The most important taxes for corporations including branches in Germany are: corporate income tax (Körperschaftsteuer), trade tax (Gewerbesteuer) and value added tax (Umsatzsteuer). Property tax (Vermögensteuer) has not been levied since 1997 because of concerns under constitutional law. Trade tax on capital was abolished in 1997 effective from 1998 onwards.
Once a corporation commences its business activities in Germany, it is automatically subject to taxation in Germany. A branch, however, is not automatically subject to taxation upon engaging in activities in Germany due to exemptions under the various double tax treaties to which Germany is a partner. If a branch is not treated as a “permanent establishment” under the provisions of a particular double tax treaty (e.g. Article 5 Sec. 4 of the OECD Model Tax Treaty), it is not subject to German taxation. Likewise, if a German representative office of a foreign corporation merely supplies information to customers in Germany but otherwise does not provide any other service in Germany, the office is not deemed to be a “permanent establishment” and, thus, is not taxable in Germany. If the business enterprise is considered to be a permanent establishment, only that portion of the income of a foreign company which is attributable to its German permanent establishment is subject to income taxes.
Corporate income tax in Germany is payable at the rate of 15% of taxable income, regardless of whether the income is distributed or not. The 15% rate also applies to permanent establishments of non-resident companies. In addition, a 5.5% solidarity surcharge is imposed on the corporate income tax assessed.
Municipalities impose a trade tax on income. All business enterprises are subject to trade tax, regardless of whether they are deemed as a corporation, permanent establishment or partnership. Trade tax is based on the profits. For purposes of calculating the trade tax basis, the taxable income is subject to certain adjustments, such as a mark-up of 25% on interests on debts, of 5% on leasing rates for mobile goods, of 12.5% for leasing rates on immobile goods and of 6.25% on royalties. A tax allowance of up to EUR 100,000 is granted by law. The effective rate of trade tax on income depends on the multipliers stipulated individually by the various municipalities. The effective tax rate presently ranges between 7.00% and 18.73%.
Certain specified professions, such as physicians, lawyers and architects are exempt from trade tax. However, in these cases, trade tax is not deductible from the assessment basis of corporate tax and income tax.
The table below compares the tax burden of a subsidiary with the tax burden of a permanent establishment. In the example, the parent company as well as the subsidiary are corporations:
|EU-Parent Company (PC)1||PC in DTT countries2||non-EU PC, no DTT|
|Profit before Income Tax||100.00||100.00||100.00||100.00|
|Corporate Income Tax 15%||– 15.00||– 15.00||– 15.00||– 15.00|
|Solidarity Surcharge 5.5% on Corporate Income Tax||– 0.83||– 0.83||– 0.83||– 0.83|
|Trade Tax e. g. 15%||– 15.00||– 15.00||– 15.00||– 15.00|
|Profit after Tax = Dividend||69.17||69.17||69.17||69.17|
|Withholding Tax 0%/5%/25%/-||0.00||– 3.46||– 17.29||not applicable3|
|Solidarity Surcharge on Withholding Tax 5.5%||0.00||0.00||– 0.95||0.00|
|Net Dividend after German Taxes||69.17||65.71||50.93||69.17|
|Tax Burden (Germany)||30.83||34.29||49.07||30.83|
1according to EU Parent/Subsidiary Directive
2withholding tax is reduced to 5% – 15% according to the respective double tax treaties (DTT), here implicated 5%
3no special branch profit tax applicable
Capital gains received by corporations, except those derived from the sale of shares, do not enjoy preferential tax treatment. Rollover relief, however, is granted if gains derived from disposals of real estate are reinvested in real estate within four years, and if certain other conditions are met.
Capital gains received by corporations derived from sale of shares in German and foreign corporations will be exempt from tax, but five percent of the tax-exempt capital gain is treated as a non-deductible expense.
