Reverse Charge – Shift of the Tax Liability

Do you know this case? You just received an invoice from your construction company abroad and take a closer look at the amounts. However, there is no VAT shown on the invoice – instead, somewhere in small letters it says “Reverse Charge”. Is this correct, and what exactly do you have to do now? This article does not replace tax advice, but it should give you a good orientation for everyday business.

What does “Reverse Charge” mean?

The word “Reverse” comes from Latin and means something like “to turn around” or “to reverse”. This was later adopted into English, and in the tax context we literally understand “Reverse Charge” as “reversed taxation” or “shifted charge”. In practice, this means that the tax liability is turned around – with this special rule in tax law, it is no longer the service provider who pays the tax (as is normally the case), but the customer who owes it.

What is the purpose of this rule?

The goal of this regulation is, simply put, to make taxation for cross-border services easier and more straightforward. It’s mainly about simplifying the tax payment process – as a client, I can handle the VAT in my own country and don’t have to deal with foreign tax laws. On the other hand, the authorities also want to prevent VAT fraud, for example through the so-called “carousel fraud”. In short, this means that VAT is “invented” and shifted from one country to another without ever being paid. The result is tax fraud worth millions. Exactly this is prevented by introducing the reverse charge procedure, because it makes such a money flow without payment impossible.

Legal basis

Even though some might find this topic a bit dry – knowledge is power. And for you as a client, it is important to know whether the invoices you receive are formally and legally correct. So let’s take a closer look. Within the European Union, the so-called “VAT Directive” regulates all matters in this context. Articles 194–199a & 199b allow the Member States to transfer the tax liability to the recipient of the service (Reverse Charge). However, it is important to know that the national implementation varies slightly in every EU member state, so it must first be checked in which country the tax must be paid. The general rule is the place of supply principle – meaning that the tax must be paid in the country where the service is actually carried out.

Reverse Charge in practice | Place of supply GERMANY

In Germany, the reverse charge mechanism is regulated by § 13b of the German VAT Act (Umsatzsteuergesetz – UStG). Reverse Charge typically applies to construction services, building cleaning, the supply of certain goods (such as mobile phones, tablets, gaming consoles, or integrated circuits above €5,000), the supply of energy and certain precious and scrap metals, and – this is a very common case – cross-border services between two companies (B2B within the EU). A detailed explanation of the reverse charge rules can be found on the official website of the State of Lower Saxony:
Official information – Reverse Charge §13b UStG (Lower Saxony Tax Authority).

Reverse Charge in practice | Place of supply AUSTRIA

In Austria, § 19 para. 1a of the Austrian VAT Act (UStG 1994) applies. The most common practical cases are construction services and building cleaning, the supply of certain waste and scrap types, telecommunications and electronic services, and invoices between Austrian companies and foreign subcontractors. Further information can be found on the official website of the Republic of Austria:
Official information – Reverse Charge (Austrian Business Service Portal)

Requirements for Reverse Charge – and when it does not apply

For the reverse charge procedure to be applied correctly, both contracting parties must be entrepreneurs with a valid VAT number (only for B2B transactions). If private individuals receive services, or if both companies operate in the same country and the service does not fall under § 13b / § 19 para. 1a, or if the recipient has no valid VAT number, this rule does not apply.

The invoice is issued – what needs to be done now?

The service has now been provided – hopefully to everyone’s satisfaction – and now it’s time for invoicing. What do both parties need to pay attention to?

Step 1: Issuing the invoice by the service provider

The service provider (for example, the subcontractor) first checks that both parties’ valid VAT numbers are listed on the invoice. If this is correct, the invoice is issued without VAT (0%) – but with a reference to the reverse charge procedure. Example note: “The tax liability is transferred to the recipient of the service under the reverse charge procedure (§ 13b German VAT Act / § 19 para. 1a Austrian VAT Act 1994).”

Step 2: Payment of VAT by the customer

The client must ensure that all information on the received invoice is correct – prevention is better than correction. Then he must calculate the VAT himself (simply apply the current VAT rate to the net amount of the invoice) and pay the tax to the responsible tax office. This is done as part of the VAT advance return. Pro-Tip 1: If the client is entitled to deduct input tax, he can reclaim the calculated tax as input tax. Pro-Tip 2: Be careful – if the VAT number is invalid, this can quickly become expensive. The tax office likes to check such cases retrospectively.

Step 3: The VAT return in accounting

In the VAT return, the customer must enter the corresponding net amount in the designated field under “Services according to § 13b UStG” (DE) or “Reverse-Charge-Transactions” (AT). At the same time, the same amount is claimed as input tax. This process is therefore tax neutral. Pro-Tip: Use code 64 (for Germany) or code 057 (for Austria).

The most common questions about the Reverse Charge procedure – our FAQ from SUBAUFTRAG

1️⃣ When does the reverse charge procedure apply? Both parties are entrepreneurs and have a valid VAT number. The service belongs to one of the legally listed categories (e.g. construction services or certain cross-border services).

2️⃣ What must a reverse charge invoice contain? The VAT number of the customer, the VAT number of the supplier, and a short note about reverse charge.

3️⃣ How can I check if a VAT number is valid? You can do this easily via the official EU portal VIES: https://ec.europa.eu/taxation_customs/vies/#/vat-validation

4️⃣ Does reverse charge also apply to private persons? No, it applies only to business-to-business transactions (B2B).

5️⃣ Does reverse charge also apply to construction services within one country? Yes, for example when construction companies invoice each other (§ 13b para. 2 No. 4 UStG / § 19 para. 1a UStG 1994).

6️⃣ How long must I keep the documents for the reverse charge procedure? Please keep all documents (especially invoices and VAT confirmations) for 10 years.

7️⃣ In which language must the reverse charge note on the invoice be written? There is no strict rule. We recommend using German or English for better readability and understanding.

Conclusion

Even though the reverse charge procedure may seem complicated at first, it is actually a great simplification for both sides. It is a good way to handle cross-border services correctly and safely in terms of taxation. As long as both sides – client and subcontractor – are informed, everything is clean and clear. Since this is not always the case, our experts at SUBAUFTRAG are happy to help you at any time.

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