated. Conditions include a valid EU VAT ID and proof of dispatch. VAT is accounted for by the buyer under the reverse-charge mechanism. 
• International Passenger Transport: Cross-border passenger transport by air or sea is zero-rated. Domestic passenger transport is generally subject to the reduced 7% rate or specific exemptions.
• Export-Related Freight Transport: Transport services directly linked to exports outside the EU are treated as zero-rated, allowing full input VAT recovery.
• 0% VAT on Residential Solar PV Systems (From 2023): The supply and installation of qualifying small solar photovoltaic systems on residential and public buildings is subject to a 0% VAT rate. Installers can still deduct input VAT, making this a true domestic zero-rate under §12(3) UStG.
• Diplomatic and International Organisation Supplies: Certain purchases by diplomats, NATO forces, and international bodies may be VAT-free through exemption certificates. These are limited, case-specific arrangements.

Related but Not Zero-Rated

EU Cross-Border B2B Services: Most B2B services supplied from Germany to EU businesses fall outside German VAT due to place-of-supply rules. VAT is accounted for by the recipient abroad under reverse charge. Input VAT remains deductible, but these supplies are technically out of scope, not zero-rated.

Practical Distinction

• Exempt without credit: No VAT charged, no input VAT recovery
• Exempt with credit (zero-rated): No VAT charged, full input VAT recovery

German VAT law clearly distinguishes between unechte Steuerbefreiungen (without deduction) and echte Steuerbefreiungen (with deduction). For businesses, this distinction directly affects cash flow, pricing, and refund eligibility.

Option to Tax and Special Cases

Some VAT exemptions can be waived or handled differently depending on the transaction type, sector-specific rules, and the business’s ability to recover input VAT.

1. Real Estate Option: Landlords can opt to charge VAT on exempt rent when renting to businesses using the property for VAT-able activities (§9 UStG). If tenant is VAT-exempt (e.g., doctor), landlord cannot opt. Many commercial leases include VAT because landlords want input tax deduction and tenants can bear it.
2. Financial Services Option: EU law doesn't allow opting for financial services or healthcare—these remain exempt without option. Banks cannot opt to be taxed.
3. VAT on Exported Services: Services to outside EU are zero-rated as "outside scope." Services related to exported goods or work on goods for export are treated as export services and may allow input VAT deduction.
4. Partial Exemption Handling: Businesses with both exempt and taxable income (e.g., hospital with exempt medical services + taxable cafeteria) must prorate VAT on overhead—directly attribute where possible, then apportion common costs by turnover or other fair means.

Compliance Requirements:

• Don't charge VAT on exempt sales (if charged by mistake, may still owe it)
• Invoices should indicate VAT exemption with relevant law paragraph
• Track input VAT separately; use formula (e.g., 30% taxable revenue = claim 30% of mixed input VAT)

Reduced Rate (7%) vs Exempt: Reduced rate applies to groceries, books, local transport, hotel stays, cultural tickets—these are still VAT-able and allow input deduction. Exempt is effectively 0% with no input deduction. Private museum charging 7% can deduct input VAT; state museum with VAT-free entry cannot deduct but may receive government subsidies.

Conclusion

The VAT system used in Germany attracts a clear line between vat exemption, zero-rated transactions, and refundable VAT, all of which play a specific legal and economic role. VAT-exempt supplies are taken completely out of the tax chain and they do not allow reclaiming of input tax whereas the zero-rated supplies retain the right to claim VAT charged on costs incurred. 

Tax neutrality is provided to foreign businesses and exporters by the VAT refund mechanisms. In order to utilize the full benefit of the provisions of vat exemption Germany and entitlement to refund, it is crucial to comply carefully, document accurately and meet the statutory deadlines.