Margin scheme (sec. 25a of the German VAT Act): requirements, calculation and practical application

What is the margin scheme (sec. 25a of the German VAT Act)?

The margin scheme is a special VAT rule for determining the taxable amount of a supply. Unlike the general rule (sec. 10 para. 1 of the German VAT Act), only the difference between the selling price and the purchase price is subject to VAT (the so-called margin, sec. 25a para. 3 of the German VAT Act), rather than the entire amount of the consideration.

Against this background, the margin scheme is also referred to as margin taxation. It is of particular importance in the trade of second-hand goods.

When does the margin scheme apply?

Pursuant to sec. 25a para. 1 of the German VAT Act, the margin scheme applies if the following requirements are met:

• The taxable person is a reseller.
• The goods were supplied to the reseller within the Community territory.
• No VAT was owed on that particular supply of goods to the reseller or the margin scheme was applied.

A supply within the Community territory means that the place of the supply of goods to the reseller must be located within the domestic territory or *somewhere in? the rest of the Community territory (sec. 25a.1 para. 3 sentence 1 of the German Administrative VAT Guidelines).

If the goods are acquired by way of import from a third country, the margin scheme is generally excluded for the subsequent supply of the subject goods (sec. 25a.1 para. 3 sentence 2 of the German Administrative VAT Guidelines). An exception previously applied to works of art, collectors’ items and antiques imported by the taxable person itself (sec. 25a para. 2 no. 1 of the German VAT Act). However, since 1 January 2025, this exception has effectively ceased to apply due to the amendment of sec. 25a para. 7 no. 1 lit. c of the German VAT Act, according to which the acquisition of such items is subject to the reduced tax rate (sec. 12 para. 2 no. 1 of the German VAT Act in conjunction with Annex 2).

Why does the margin scheme exist?

The margin scheme serves to prevent distortions of competition and multiple VAT burdens.

Resellers are, typically, in competition with private individuals when selling second-hand goods. Private sellers are not liable for VAT and can therefore often offer lower prices. Taxing only the margin reduces this structural competitive disadvantage.

At the same time, the margin scheme prevents economic double taxation with VAT. If, for example, goods are acquired from a private individual, VAT has already been incurred in the supply chain without any possibility of input VAT deduction. Without the margin scheme, the full consideration would again be subject to VAT upon resale.

Example: Comparison between the general VAT rules and the margin scheme

The effects of the margin scheme can be illustrated using the example of a used car sale:

A taxable person purchases a vehicle from a private individual for EUR 10,000 and resells it for EUR 13,000, including VAT.

• Under the general VAT rules, the VAT is extracted from the selling price (EUR 13,000) and amounts to EUR 2,076, as no input VAT deduction is available. A profit of EUR 924 remains.

• Under the margin scheme, only the margin of EUR 3,000 is subject to VAT. The VAT included therein amounts to EUR 479. The profit therefore increases to EUR 2,521.

This example demonstrates that the margin scheme significantly reduces the VAT burden because only the margin is subject to VAT.

Who qualifies as a reseller within the meaning of sec. 25a of the German VAT Act?

A reseller is any person who, on a commercial basis, trades in movable tangible goods or auctions such goods in its own name (sec. 25a para. 1 no. 1 sentence 2 of the German VAT Act).

In practice, this particularly concerns:

• used car trade
• second-hand trade
• re-commerce and upcycling models

The decisive factor is that the goods are acquired, at least in part, for the purpose of resale and that the resale constitutes part of the taxable person’s ordinary economic activity (sec. 25a.1 para. 2 sentence 2 and para. 4 sentence 3 of the German Administrative VAT Guidelines).

What are the requirements for the prior supply?

The application of the margin scheme requires that, in respect of the supply of goods to the reseller, either no VAT was due or the margin scheme was applied.

This is particularly the case if the supplier, in the prior stage:

• is a private individual,

• is a small enterprise,

• carries out VAT-exempt transactions, or

• has itself applied the margin scheme.

(sec. 25a.1 para. 5 of the German Administrative VAT Guidelines).

In practice, verifying these requirements is challenging, as they generally lie outside the reseller’s knowledge and control.

German perspective: evidentiary requirements and risks

According to the Federal Fiscal Court case law and the position of the German tax authorities, the margin scheme must have been correctly applied in the preceding stage (Federal Fiscal Court, judgment of 23 April 2009 – V R 52/07, BStBl. II p. 860; sec. 25a.1 para. 5 sentence 2 number 5 sentence 2 of the German Administrative VAT Guidelines).

If the reseller cannot prove this and has failed to take all reasonable verification measures, this will be to its detriment (Federal Fiscal Court, decision of 11 December 2024 – XI R 15/21).

In practice, this means: Resellers must carefully review and document purchases. Only in this way can good faith be demonstrated in the event of a dispute.

