That's not a good reason, Hetzner doesn't require that to not charge you VAT.
Yes, I agree it seems excessive.
Hetzner is in Germany. They might have different tax rules & audits.
Hetzner does in fact require the exact same verification for new customers.
Hetzner DOES ask for the same kind of documentation. I am in India and they asked me to send id and address proof when I signed up with them, which I did. And they don't charge me VAT.
No they do activation, or used to, by mail.
IMO this is for legal purposes.