For corporate income tax purposes (not trade tax), a loss can be carried back to the previous year. The maximum loss carry back is EUR 1,000,000. Remaining losses can generally be carried forward without a time limit (corporate income and trade tax). They can be charged against profits in the subsequent year, up to a limit of EUR 1,000,000. Profits exceeding this limit can only be shortened by remaining losses by 60%.
Under the current tax regime, dividends received by German companies in the legal form of a corporation from German and/or foreign corporations will be exempt from corporate income tax, if the shareholding in the corporation is at least 10% at the beginning of the calendar year. Five percent of the tax-exempt dividend income received from (foreign or German) corporations is treated as a non-deductible expense. If the shareholding in the corporation is less than 10% the dividend payment is subject to corporate income tax.
If the shareholding in the distributing corporation is less than 15% at the beginning of the calendar year, the received dividends are fully trade taxable. If the shareholding in the distributing corporation is 15% or more at the beginning of the calendar year, only five percent of the dividend income is trade taxable.
Generally, any entrepreneur or company
(incorporated or not) is subject to Value Added Tax (VAT). The taxable base is the consideration agreed upon (exclusive VAT) for goods supplied and services rendered. For imported goods, the taxable base is the value at importation including customs duties and expenses as far as non-EU countries are concerned. In computing the final tax liability, the tax paid on purchases of goods and services rendered may be deducted by the entrepreneur or is refunded by the tax authorities, so that, in effect, only the value added is taxed.
The current standard VAT rate is 19%; the reduced VAT rate of 7% applies to specific goods (certain agricultural goods, food, printed products and art objects as listed in the Value-Added Tax Act and its Annex 2). Since the beginning of 2010 the reduced VAT rate of 7% is also applicable on remuneration paid for hotel accommodation.
There are special rules that deal with the taxation of transfer of goods and services within the EU. Special rules and allowances also apply to transactions concerning real estate.
In addition to VAT, an import duty (Zoll) can be levied on the importation of goods into Germany. The duty is paid at the time the goods enter the EU; thereafter the goods can circulate in the EU without further duty.
German tax law provides a tax consolidation for a German tax group (Organschaft). This tax consolidation is applicable for purposes of corporate income/trade tax and VAT. To apply these special rules, certain preconditions must be met.
For corporate income and trade tax purposes, a more than 50% shareholding in a German subsidiary (financial integration) and a profit and loss transfer agreement (Ergebnisabführungsvertrag) is required. The profit and loss transfer agreement is concluded between the group parent company and the subsidiary and must be entered in the trade register. It must be executed for a period of at least five years. Only if these criteria are fulfilled, the subsidiary’s net income is attributed to the group parent company for corporate income tax and trade tax purposes. In this case, losses of group companies can be off-set against profits of other group companies.
For VAT purposes, the financial integration, economic integration and integration in organizational matters are required. If these preconditions are met, the controlling company is considered to be the sole VAT subject of the tax group.
As in many other countries, the corporate tax law in Germany provides a thin capitalization rule: the so called “interest barrier rule” with the fiscal aim of limiting the deductibility of extensive interest payments.
Interest payable exceeding interest earned can only be deducted up to 30% of the (tax) EBITDA when the exceeding interest payable is EUR 3,000,000 or higher. If the exceeding interest payable is below EUR 3,000,000, interest is fully deductible. Excess interest payable which could not be deducted according to the rule can be carried forward (comparable to losses). This interest barrier rule is not applicable if the company is not part of a group, or when the equity ratio of the company is not lower than the average group equityratio (2% divergence is allowed) – so called “escape-clause”. Regarding corporations, the application of the escape-clause is subject to additional regulations.
However, the German Federal Fiscal Court (Bundesfinanzhof) questions if the interest barrier rule is consistent with German constitutional law. Thus, it might bring the case to the German Federal Constitutional Court (Bundesverfassungsgericht). It remains to be seen whether the interest barrier rule continues to be applicable in future.
