Germany personal income tax (Einkommenssteuer) rates are progressive up to 45%.
Taxable income (EUR) Tax payable (EUR)
Less than 8,004 Nil
8,005 to 52,881 Progressive rates of between 15% and 42%
52,882 to 250,000 42%
More than 250,000 45%
The highest tax rate is 45% for taxable income of individuals that exceeds EUR 250,000 (EUR 500,000 for married couples).
Income tax is payable by German resident individuals on their worldwide income. Non-resident individuals are only required to pay tax on German-sourced income.
Individuals are deemed resident if they have a residence in or their customary place of abode is in Germany. The latter is the case if the individual has spent more than 180 consecutive days of the relevant year in Germany.
Income tax is payable on assessable income less allowable deductions. Assessable income includes business income, income from agriculture and forestry, income from self-employment, income from employment, certain capital gains, capital investment income, and rental and royalty income. Allowable deductions include personal allowances, deductions for business/professional expenses and contributions to specified (insurance) bodies.
Individual taxpayers suffer instalment payments which are withheld from their salaries by their employers. Self-employed individuals and those with non-salary income pay instalments on a quarterly basis with reference to the income realised in the previous year.
Retained profits from a trade or business, agriculture or self-employment generated in business years ending after 31 December 2007 by individually-owned firms or partnerships are taxable upon application at a reduced tax rate of 28.25%. When profits are withdrawn, the amount withdrawn is subject to a further tax charge (tax rate 25%) in the assessment year of the withdrawal but is reduced by taxes already paid on the profits distributed. Interest and dividend income is subject to a 25% flat withholding tax plus surcharge of 5.5% of the tax due only. Expenses connected with the receipt of investment income are not deductible but a lump sum of EUR 801 can be deducted. The shareholder may opt to report the interest in his income tax return if the withholding tax rate exceeds his marginal income tax rate.
If the taxpayer is married, the income of the taxpayer is combined with the income of the spouse. Then the tax on 50% of the combined income is doubled correspondingly. In addition to the personal income tax, a surcharge is levied at the rate of 5.5% of the personal income tax.
Social security contributions are withheld from employees' salaries and wages. The employer and employee each generally contribute 50% of the total social security contributions. From 1 January 2010 the deductibility of medical insurance contributions has been reformed for income tax purposes to a large extent in favour of the taxpayer.
Members of the Roman Catholic, German Protestant, Lutheran and Jewish churches have to pay church tax. The tax rate amounts to about 8% or 9% of the annual income tax liability and varies according to the district of residence. It is a deductible expense for income tax purposes.
Assets transferred by gift or inheritance are subject to tax. If either the transferor or the recipient is resident in Germany, all transferred assets are taxed wherever situated. If neither party is a German resident, the tax is limited to property located in Germany. The Federal Republic of Germany keeps tax treaties with six countries for these purposes - Austria (expired 1 January 2008), Denmark, Greece, Sweden, Switzerland and USA.
With effect from 1 January 2009, the German national Inheritance and Gift Tax Act was significantly reformed. The tax rates and exemptions vary according to the relationship between the transferor and the recipient and the value of the assets. Where children or the spouse are the beneficiaries, the rates range between 7% (where the assets have a value of EUR 52,000 or less) and 30% (where the assets have a value of more than EUR 25,565,000). In the new legislation the rates for brothers and sisters have been reduced and vary between 15% and 43%. If the transferor and the beneficiary are unrelated, the rates vary between 17% and 50% respectively. The spouse of the transferor is granted a personal allowance of EUR 500,000 and the children of the transferor are granted an allowance of EUR 400,000.
Germany corporate tax (Körperschaftssteuer) rate is 15% plus 5.5% surtax plus trade tax assessed independently by each municipality, which ranges from 7% to 17.50%.
German-resident companies are subject to tax on their worldwide income. Nonresident companies are required to pay tax in various forms on income derived from German sources.
