Reduction of VAT in Germany in 2026: What Businesses Need to Know

As of 1 January 2026, Germany has reduced the value added tax (VAT) rate to 7% for restaurant services and prepared food. This change represents one of the most significant tax developments at the beginning of the year and directly affects businesses operating in the hospitality and service sectors.

At first glance, the VAT reduction appears to be a straightforward tax relief measure. In practice, however, the correct implementation of the new rate raises a number of legal and tax-related issues. Under German tax law, even favourable changes can create substantial risks if they are not applied properly and consistently.

The legislator’s objective is primarily economic. The hospitality sector has been under pressure for years due to rising costs for energy, rent, labour and logistics. By lowering the VAT rate, the government aims to stabilise businesses and stimulate domestic consumption without introducing direct subsidies. Importantly, companies are not legally required to pass the tax reduction on to consumers through lower prices. Pricing decisions remain within the entrepreneur’s discretion, provided that VAT is applied correctly.

Market reactions during the first weeks of 2026 have been mixed. Larger restaurant chains have partially reduced prices, using the VAT cut as a competitive and marketing tool. Many small and medium-sized enterprises, by contrast, are using the tax relief to offset increased operating costs. From a legal perspective, both approaches are permissible, as long as the reduced VAT rate is correctly shown on receipts, invoices and in accounting records.

This is precisely where practical risks arise. Switching to the new VAT rate requires adjustments to cash register systems, accounting software and internal documentation. The situation becomes particularly complex for businesses offering multiple types of services, such as dine-in restaurants combined with delivery or catering. In such cases, determining which VAT rate applies to which service can be challenging and may later become the subject of disputes with the tax authorities.

The transition period deserves special attention. Experience shows that German tax authorities tend to increase scrutiny following legislative changes. In 2026, businesses should expect closer inspections focusing on the correct application of the new VAT rules. Errors in VAT returns, incorrect classifications or inconsistencies between reported figures and actual business activities may lead to additional tax assessments and penalties.

Beyond compliance, the VAT reduction also affects tax and financial planning. Businesses should review pricing structures, contractual relationships and profitability calculations. Without proper legal and tax analysis, the economic benefit of the reduced VAT rate may be diminished or even outweighed by compliance risks.

In summary, the VAT reduction in 2026 is a positive signal for the German business environment. However, it requires careful legal implementation. Companies that address tax and economic law implications at an early stage can benefit from the reform while avoiding unnecessary risks. Professional legal and tax advice plays a key role in ensuring compliance and long-term legal certainty.