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Taxation in Germany
 
 
 

BUSINESS TAXATION IN GERMANY

General

The principal taxes applicable to companies in Germany are the corporate income tax, municipal trade tax, value added tax and social security contributions. In addition to the normal corporate income tax, a surcharge of 5.5% of corporate income tax paid is levied to finance Germany’s reunification. Other taxes include municipal real estate tax, real estate transfer tax, and customs and excise duties.

Municipal trade tax is levied by the local authorities on business profits. The tax rate varies from community to community, but it averages 14%-15% of income from 2008. Before FY 2008, the trade tax was a deductible expense in computing corporate and trade tax liability; as from 1 January 2008, it is no longer deductible.

The most important corporate bodies established under German law that are subject to corporate income taxation are the AG and the GmbH, but others include the KGaA, trade and industrial co-operatives and mutual insurance companies. Comparable foreign entities are taxed as nonresidents and are only subject to tax on their German-source income. General and limited partnerships (OHG and KG) are not taxable entities for corporate income tax purposes, even though the taxable income of their partners is determined at the partnership level. General and limited partnerships may, however, be taxable entities for trade tax purposes.

Germany’s “split-rate” tax system was abolished in 2001 and replaced with a “classical” system of taxation. Under current rules, dividends received by resident companies are generally exempt from corporate income tax regardless of how long the participation has been held and regardless of the extent of the participation. However, 5% of the gross dividend is added back to taxable income as non-deductible business expenses, resulting in an effective tax rate of approximately 1.5% from FY 2008. The 95% exemption for dividends does not apply to certain banks, financial institutions, life or health insurance companies or pension funds, unless the EC Parent-Subsidiary Directive applies. Since the end of 2006, the exemption applies only if the dividend has not been treated as a deductible business expense at the level of the distributing company. The 95% exemption will generally only apply for trade tax purposes if certain minimum holding and minimum ownership requirements are met. In addition, certain activity requirements apply for shareholdings in companies that are resident outside the EU.

A similar rule applies for capital gains on the sale of corporate shareholdings. Capital gain arising from the sale of shares by a corporation should be 100% tax exempt with a 5% add- back as non-deductible business expenses. Exceptions apply to certain banks, financial institutions, life or health insurance companies or pension funds that do not benefit from the 95% exemption. Exceptions apply for shares that result from certain types of reorganisations at below fair market value that took place before 13 December 2006 if the shares are sold within seven years from the effective date of the reorganisation.

Taxable Income and Rates

The corporate tax rate is 15%, plus the 5.5% solidarity surcharge, which results in a combined rate of 15.825%. Corporations with a registered office or a German place of management and control are deemed to be resident in Germany and are subject to corporate income tax on their worldwide income. In practice, however, double taxation treaties generally provide that income earned in a foreign country will be taxed only in that country and remain tax-free in Germany.


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