Doing Business In Germany - Overview On Taxation
1.1 Generally, taxes are administered and enforced by the relevant local tax office. These local tax offices administer, in particular, the income tax to be paid by individuals, corporate income tax (CIT) to be paid by corporations as well as value added tax (VAT) and real estate transfer tax (RETT), where applicable. Trade tax is based on the assessment of corporate taxes but is enforced and assessed by the local municipalities.
1.2 The Federal Central Tax Office (Bundeszentralamt für Steuern) is, among other things, responsible for foreign taxpayers, e.g. for the exemption and tax refund of withholding tax according to double tax treaties and EU directives, advanced transfer pricing agreements as well as the issuance of tax rulings for foreign investors and for several measures in connection with VAT on cross-border supplies and services.
2.1 Corporations, such as the German limited liability company (GmbH) or stock corporation (AG), that are tax-resident in Germany are subject to CIT on their worldwide income, unless relieved by double tax treaties. Corporations are resident in Germany if their effective place of management or their registered seat is located in Germany. The place of management is the centre of the top management of a corporation. It is located where the commercial matters of some importance for the corporation are effectively decided, usually at the directors' office. The legal seat of a corporation is determined by the by-laws of the corporation. Foreign corporations that neither have their place of management nor their registered seat in Germany are only subject to CIT on their German-source income.
2.2 The calculation of the taxable income is based on the annual financial statements (Handelsbilanz) drawn up pursuant to general German accounting principles which must then be modified under specific provisions of tax law. These notably include regulations on the treatment of hidden profit distributions and restrictions on the deductibility of business expenses, in particular with respect to debt financing expenditures.
2.3 The taxable income includes the corporation's current profits or losses as well as any capital gains. In general, the entire profit is fully taxable. However, there are some exemptions. For example, the German Corporate Tax Act provides for a 95% tax exemption of dividends received, as well as capital gains from the sale of shares in other German or foreign corporations, unless certain restrictions apply.
However, this tax exemption may not be available if the selling corporation is a bank or other financial institution or, under certain conditions, is a holding company that holds the shares as trading assets. The tax exemption applies irrespective of a minimum shareholding or minimum holding period. In return, any losses arising from the ownership of shares, such as, for example, from the disposal or liquidation, are not tax deductible on the level of the corporation.
2.4 The CIT rate is 15%. In addition, the solidarity surcharge of 5.5% is levied on the amount of CIT due, which results in an aggregate tax rate of 15.825%. The local tax office where the central management of the corporation is located is the competent office for assessing the CIT.
2.5 Corporations are also subject to municipal trade tax. Foreign businesses, which do not have their registered office or place of management in Germany but receive income that is allocated to a German permanent establishment, are also subject to trade tax. The basic trade tax rate is 3.5%, which is supplemented by the application of a multiplier fixed by the competent municipality and varies from a minimum rate of 200% up to around 500%. Thus, the effective trade tax rate ranges from 7% to around 17.5%. As a result, corporations are subject to CIT (including solidarity surcharge) and trade tax at a combined rate between 22.825% and 33.325%. For trade tax purposes, the above-mentioned 95% tax exemption of dividends received from other corporations requires a minimum shareholding of 15% as of the beginning of the respective fiscal year.
2.6 Both CIT and trade tax are assessed on an annual basis. However, the determination of the taxable income may refer to a 12-month period deviating from the calendar year. Additionally...
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