Corporate Tax in Germany: What You Need to Know Before You Start or Expand Your Business
As a business owner or founder, you may be confused about how corporate taxation works in Germany. Companies must pay different types of taxes, and the tax burden can vary depending on the company’s size and profits.
You may wonder how much you will need to pay in taxes if your company does business in Germany. The amount of tax your company owes depends on many factors, including the type of business activities your company undertakes and the profit your company makes.
This guide will teach you everything you need to know about corporate taxation in Germany. You’ll learn about the different types of taxes companies must pay and the tax rate each company must pay.
What is corporate tax, and who pays it in Germany?
Corporate tax is a tax levied on the profits of corporations, such as limited liability companies (GmbH), stock corporations (AG), cooperatives, etc.
Anyone running a German business or carrying on a trade is subject to corporate tax in Germany, regardless of their legal form or residence status.
What are the main components of corporate tax in Germany?
The main components of corporate tax in Germany are:
- Corporation tax (Körperschaftsteuer), which is levied at a uniform rate of 15% plus a solidarity surcharge (SolS) of 5.5%, resulting in a total rate of 15.825%.
- Trade tax (Gewerbesteuer), which is levied by local authorities on business income, with rates varying from municipality to municipality, ranging from around 7% to 21%, in most localities, resulting in an average effective rate of around 14%.
Hence, the effective corporate tax rate ranges from 22.825% to 36.825%, depending on your business location.
Use our free corporate tax calculator to determine your effective corporate tax rate.
How does corporate tax affect your business income and profits?
Corporate tax affects your business income and profits by reducing your net income after deducting expenses, allowances, exemptions, etc.
The corporate tax also affects your cash flow, as you must pay taxes periodically throughout the year based on your estimated or actual profits.
Corporate income tax can also affect your investment decisions, as different financing costs can have different tax implications based on different depreciation options.
Corporate Income Tax (CIT)
What is the Corporate Income Tax rate, and how is it calculated?
The Corporate Income Tax rate is 15% plus a solidarity surcharge of 5.5%, resulting in a total rate of 15.825%.
The Corporate Income Tax is calculated on your taxable income, which is your gross income minus expenses, allowances, exemptions, etc.
How do you pay Corporate Income Tax, and when are the deadlines?
You pay Corporate Income Tax by filing a tax return and paying the tax authorities.
The deadline for filing a Corporate Income Tax return is usually July 31st of the following year. However, it can be extended if you hire a professional tax consultant. Then you even have 14 months.
Due to special circumstances such as the COVID 19 pandemic, there are equally extended filing deadlines for the next few years, which vary from year to year.
The deadline for the final CIT payment is usually one month after receiving the final tax assessments.
There are possibilities to make advance payments already during the year. If advance payments have been set, they must also be made on time. Otherwise, additional late payment penalties will be incurred. Sometimes the tax office also sets advance payments on its own. These can be changed at any time with an application.
The payment dates for CIT prepayments are March 10, June 10, September 10 and December 10.
What are some common deductions and allowances for Corporate Income Tax purposes?
Some common deductions and allowances for Corporate Income Tax purposes are:
- Business expenses include wages, rent, interest, depreciation, etc.
- Loss carryforwards and carrybacks allow you to offset losses against profits from previous or future years.
- Dividends received from domestic or foreign subsidiaries are generally exempt from taxation under certain conditions.
- Research and development costs can be deducted from your income.
How do you file a Corporate Income Tax return, and what documents do you need?
You file a Corporate Income Tax return electronically using an official form provided by the tax authorities.
You need various documents to support your return, such as financial statements, balance sheets, profit and loss accounts, etc.
Trade Tax (TT)
What is Trade Tax, and how does it differ from Corporate Income Tax?
Trade Tax is a tax levied by local authorities on business income, regardless of whether it is distributed or retained.