The scope of these requirements is currently the subject of a request for a preliminary ruling before the European Court of Justice (ECJ). By order of 13 May 2026, the Austrian Supreme Administrative Court (VwGH) referred to the ECJ the question of whether the application of the margin scheme requires that the scheme was applied in compliance with EU law at the previous stage, or whether its actual application is sufficient. The request for a preliminary ruling concerns a case involving the cross-border trade in silver coins.

EU law foundations and case law

The margin scheme is based on Art. 311 et seq. of the VAT Directive.

• Art. 314 VAT Directive governs the requirements,

• Art. 315 VAT Directive the taxable amount (margin).

Its interpretation is shaped by the ECJ case law, in particular the judgments in Litdana (C-624/15), Mensing I (C-264/17), and Mensing II (C 180/22).

The ECJ clarifies in its judgment Litdana that a reseller must not be denied the margin scheme solely because it was not actually applied in the preceding stage. The decisive factor is whether the reseller acted in good faith and took all reasonable measures that could reasonably be expected of it to verify the information provided by its supplier.

How is the taxable amount determined?

The taxable amount is the margin:

Margin = selling price – purchase price

• VAT is extracted from the margin.

• If the margin is negative, no VAT is due.

• As a general rule, offsetting against other transactions is not possible.

For low-value goods (up to EUR 750), the so-called total margin scheme may be applied (sec. 25a para. 4 of the German VAT Act). In this case, the total purchase prices and total selling prices, within a tax period, are offset against each other (so-called total margin).

For the supply of work of art (No. 53 of Annex 2 to the German VAT Act) where the purchase price is negligible or cannot be determined, the taxable amount is deemed to be 30% of the selling price (the so-called flat-rate margin, sec. 25a para. 3 sentence 2 of the German VAT Act; sec. 25a.1 para. 11a of the German Administrative VAT Guidelines).

Which tax rate applies?

Transactions subject to the margin scheme are always subject to the standard VAT rate of 19 % (sec. 25a para. 5 of the German VAT Act).

This applies irrespective of whether the goods would be subject to a reduced rate outside the margin scheme.

What are the specific requirements for invoicing?

Within the scope of the margin scheme, specific requirements apply:

• A reference in the invoice (e.g. “second-hand goods/margin scheme”, see sec. 14a para. 6 sentence 1 of the German VAT Act)

• No separate statement of VAT (sec. 14a para. 6 sentence 2 of the German VAT Act)

An unjustified statement of VAT results in an additional VAT liability pursuant to sec. 14c para. 2 of the German VAT Act (sec. 25a.1 para. 16 sentence 2 of the German Administrative VAT Guidelines).

What is the impact of the margin scheme on input VAT deduction?

A recipient of supplies subject to the margin scheme is not entitled to deduct input VAT.

The reason lies in the prohibition of separately stating VAT. Any VAT nevertheless stated does not qualify as legally owed VAT within the meaning of sec. 15 para. 1 no. 1 sentence 1 of the German VAT Act.

Can the margin scheme be waived?

Resellers may opt for the application of the general VAT rules for individual transactions (sec. 25a para. 8 of the German VAT Act).
Such a waiver may be advisable, in particular:

• where the customer is entitled to deduct input VAT

• where a reduced VAT rate would apply

The decision requires an overall economic assessment of the individual case.

What is the significance of the protection of legitimate expectations?

Since a reseller will generally not have full insight into the circumstances of its supplier, the protection of legitimate expectations is of particular importance. The ECJ focuses on whether the reseller acted in good faith and took all reasonable measures to dispel any doubts concerning the information provided by its supplier. A systematic verification of all prior supplies is not required.

In practice, this means: Careful verification and documentation are essential.

If it subsequently transpires that the statutory requirements for applying the margin scheme were not met or cannot be substantiated, affected resellers should consider filing an application for equitable relief at an early stage, pursuant to sec. 163 and 227 of the German Fiscal Code. In this regard, the Federal Fiscal Court referred a question to the ECJ by order of 19 February 2025 (XI R 23/24). The question was whether, under EU law, the reseller’s good faith must already be taken into account in the tax assessment procedure. The Federal Fiscal Court had previously raised similar questions in two earlier cases concerning input VAT deduction and direct claims, but these questions remained unanswered. The General Court of the European Union is now expected to clarify (case T-569/25) whether the national practice of referring a reseller, acting in good faith, to a separate equitable relief procedure is compatible with EU law. Until this issue has been resolved, affected taxable persons should seek to preserve all available procedural options.

Typical field of application: used car trade

The margin scheme is of central importance in the used car trade, as vehicles are frequently acquired from private individuals or small enterprises.

At the same time, increased risks do exist. Current investigations at the European level show that incorrect applications of the margin scheme may lead to significant tax and criminal consequences.

Summary

The margin scheme is a key special regime in VAT law that allows taxation only of the margin.
It reduces the VAT burden and ensures competitive neutrality but, at the same time, requires careful verification of requirements and robust documentation.