Germany has a robust, yet slightly complicated system of taxation, specially when it comes to corporate tax. All businesses in Germany are subject to the conditions of corporate tax, whether they are limited liability (GmbH), stock corporations (AG), or foreign businesses having a permanent establishment in Germany. Businesses pay corporate tax (German: Körperschaftsteuer) based on their net income accumulated in one business year. Businesses can, however, choose their financial year, once they have registered. German corporate tax consists of federal business tax and a municipal business tax. The average tax burden on businesses is under 30 percent, while there are a lot of variables which can affect the final amount.
Companies which are active in Germany but don’t have management or registered offices need to only pay corporate tax on their income.
In general, the income taxation consist of:
- Corporate income tax;
- Solidarity surcharge;
- Trade tax.
Since my firm is an expert at corporate taxation, I wanted to explain the different forms of corporate tax, and how it affects different businesses, based on the nature of the business, and how their revenue / profit structures are set.
In accordance with the German tax law, there are several options for managing tax as well as several income correction rules.
Solidarity surcharge
A solidarity surcharge (German: Solidaritätszuschlag) is a component of company taxation. Essentially, it is deemed as an additional fee on top of corporate tax. It is charged at a flat rate of 5.5%.
Trade tax
Irrespective of a company’s legal form, commercial businesses in Germany are subject to trade tax (German: Gewerbesteuer). As a rule, the local authorities determine the trade tax. As such, the tax determined can be different in each municipality.
It is not legally regulated, but the German average trade tax rate is on average above 14%.
Taxation of GmbH
A GmbH is a corporation and is subject to taxation based on its profit as a legal entity. The GmbH must pay corporate income tax of 15 %, solidarity surcharge of 0,825 % and trade tax of about 15,4 %, so the tax rate is approximately 32 %. Salary payments to shareholders or other payments from the GmbH are tax deductible. Companies also have to pay the tax on their turnover (VAT).
Exemptions for Corporate Tax
There are various incomes exempt from the German corporate tax, including but not limited to:
- Company level capital contributions when a company is formed, or when a company decides to increase its capital.
- Capital repayments by businesses at a shareholder level. This is contigent to the repayments not containing dividen distributions.
- Dividends to the tune of 95%, both domestic and foreign dividends.
- Shares sold leading to capital gains to the tune of 95%
Investment grants
Companies are bound to submit tax retruns to the tax authority once a year. Corporate tax in Germany is a complex topic, one which covers various facets and changes based on the nature of the company, its revenue, profits and policies set by them and the state. Get in touch with us at jaberi@jaberilawyers.com to know more about corporate taxation and how it affects your business.