Trade Tax differs from CIT in that it is based on a different tax base, which includes certain adjustments such as adding back 25% of financing costs over EUR 200,000, and it varies depending on the municipal tax rate (Hebesatz), which ranges in most areas from around 7% to 21%. Anyway, there is even one special district with a trade tax rate as high as 31.5%. So, please check your trade tax rate before you start with your business! Try out our trade tax calculator to determine the rate in different municipalities. If you are keen to learn more about this tax, check our article dedicated to trade tax in Germany.
How is Trade Tax calculated, and what factors affect it?
Trade Tax is calculated by multiplying your adjusted profit for CIT purposes by a uniform base rate of 3.5% and then by the municipal tax rate.
The factors that affect TT are your profit level, financing structure, location, and any deductions or exemptions you may qualify for.
How do you pay TT, and when are the deadlines?
You pay Trade Tax by filing a tax return and paying the local tax office.
The deadline for filing a Trade Tax return is the same as for the CIT and it is usually July 31st of the following year. It can be extended if you hire a professional tax consultant. Then you also have 14 months.
Due to special circumstances such as the COVID 19 pandemic, there are equally extended filing deadlines for the next few years, which vary from year to year.
The deadline for the final payment of Trade Tax is usually one month after you have received the trade tax assessements of the local authorities.
As with corporate income tax, advance payments for business tax can be made during the year. If advance payments have been set, it is essential that they are made in good time. Otherwise, additional late payment penalties will be incurred.
Sometimes the municipality automatically sets advance payments if they expect high profits. These can be changed at any time with a request.
The payment dates differ from the corporate income tax and are February 15, May 15, August 15 and November 15.
What are some common deductions and exemptions for Trade Tax purposes?
Some common deductions and exemptions for Trade Tax purposes are:
- A basic allowance of EUR 24,500 for sole proprietorships and partnerships.
- A trade tax credit for sole proprietorships and partnerships allows them to deduct part or all of their trade tax liability from their income tax liability.
- An exemption for certain types of income, such as dividends received from domestic or foreign subsidiaries under certain conditions.
Solidarity Surcharge (SolS)
What is Solidarity Surcharge, and why is it imposed?
Solidarity Surcharge is an additional fee attached to certain taxes, such as income tax, capital gains tax, and corporate tax.
Solidarity Surcharge was introduced in 1991 to finance the costs of German reunification and other expenses, such as the Gulf War, and support for countries in central, eastern, and southern Europe.
How much is Solidarity Surcharge, and how is it calculated?
Solidarity Surcharge is 5.5% of whatever tax payment it is attached to. However, as of January 2021, only about the top 10% of earners are subject to Solidarity Surcharge, as a threshold based on your taxable income exempts most taxpayers from paying it.
How do you pay Solidarity Surcharge, and when are the deadlines?
You pay Solidarity Surcharge with the tax it is attached to, so you don’t need to file a separate return or make a separate payment for it.
The deadlines for paying Solidarity Surcharge depend on the deadlines for paying the corresponding tax, which vary depending on your type of income, filing status, etc.
Value Added Tax (VAT)
What is VAT, and who pays it in Germany?
VAT is an indirect tax applied to the supply of goods and services in Germany.
Value Added Tax is paid by the end-user of the product or service but collected by businesses that add VAT to their prices.
Businesses that supply goods or services subject to VAT must register for VAT, file VAT returns, and pay VAT dues to the tax authorities.
What are the VAT rates, and how are they applied?
The standard VAT rate in Germany is 19%, but there is a reduced rate of 7% for certain supplies, such as food, books, public transport, etc.
The VAT rate is applied to the net price of the product or service, excluding any other taxes or charges.
How do you register for VAT, and what documents do you need?
Register for VAT online via the ELSTER portal or submit a paper form to your local tax office.
You must provide basic information about your business, such as name, address, legal form, activity, turnover, etc.
You may also need to provide some supporting documents, such as a certificate of incorporation, a bank statement, a lease agreement, etc.
