Late payment fees – permissible amount and VAT in Germany

If you, as a car dealer, provide goods or services, you typically issue an invoice to the customer. This invoice must be paid within a specific period. If the customer fails to pay on time, you, as the dealer, have the right to charge the customer a reminder fee or collection costs to cover the expenses incurred in sending a payment reminder.

What late payment fees are permissible?

If your customer fails to make payments, you have the right to charge fees or late payment fees. These fees may not be very high, but they compensate you for the effort and costs incurred in sending reminders. In some cases, late payment fees can also help motivate a customer to pay.

How high can late payment fees be?

If you decide to set late payment fees for your business, there are two important points to consider: 1. The fee must be reasonable in amount. 2. The fee must be transparent and remain within a manageable range that covers actual expenses

If you opt for a three-stage dunning process, the reminder fee could be €2.50 for the first reminder, €5.00 for the second, and €7.50 for the third. These figures are only rough guidelines – your actual costs (e.g., for postage, paper, and envelopes) as well as the time spent sending the invoices should always be taken into account when setting your fees.

It is common practice to charge a fee of 2 to 3 euros for each reminder level. Reminder fees at this level are not considered unlawful. The safest option is therefore in the middle, at 2.50 euros per level.

The fee you charge must be reasonable. You should be able to explain the fee clearly and keep it within a manageable range that covers your actual expenses. This way, you can ensure that you are being justified and that your customers are satisfied.

Reminder fees are not default interest

You can add both reminder fees and default interest to the original invoice amount in your reminder notice. This applies to both civil debt collection and court-ordered debt collection proceedings, where you notify the local court of the amount demanded – consisting of the invoice amount, default interest, and, of course, the reminder fee of your choice.

You have considerable freedom in choosing the amount of the late payment fee, as long as you stay within a small range. (Of course, you can't simply choose €100.00 instead of €2.50 – that would be considered unreasonable and difficult to justify.) Default interest, on the other hand, is calculated precisely according to a fixed formula, without any room for interpretation.

Are late payment fees subject to VAT?

No VAT is added to late payment fees. Therefore, when you send a payment reminder, you are requesting payment for the original invoice amount – if the invoice includes VAT, the invoice amount consists of the net amount plus VAT. The late payment fees that appear separately on your reminder are not subject to VAT.

Please note the following when booking:

1. The late payment fees are recorded as other income and no sales tax is charged , as there is no exchange of services.
2. The interest must be recorded as interest income. No sales tax is levied on this either.
3. Collection fees are incidental costs of money transactions. The offsetting entry must be made to the "other income" account – this entry is therefore neutral with respect to profit and thus tax-free!

Late payment fees – short and sweet

Late payment fees are therefore genuine compensation for damages and are thus not subject to VAT. The recipient of a payment reminder, including late payment fees, can only claim the VAT on the original invoice amount in their input tax return. The safest option for the fee amount is €2.50 per reminder.

You can enter the late payment fees in CATAMA in the order editor under "Dunning". These will be displayed on the dunning notice, below the invoice amount, as dunning costs.

Should you have any questions about recording dunning notices in CATAMA, our support team available at any time.