Germany’s temporary VAT cut for COVID‑19: 2020 stimulus explained

1. Background to the German VAT reduction

On 12 June 2020, the German cabinet endorsed a package of measures that included temporary reductions in VAT rates as a central lever of the COVID‑19 recovery programme. German Chancellor Angela Merkel had already outlined the concept on 3 June, presenting a stimulus plan aimed at supporting demand and stabilising the economy. The government communication on the package is available on the federal portal: German Federal Government stimulus package announcementopen_in_new.​

The decision followed data indicating a historic slump in industrial output in April 2020 as lockdowns and supply chain disruptions hit Europe’s largest economy. During the same period, Germany’s unemployment rate rose from 5.8% to 6.3%, underscoring the need for rapid intervention.​

2. What VAT changes were introduced?

The stimulus package temporarily lowered both the standard and the reduced VAT rates:​

• The standard VAT rate dropped from 19% to 16%.
• The reduced VAT rate fell from 7% to 5%.​

These reduced rates applied from 1 July 2020 to 31 December 2020, after which the standard and reduced rates returned to their previous levels. The short implementation window meant businesses had only weeks to adapt their invoicing, point‑of‑sale and ERP systems to ensure correct tax calculation and reporting from 1 July onward.​

Special rules for catering and food services

Earlier in May 2020, the German government had already decided to reclassify certain catering services from the standard rate to the reduced VAT rate, in order to support the hospitality sector. Under this measure, restaurant and catering food services, previously taxed at 19%, became subject to the 7% reduced rate from 1 July 2020 until 1 July 2021. Take‑away and delivered food were already eligible for the 7% reduced rate even before the reclassification.​

3. Practical implications for businesses and ERP systems

Because the VAT changes applied on a fixed date and for a clearly defined period, companies had to act quickly to avoid mis‑taxing transactions around 1 July 2020. Key action points included:​

• Updating ERP and billing systems to reflect the 16% and 5% rates and revert correctly after 31 December 2020.
• Ensuring that cash registers, e‑invoicing solutions and accounting software applied the correct rate based on the supply date.
• Reviewing pricing, contracts and long‑term agreements to handle supplies that spanned the changeover period.

Failure to implement the changes in time risked incorrect VAT accounting, potential under‑ or over‑collection of tax, and later correction work with the tax authorities.​

4. Fiscal impact and supporting measures

Analyses published at the time suggested that the pandemic‑related downturn would reduce German tax revenues by close to €100 billion in 2020. The stimulus package, including the temporary VAT rate cuts, formed part of a wider programme worth around €130 billion intended to revive consumption and support business liquidity.​

One of the most visible consumer‑focused elements was a one‑off child bonus of €300 per child, designed to put additional disposable income into families’ hands and encourage spending. An accessible explanation for residents is available here: Germany’s child bonus informationopen_in_new.​

Together, the temporary VAT reductions and the child bonus were designed to stimulate consumer demand, support sectors most affected by lockdowns and accelerate Germany’s post‑pandemic recovery