Resident companies are those that are incorporated in Germany or have their place of management and control in Germany.
The corporation tax rate is 15%. In addition, a surcharge is levied at the rate of 5.5% of the corporation tax.
The tax year in Germany is the calendar year. Companies are required to make quarterly prepayments of tax based on the previous year's income. Corporation tax returns should be submitted by 31 May of the following year. An automatic extension of seven months (31 December) is granted for returns prepared by a tax consultant.
TRADE TAX (Gewerbesteuer)
Trade tax is applied only to business income. (Trade Capital Tax was abolished with effect from 1 January 1998.) All business enterprises operating in Germany are subject to this tax. The trade tax rate is assessed independently by each municipality. The effective tax rates range from 7% to 17.50%.
From 1 January 2008 individuals may deduct trade tax as a block credit to a certain extent against individual income tax. No tax relief by deduction or credit will be available to companies.
CAPITAL GAINS TAX
There is no special or separate capital gains tax. For privately held shares a flat withholding tax of 25% plus surcharge of 5.5% of the tax due has recently been introduced (for details see below under 'Capital gains and losses').
BRANCH PROFITS TAX
There is no separate branch profits tax in Germany. Trading profits and capital gains of a German branch of a foreign company are calculated and taxed on the same basis as those of a German resident company.
FRINGE BENEFITS TAX
For some services provided to its employees (eg canteen food, office outings, transportation of employees, accident insurances and payments to retirement funds), the company has the option to pay the income tax on account for the employee. The tax is paid at a flat tax rate which varies depending on the service provided from 15% to 25% of the given value.
In Germany a net wealth tax is not levied. Other taxes include real estate transfer tax (RETT) at a rate of 3.5% (Berlin, Hamburg and others may follow: 4.5%) and insurance tax (excluding life insurance and private medical insurance) at 19%. Certain exemptions for RETT on intra-group restructurings have been introduced with effect from 1 January 2010.
DETERMINATION OF TAXABLE INCOME
The taxable income of a company is determined by ascertaining assessable income and then subtracting all allowable deductions. Business expenses are generally deductible for tax purposes, although there are some exceptions such as entertainment expenses which are only 70% deductible. Special rules apply in respect of the categories listed below.
Tangible fixed assets, other than land, are written off over their estimated useful lives at rates prescribed by the tax law or an administrative regulation. For tangible goods bought after 31 December 2007, only the straight-line method of depreciation can be used. The declining-balance method applies for movable assets bought before 31 December 2007 and for a transition period between 31 December 2008 and 1 January 2011. In the case of a long-term devaluation of assets, an extraordinary depreciation is allowed. This write-down has to be reversed if the value of the asset goes up again.
From 2010 onwards, assets with purchase costs from EUR 150 to EUR 1,000 exclusive of VAT can be pooled every year. The pool for each year has to be written off in five years. Here the straight-line method applies. A new law allows a taxpayer to elect for an immediate write-off of goods with a value of less than EUR 410 from 2010.
Inventory includes raw materials, work-in-progress, finished goods and payments on account. Each item of inventory must be valued at acquisition cost or cost of production. Accepted valuation methods include 'last in, first out' (LIFO) and average cost.
CAPITAL GAINS AND LOSSES
In principle, capital gains from business assets are taxed at the ordinary tax rate. Profits on the sale of land and buildings may be reinvested tax-free (roll-over relief).
Where the shareholder is a corporation, capital gains relating to the sale of shares held in an enterprise (German or foreign) are tax-free with effect from 2002. Correspondingly, a write-down of a participation does not have any tax consequences. Neither will losses arising from the sale of such a subsidiary be recognised for tax purposes. A flat rate of 5% is deemed to be a non-deductible business expense irrespective of the actual expenses incurred by the company.
