Small Business Regulation in Germany: Everything You Need to Know

When you start as a freelancer in Germany, you’ll sooner or later be confronted with the question: Should I use the Kleinunternehmerregelung or register for VAT? This decision shapes not only your invoicing but also your entire business activity. However, many self-employed professionals make this choice without understanding all the consequences.

The Kleinunternehmerregelung, regulated in §19 of the German VAT Act, is a special regulation designed to make it easier for small businesses to start self-employment. It allows you to be exempt from VAT obligations, which means you don’t need to show VAT on your invoices and don’t need to file regular VAT returns. Sounds tempting? It is – but only under certain conditions.

Understanding the Basics

Before we dive into the details, it’s important to understand what the Kleinunternehmerregelung actually is and why it exists. The German tax system recognizes that small businesses and freelancers often don’t have the resources to manage complex tax structures. The regulation was therefore introduced to reduce bureaucratic burden and make it easier to start self-employment.

The requirements are relatively clearly defined: You can use the Kleinunternehmerregelung if your total revenue in the previous calendar year was under 22,000 EUR and you expect your revenue in the current year to remain under 50,000 EUR. It’s important to understand that this refers to revenue, not profit. All income from your self-employed activities counts, even if you have multiple side activities.

The Advantages in Detail

The most obvious advantage of the Kleinunternehmerregelung is simplicity. Imagine you create an invoice for 1,000 EUR. As a small business, that’s also the amount your customer pays – done. No calculations, no VAT, no confusion. For many freelancers who are just starting out, this clarity is worth its weight in gold.

But the advantages go beyond simplicity. If you work mainly with private customers, you can advertise with prices that are 19% lower than your VAT-registered competitors. A customer choosing between two providers will likely choose the cheaper one – and that’s you. This competitive advantage shouldn’t be underestimated, especially in markets where price plays an important role.

The bureaucratic relief is another major advantage. While VAT-registered businesses must file monthly or quarterly VAT returns, you as a small business can focus entirely on your business. No deadlines, no forms, no additional work. This time savings can add up to dozens of hours over a year.

Don’t Overlook the Disadvantages

But as with most things in life, there’s a flip side. The most important disadvantage is that you cannot deduct input VAT. This means: Every VAT you pay on your business expenses cannot be reclaimed. If you buy software for 1,190 EUR (including 190 EUR VAT), you pay the full 1,190 EUR as a small business. A VAT-registered competitor would pay only 1,000 EUR net, since they can deduct the 190 EUR as input VAT.

This difference can add up quickly. If you regularly make larger purchases – whether new hardware, software licenses, or professional services – the lack of input VAT deduction can become more expensive than the bureaucratic relief is worth. It’s therefore worth doing a rough calculation before deciding: How high are your estimated VAT-liable expenses? The VAT on these is essentially the price you pay for simplicity.

Another aspect many don’t consider is perception among business customers. While private customers are happy about lower prices, many companies expect their suppliers to be VAT-registered. The reason is simple: Companies can deduct VAT as input VAT, so it’s irrelevant to them whether you show VAT or not. But the missing VAT ID on your invoice can raise questions with some business customers or even be perceived as less professional.

When Is the Kleinunternehmerregelung the Right Choice?

The answer depends heavily on your individual situation. If you’re just starting out, still uncertain about your long-term revenue, and work mainly with private customers, the Kleinunternehmerregelung is often the best choice. It gives you the opportunity to focus on your business without having to worry about complex tax matters.

It’s particularly advantageous if you mainly offer services and have few VAT-liable expenses. A consultant who mainly works from home and only needs a laptop and internet connection benefits significantly more from the regulation than someone who regularly buys expensive equipment or materials.

The regulation is also ideal if you value simplicity. Invoicing becomes significantly simpler, and you don’t need to worry about VAT calculations. Modern accounting software like Solobooks can help you keep track, even if you use the Kleinunternehmerregelung. The software shows you your current revenue and warns you when you approach the thresholds, so you can plan in time.

When Should You Switch to VAT Obligation?

There are clear signals that indicate a switch to VAT obligation might make sense. The most obvious case is when you exceed the revenue thresholds. From a revenue of 22,001 EUR in the previous year or if you expect to exceed 50,000 EUR in the current year, you must register for VAT anyway. In this case, it’s better to plan the switch proactively rather than being surprised.

But even if you’re still below the thresholds, a switch can make sense. If you work mainly with business customers, VAT obligation often makes more sense. Your customers can deduct VAT anyway, so the price difference is irrelevant to them. At the same time, you can deduct input VAT yourself, which reduces your expenses.