The regulations concerning the forfeiture of the tax loss carry-forward in case of change in ownership were modified in 2009. First, a distinction must be drawn between the change in ownership up to 25%, from 25% to 50% and of 50% or more. An acquisition of stock less than 25% in a corporation is not considered as harmful and does not trigger a shortfall in the tax loss carry-forwards. A change in ownership of 25% or more within five years causes a respective forfeiture of 25% or more of the loss carry-forward. A change in ownership of 50% or more within five years causes the total forfeiture of the loss carry-forward.
Finally, there is an exception to the restrictions on loss-offset explained above. In case of a harmful change in ownership a loss-offset is possible to the amount of the hidden reserves of the respective company.
A German Fiscal Court brought the case to the German Federal Constitutional Court (Bundesverfassungsgericht) if the forfeiture of the loss carry-forward resulting from the change in ownership is consistent with German constitutional law.
On March 29th, 2017, the German Federal Constitutional Court decided that the regulation regarding the partial forfeiture (change in ownership between 25% and 50%) is not consistent with German constitutional law and asked the German legislation to adjust the rule until 31 December 2018. Also as a reaction to the financial crisis a new recapitalization exemption was introduced in 2009. If an investor clearly showed that the acquisition of a corporation is executed for the purpose of recapitalization, meaning the prevention or deletion of illiquidity and debt overload of the target, and the investor pursues by maintaining the basic business organization, he would have kept the full tax loss carry-forward (“Sanierungsklausel”). Nevertheless, in 2010 the European Commission started an investigation into the Sanierungsklausel and decided in January 2011 that it violates European law. The German Federal Government filed an action of nullity, but failed to file a timely complaint. Thus, no Sanierungsklausel is applicable at the moment.
However, at the end of the year 2016 a new rule was introduced. According to this provision a forfeiture of the loss carry-forward can be avoided if the corporation’s business remains unchanged after the change in ownership (so called fortführungsgebundener Verlustvortrag).
Intercompany charges such as management fees, rentals and royalties charged by a foreign parent to its German subsidiary will be recognized as deductible expenses to the extent that they satisfy
the arm’s length principle. The German tax authorities release the “administrative principle” to determine whether an arm’s length transaction has existed. Arm’s length prices are predominantly evaluated under the traditional methods (comparable uncontrolled price method, resale price method, or cost-plus method). Additionally, profit methods (TNMM or profit split method) could be used, if no unrestricted comparable data is available. Inter-company charges which do not meet the arm’s length criteria could be treated as hidden profit distribution and are subject to corporate income and trade tax. The determination of transfer prices must be documented carefully and on a regular basis.
Generally, it is highly recommended that the parent company enters into a written agreement prior to providing goods or services to its subsidiary. A written documentation on transfer pricing must be available for each business relation to an affiliate foreign person or company. If the documentation cannot be presented in a course of a tax audit, tax authorities are able to assess a surcharge of 5 – 10% of the amount of the adjusted income asserted. These rules apply to foreign entrepreneurs who maintain a branch in Germany as well as to a German subsidiary of the foreign investor.
Resident individuals are subject to income tax (Einkommensteuer) on their worldwide income unless otherwise provided in a double tax treaty.
Income tax is levied at progressive rates:
|Basic Personal Allowance in EUR1||Minimum Tax Rate||Top Tax Rate|
|8,652 (2016) / 8,820 (2017) / 9,000 (2018)||14.0%||45.0%|
From 2008, onwards a new regulation regarding cross border business restructuring has been introduced. Consequently, a shifted business function has to be evaluated and its transfer is subject to tax. Valuation methods that are used in acquisition deals between independent parties should be applied to determine the respective transfer price. 1For married couples, the basic personal allowance is twice the amount.
The maximum tax rate is 45% for income exceeding EUR 256,303 (2017)/EUR 260,532 (2018), (wealthy additional tax surcharge). For income below EUR 256,304 (2017)/EUR 260,533 (2018) the maximum tax rate remains at 42%. In addition, a 5.5% solidarity surcharge is imposed on the income tax assessed. Expenses incurred in acquiring and maintaining taxable income may be deducted. Furthermore, special expenses (Sonderausgaben) and exceptional expenditure (außergewöhnliche Belastungen) may lower the taxable income. Spouses are taxed under a splitting of income lowering their progressive tax rates.
