Tax & Law
Reverse Charge
Definition
Under the reverse charge mechanism, the VAT liability is shifted from the supplier to the recipient of the supply. In Germany it applies to, among other things, certain construction services, metal supplies, and all cross-border B2B services within the EU. On electronic invoices, the VAT category code AE (BT-151) must be used, and a reference to the legal basis (e.g., § 13b UStG) should appear in the invoice text.
Background & context
Under the reverse charge mechanism (shift of tax liability, § 13b UStG), exceptionally it is not the supplier but the recipient who owes the VAT. The seller issues the invoice without VAT and expressly points out the recipient's tax liability; the recipient calculates the tax itself, reports it, and can simultaneously deduct it as input VAT (where fully entitled to deduct, this nets to zero). The mechanism serves to combat fraud and applies, among others, to intra-community B2B services, certain construction services, building cleaning, metal and scrap supplies, and the supply of mobile phones above certain amounts. In the electronic invoice, reverse charge is mapped via the VAT category code AE (BT-151). Importantly: the tax amount (BT-117) for an AE category must be 0.00 (rule BR-AE-1), and an exemption/notice reason (BT-120) referring to the legal basis must be provided.
In practice — a worked example
A German construction company provides a construction service to another contractor and thus falls under § 13b UStG. In the XRechnung it uses VAT category AE with percentage 0 for the affected line. In the tax breakdown (BG-23) the taxable base appears (e.g. €2,000), the tax amount is €0.00, and the exemption reason (BT-120) is entered as 'Reverse charge, recipient liable, § 13b UStG'. The recipient reports the €380 VAT (19% of €2,000) itself and simultaneously deducts it as input VAT.
Common mistakes
- •With category AE NO tax amount may be shown — BT-117 must be 0.00 (otherwise error BR-AE-1).
- •The explicit reference to the recipient's tax liability (BT-120) is often missing, but is mandatory.
- •Do not confuse reverse charge with exemption (category E) or intra-community supply (category K) — these are different categories.
Frequently asked questions
Which VAT category code applies to reverse charge?
Code AE (BT-151) with percentage 0 and tax amount 0.00. Additionally, an exemption reason (BT-120) referring to § 13b UStG must be stated.
Who pays the VAT under reverse charge?
The recipient (buyer), not the supplier. The recipient reports the tax itself and, if entitled to deduct input VAT, can deduct it at the same time.
When does the reverse charge mechanism apply?
Among others, for intra-community B2B services, certain construction services, building cleaning, and metal and scrap supplies. The exact cases are governed by § 13b UStG.