Where the shareholder is an individual or a partnership, capital gains arising from the sale of shares held as business assets are taxable, but only 60% of the capital gain is added to the individual's/partner's annual gross income. The remainder is tax-free (40% participation exemption). Correspondingly, only 60% of the losses are deductible. Capital gains realised by partnerships are tax-free if reinvested in shares within two years (roll-over relief).
Where the shareholder is an individual, capital gains arising from the sale of privately held shares bought after 31 December 2008 are subject to a 25% flat withholding tax plus a surcharge of 5.5% of the tax due if the participation is below 1%. If the participation is 1% or more, the rules for shares held as business assets apply.
Losses from the sale of privately held shares may be deducted only from gains arising on privately held shares. Non-deductible losses may be carried forward.
Capital gains arising on the sale of privately held shares bought before 31 December 2008 are not taxed unless the assets are sold within one year. In this case, only 50% of the capital gain is added to the individual's annual gross income. The remainder is tax-free (50% participation exemption). Correspondingly, only 50% of the losses are deductible.
Capital gains arising from the sale of other privately held movable assets are not taxed unless the assets are sold within one year. Capital gains arising from the sale of privately held land and buildings are not taxed unless the assets are sold within ten years.
Dividend income is subject to 25% withholding tax plus a surcharge of 5.5% of the tax due. The withholding tax rate may be reduced in accordance with tax treaties or EU regulations (Parent-Subsidiary Directive).
Where the shareholder is a corporation, the dividend income is tax-free (100% participation exemption). However, a lump sum of 5% of the gross dividends is added back to taxable income representing non-deductible business expenses, irrespective of the actual expenses incurred by the company. This applies to dividends received from both German and foreign enterprises. There is no minimum shareholding and no minimum holding period for corporate tax purposes. For trade tax purposes a 15% minimum participation is required as at the beginning of the calendar year.
Where the shareholder is a partnership, only 60% of the dividend income is added to the partner's annual gross income. The remainder is tax-free (40% participation exemption). Correspondingly, only 60% of the expenses directly connected to the dividend are deductible. A resident taxpayer may credit the withholding tax which has been deducted by the corporation against his own individual tax liability.
Corporation tax can no longer be credited against the individual tax.
Where the shareholder is an individual, dividends are subject to a 25% flat withholding tax plus a surcharge of 5.5% of the tax due. However, if the withholding tax rate exceeds the marginal income tax rate of the shareholder, the shareholder may opt to report the dividend in his income tax return instead. Economically connected expenses such as financing fees will no longer be deductible.
Interest is deductible to the extent that it is payable on loans taken out to generate taxable income. Where interest is paid in order to finance a participation in another company, the above mentioned special provisions concerning business expenses which are directly related to tax-free dividends apply.
In order to combat abusive transfers of profits outside the German tax jurisdiction, an "interest barrier" limiting the deductibility of interest payments as business expenses has been introduced. Interest payments are generally deductible if they do not exceed interest income for the period. The excess amount is only deductible up to 30% of EBITDA as defined for tax purposes. An additional safe haven of EUR 3,000,000 is granted for excess interest expenses before the 30% barrier applies. In addition to this, an EBITDA carry-forward has been introduced with retroactive effect from 1 January 2007.
The interest barrier is only applicable for companies belonging to a group. Such a group is deemed to exist if a German company may be consolidated with other companies.
The interest barrier does not apply to companies that are part of a group if, under IFRS, the ratio of equity to total assets of the company is equal or higher than the ratio of equity to total assets for the group as a whole. In addition, a shortfall of up to 2% (1% up to 31 December 2009) compared to the group ratio is permissible. The escape clause will not be applicable for corporations if more than 10% of the interest expenses are on relatedparty debt, ie to shareholders with participations of 25% or more.
In the year in which they are incurred, losses may, in principle, be deducted without restrictions. Remaining losses may be carried back to the preceding accounting period up to an amount of EUR 511,500 and, if there are still losses, they may be carried forward indefinitely to future years. However, in each future year, the deduction must not be more than EUR 1m plus 60% of any remaining profit. Loss carry-forwards may be forfeited by certain share transfers or corporate restructurings.