Capital gains derived by the sale of certain mobile goods are only taxable if the period between date of purchase and date of sale is one year or less, or for real estate, a period of 10 years or less applies.
Starting from 2009, on all capital earnings of private investors a flat tax rate of 25% is levied (plus 5.5% solidarity surcharge). Capital gains derived from the disposition of shares are taxable irrespective of the holding period. Several other forms of capital earnings such as dividends, interests and earnings from investment funds are subject to the flat tax. No expenses will lower the tax basis, only a standard deduction of EUR 801 p.a. is granted. For married couples, the standard deduction is EUR 1,602. Among other regulations, losses resulting from capital earnings cannot be set-off against other earnings, but can be carried forward to be set-off against future profits resulting from capital earnings. Losses resulting from the sale of shares will be separated and can only be set-off against capital gains resulting from the sale of shares.
Capital gains derived from an investment with a shareholding of 1% or more are taxable as business income. Furthermore, capital earnings earned by a sole proprietor or by a commercial partnership are regarded as business income and are subject to a special treatment (partial income treatment/ “Teileinkünfteverfahren”). Gains in the sale of shares or the receipt of capital earnings are taxed only under 60% of its basis with a progressive tax rate. Therefore, 40% of such income is tax-free.
Capital income earned in corporations is not affected by these provisions.
Non-residents are generally liable on certain German sources of income. A special tax rate may apply. Germany’s right of taxation may be limited by double taxation treaties (see ‘Tax treaties’ section).
Under the German tax regime, partnerships (general partnerships and limited partnerships) are regarded as being transparent. Therefore, the partners are liable to income tax on their individual proportion of the partnership’s profit. Profits remaining in the partnership or in the enterprise of a sole trader (retained profits) will be taxed differently at a lower tax rate (28.25%) on application. In the case of an interest in a partnership, this privilege is only applicable if the respective share of profit is exceeding 10% or the profit allocated to this interest is exceeding EUR 10,000. The withdrawal of these retained profits will be taxed at a rate of 25%.
Real estate is subject to real estate tax. The tax imposed on the real estate is calculated by multiplying the tax basis with a multiplier which is determined by the municipality and ranges from 2.6% to 6%.
Real estate transfer tax, imposed on sales and transfers of real estate, including buildings, and on certain transactions that are deemed to be equivalent to transfers of real estate. The tax is levied on the purchase price of real estate. The tax rate is stipulated by the various federal states and ranges between 3.5% and 6.5%. From 2010 on, the reorganization within groups of companies will often be exempted from real estate transfer tax. However, any transfer of real estate by a participating entity during a period of five years before or after a change of legal form would trigger taxation.
To avoid double taxation, Germany holds numerous tax treaties with many foreign countries. In absence of a tax treaty, taxes paid abroad can be credited against German tax liability if the foreign taxes are equivalent to a German tax. Within this tax credit there are two possibilities: offset of the assessed tax or deduction from the tax basis. It is the taxpayer’s choice which one to take.
Within the numerous tax treaties between Germany and several foreign countries, the right of taxation is usually granted to either the country of source of income or to the country where the recipient resides. In this case, the other country has generally no right of taxation concerning this source of income (“Freistellungsverfahren”). In other cases, where double taxation cannot be completely avoided, foreign tax credit is allowed in order to relieve the impact
of double taxation. In most tax treaties capital income, for example, which is usually taxed in the recipient’s resident country, can also be subject to withholding tax in the country of source. This withholding tax can be credited against the German tax duty as a relief.
Germany has concluded tax treaties concerning taxes on profits and assets with 96 countries. Please see appendix for a list of countries (status: January 1st, 2017).
Furthermore, Germany has concluded tax treaties concerning other taxes with several countries. Concerning inheritance tax, the following tax treaties have been concluded:
Denmark, France, Greece, Sweden, Switzerland and United States.