Taxes- a fact of life! In Germany there is a corporate tax rate made up of business tax and municipal business tax. There is also a solidary surcharge on corporate tax.
Corporate tax and company law within Germany
Under German law companies come under one of two groups:
- Companies (incorporated)
- Partnerships (unincorporated)
Here are the principal differences:
- In terms of shareholders, companies provide limited liability whereas partnerships (on a whole) require unlimited liability
- A minimum share capital is necessary for a company. Financial services may be satisfied with other financial guarantees such as property for a partnership
- Companies are taxed as a distinct legal entity but a partnership only has partial legal entities. With regards to civil and tax law, profits and losses are the responsibilities of the partners.
You can find different types of entities defined for German companies in the Civil Code (Bürgerliches Gesetzbuch).
- Stock Company Law- Aktiengesetz, AktG
- Limited Liability Law- Geesetz betreffend die Gesellschaften mit beschränkter Haftung, GmbHB
- Commercial Code for partnerships- Handelsgesetzbuch, HGB
All new businesses, with the exception of civil law partnerships, have to register with the Commercial Register (Handelsregister) and also with the local trade office and tax authorities, regardless of the business’ activity.
Corporate Tax in Germany
Companies based in Germany are obliged to pay corporate income tax on income earned worldwide. There may be tax treaties or foreign tax credits for some forms of income from abroad, for example, income received from foreign permanent establishments.
Regardless of how the income is derived, the business activity, rental income, dividends, it will be considered business income and you will have to pay corporate income tax and business tax on all business income.
It is the law that companies maintain a booking system based on the accrual basis, profits are calculated by comparing net worth. Your profit will be the difference between your net assets at the end of the previous year and figure at the end of the current year.
If by any chance there are any discrepancies, you are required to complete a commercial balance sheet (Handelsbilanz) and a tax balance sheet (Steuerbilanz). To do this you can fill out two different financial statements or alternatively, you could explain the tax deviation by adding an appendix when filing your corporate income tax return.
Germany’s Solidarity Surcharge
All companies, resident, and non-resident will have to pay a solidarity surcharge. It is calculated at 5.5% of the corporate income tax required to pay by the taxpayer once all tax credits have been deducted. If a non-resident benefits from tax treaty, the total tax cannot be more than the maximum treaty rate and this includes the surcharge.
Tax Rates in Germany
- National German corporate tax rate- 15%
- Solidarity Surcharge- 5.5% on corporate tax (about 0.825% in total)
- Trade tax rates (set by local municipalities) – 14-17%
In total, companies will be looking at a corporate tax rate of approximately 30-33%. You might be able to deduct certain expenses (in a similar way to income taxes). There is a personal exemption for individuals and partnerships of 24,500€.
Corporate Tax Rate Credits in Germany
The credit is calculated at 3.8 times the amount of municipal business tax, there is a maximum that can be paid depending on all taxable income. Excess credit may not be refunded in the form of income tax and it won’t be carried on to the next year either. There are some cases of overcompensation and in these cases, you can use all of the credit against the income tax liability.
Income that is exempt from corporate tax in Germany
- Companies: capital contributions from when the business was formed or and increase in the capital.
- Shareholders: capital repayments but they must not contain dividend distributions. They will be taxed if they are more than the book value of the shareholder’s investment.
- 95% of domestic and foreign dividends
- 95% of capital gained from the sale of company shares
- Investment grants used in the new federal states
The Tax Year
The tax year is the same as a calendar year. All profits gained within the year are subject to taxes for that year. Once the company has been registered with the Commercial Register, it can choose its own financial calendar year.