FOREIGN SOURCED INCOME
Foreign sourced income is generally taxable. In addition, Germany has a controlled foreign company (CFC) regime. Its objective is to ensure that profits of German controlled companies are not transferred to, or generated in, low tax jurisdictions. A low tax jurisdiction is deemed to be any country which taxes income at a rate of less than 25%. Where German residents hold more than 50% of the shares or the voting rights of an intermediate corporation with passive income, the income is deemed to be distributed to the German shareholders and taxed at their level if the intermediate corporation is located in a low tax jurisdiction. Under certain conditions, a participation of 1% in the foreign intermediate corporation is sufficient to trigger the CFC taxation.
Profit distributions by corporations and capital gains arising from the sale of these participations are deemed to be active income. Income derived by foreign holding companies is thus effectively exempt from CFC tax.
Qualifying investment aids are tax-free and available in selected areas from local authorities for the improvement of the regional economic structure. Investment grants are provided by the tax authorities for the acquisition of new buildings or depreciable, new movable assets in the new federal states.
FOREIGN TAX RELIEF
Even in the absence of a tax treaty, foreign tax on income derived by a German resident may be credited against his income or corporation tax liability. The tax relief must not exceed the German tax charged on the same profits. Alternatively, the foreign tax may be deducted from the income of the German resident.
Profits and losses of German group companies may be pooled for corporate tax and trade tax purposes if the requirements of the so-called 'Organschaft' are met. The controlling company must hold – directly or indirectly – the majority of the shares of the controlled company and there must be a profit and loss pooling agreement between the two companies.
RELATED PARTY TRANSACTIONS
Inter-company pricing between affiliated companies must be carried out on an arm's length basis. If this is not the case, the income of both companies is adjusted for tax purposes. Arbitration proceedings are available within the European Union.
Legislation is in force that specifies the duty to document the way in which a taxpayer arrives at the transfer prices he charges on transactions with foreign closely related persons/enterprises. The documentation must encompass the nature and contents of the business relationship and the economic and legal basis underlying the arm's length prices. Specific legislation applies to a "transfer of functions" between intra-group companies.
Under domestic law, all dividends, regardless of whether they are paid to a resident or a non-resident, are subject to a 25% withholding tax plus surcharge of 5.5% of the tax due as a flat tax. This is reduced to nil in the case where the shareholder satisfies the conditions of the EU Parent/Subsidiary Directive (broadly that the shareholder is an EU resident company with a 10% or more interest in the company paying the dividend). Interest is subject to a 25% withholding tax plus surcharge of 5.5% of the tax due if it is paid to a resident. Interest paid to a non-resident is not liable to withholding tax. Royalties paid to a non-resident are subject to a 15% withholding tax plus a surcharge of 5.5% of the tax due. Certain German tax treaties provide for an exemption or a reduced rate.
There are no exchange control requirements.
This is a tax on the supply of goods and services, other than exempt supplies and
services, rendered in Germany by a taxable person. The tax rates are as follows:
- Standard rate: 19%
- Reduced rate: 7%
VAT Registration – German entrepreneurs must generally register for VAT purposes. The registration threshold is turnover of EUR 17,500 in the previous calendar year and estimated turnover of EUR 50,000 in the current calendar year. Nonresidents that make taxable supplies of goods or services in Germany also must register.
Filing and VAT payment – The tax year is the calendar year. The entrepreneur must file an electronic quarterly preliminary VAT return by the 10th day of the following month and pay the tax due. A refund will be paid if the input tax exceeds the VAT. If the tax for the previous calendar year was more than EUR 7,500, monthly preliminary returns must be filed.
Income Tax Rate
Corporate Tax Rate
Sales Tax / VAT Rate
Last Update: Nov 2010
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