Another important factor is your business expenses. If you regularly make larger investments – whether in equipment, software, or professional services – input VAT deduction can quickly be worth more than the bureaucratic relief of the Kleinunternehmerregelung. A simple calculation helps: Estimate your annual VAT-liable expenses and multiply by 19%. The result is approximately the amount you could save through input VAT deduction.

Practical Implementation

If you decide to use the Kleinunternehmerregelung, you must indicate this to the tax office. This usually happens when filling out the tax registration questionnaire, which you receive when first registering as self-employed. In the VAT section, you can check that you want to use the Kleinunternehmerregelung.

On your invoices, you must then include the note “Kleinunternehmer gemäß §19 UStG”. This is mandatory information that must appear on every invoice. Modern accounting software like Solobooks automatically inserts this note, so you don’t need to worry about the correct wording. The software automatically generates legally compliant invoices with all required information.

Keeping an Eye on the Thresholds

One of the most common mistakes freelancers make is not keeping an eye on the revenue thresholds. It’s easy to get lost in daily work and forget that revenue is continuously rising. Suddenly you exceed the 22,000 EUR threshold, and you must immediately register for VAT.

This can lead to problems, especially if you’re not prepared. You then suddenly need to show VAT on all future invoices, update your invoice templates, and possibly inform customers about the change. A better strategy is to regularly monitor your revenue and plan early when you approach the thresholds.

Here, modern accounting software can make a big difference. Tools like Solobooks not only show you your current revenue but also automatically warn you when you approach the thresholds. This gives you enough time to plan and smoothly implement the switch to VAT obligation.

Making the Decision

At the end of the day, the decision for or against the Kleinunternehmerregelung is an individual weighing. There’s no universally right answer that applies to all freelancers. Instead, you must analyze your own situation: How high are your expected revenues? How many VAT-liable expenses do you have? Do you work mainly with private or business customers? How important is simplicity to you versus tax optimization?

If you’re uncertain, it can be helpful to consult a tax advisor. A brief consultation can help you understand the advantages and disadvantages for your specific situation. But even without a tax advisor, you can make an informed decision if you understand the basics and are honest with yourself about your needs and priorities.

A Look into the Future

The Kleinunternehmerregelung is not forever. Many successful freelancers start as small businesses and later switch to VAT obligation when their business grows. That’s completely normal and expected. The regulation is intended as a starting aid, not as a permanent solution for everyone.

If you decide to use the Kleinunternehmerregelung, you should consider this as a conscious choice for this phase of your business. Keep an eye on your development, and be ready to switch to VAT obligation when it makes sense. With the right tools and a good understanding of the rules, you can make these transitions smoothly.

The right accounting software can help you make these decisions with confidence. Solobooks, for example, not only shows you your current revenue but also helps you categorize your expenses and understand how input VAT deduction would affect your finances. This way you can always make an informed decision about whether the Kleinunternehmerregelung is still the right choice for you.

Frequently Asked Questions Answered

Many freelancers wonder if they can switch the regulation anytime. The answer is: Yes, but with limitations. You can switch from the Kleinunternehmerregelung to VAT obligation at any time. The reverse path is more difficult – if you were once VAT-registered, you can only switch back if you fall below the thresholds again, and then you must remain VAT-registered for at least five years.

Another common question concerns side income. Do these count toward revenue? The answer is yes – all income from self-employed activities is added together. So if you have multiple freelance activities, you must add them all together to see if you’re staying within the thresholds.

What happens if you exceed the thresholds? From the month in which you exceed the threshold, you’re automatically VAT-liable. You must immediately notify the tax office and from that point on show VAT on all invoices. The invoices you issued before exceeding remain valid – there’s no retroactive VAT obligation.

The Right Choice for Your Business

The Kleinunternehmerregelung is a powerful tool for freelancers who are just starting out or are still small. It significantly simplifies accounting and gives you the opportunity to focus on what really matters: building your business and winning customers.

But as with all tax decisions, there’s no one-size-fits-all solution. What’s perfect for one freelancer can be disadvantageous for another. The art lies in honestly assessing your own situation and making the decision that makes the most sense for you and your business.

With the right tools and a good understanding of the rules, you can make this decision with confidence. Modern accounting software like Solobooks can help you keep track, understand your finances, and make informed decisions – whether you use the Kleinunternehmerregelung or are VAT-registered.

Need Help?

If you have questions about the Kleinunternehmerregelung or need help with accounting, we’re here to help. Contact us by email at support@solobooks.de, chat with us in the app, or visit our Help Center for more guides.

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Last updated: October 1, 2025