How do you file a VAT return and pay VAT dues?
You can file a VAT return online via the ELSTER portal or any other supporting software. There is no possibility anymore to submit a paper form to your local tax office.
You must report your taxable turnover, input and output VAT amounts, intra-community transactions, etc.
You must pay your VAT dues by direct debit or bank transfer to your local tax office.
The deadline for filing a VAT return and paying VAT dues depends on your turnover and filing frequency. It can be monthly (by the 10th day of the following month), quarterly (by the 10th day of the following quarter), or annually (by July 31st of the following year or longer, if you are working with a tax accountant).
You can apply for an automatic extension during the year, which gives you 30 days more time each month. For example: Normally, you should file the advance return for January by February 10. With the automatic extension, this deadline is extended to March 10. The advantage is that you have to pay the VAT on March 10 instead of February 10. That will give you a cash flow advantage
For this extension you have to pay a deposit, which is 1/11 of the previous year’s VAT. This deposit will be returned to you with the December advance return.
The various payment dates can be very confusing and it is easy to forget a date. The tax office penalizes each late payment (even if it is only 1 day) with a fee of 0.5% of the tax to be paid. It is advisable to file a SEPA mandate with the tax office. The tax office will debit the due taxes upon payment and there will be no late payment penalties.
Other Taxes
The following are some examples of other taxes that may apply to your business in Germany. However, there may be more depending on your specific situation and activities.
- Customs duties: These taxes on imports into the European Union vary depending on the origin and type of goods. You may have to pay customs duties if you import goods from outside the EU or export goods to non-EU countries.
- Excise taxes: These are taxes on specific goods such as alcohol, tobacco, energy products, electricity, coffee, etc. The rates vary depending on the type and quantity of goods.
- Real estate transfer tax: This is a tax on transfers of real estate property ownership in Germany. The rate varies by state, ranging from 3.5% to 6.5% of the purchase price.
- Inheritance tax and gift tax: These are taxes on transfers of assets by inheritance or gift in Germany. The rates vary depending on the relationship between the donor and recipient and the value of the assets transferred.
International Aspects of Corporate Taxation
How does Germany tax foreign corporations operating in Germany or German corporations operating abroad?
Germany taxes foreign corporations on their income derived from German sources, such as a permanent establishment (PE), a branch, a partnership interest, or dividends from a German subsidiary. German corporations are taxed on their worldwide income, regardless of where it is earned. However, they may be able to claim a credit or exemption for foreign taxes paid on foreign income to avoid double taxation.
What are permanent establishments (PEs), and how do they affect your tax liability?
A permanent establishment is a fixed place of business through which a foreign corporation carries out its activities in Germany. This may include an office, a factory, a warehouse, a construction site, etc. A permanent establishment may also exist if a foreign corporation has an agent or representative in Germany who has the authority to conclude contracts on its behalf. A PE is subject to corporate tax and trade tax on its income attributable to its activities in Germany.
How does Germany avoid double taxation of corporate income with other countries?
Germany has concluded over 100 bilateral tax treaties with other countries that allocate taxing rights between them and provide relief from double taxation. The relief may take the form of either an exemption method or a credit method.
Under the exemption method, certain types of foreign income (such as dividends or capital gains) are exempt from German tax if certain conditions are met.
Under the credit method, foreign taxes paid on foreign income are credited against German tax up to the amount of German tax attributable to that income.
What are fiscal unities or consolidated groups for taxation purposes?
A fiscal unity (Organschaft) is a form of group taxation that allows a parent corporation and one or more subsidiaries to be treated as one entity for corporate tax and trade tax purposes.
This means that profits and losses can be offset within the group, and intercompany transactions can be ignored for tax purposes. Certain requirements must be met to form a fiscal unity, such as financial integration, organizational integration, economic integration, etc.
Special rules or incentives for cross-border transactions or investments
Some special rules or incentives may apply to cross-border transactions or investments involving German corporations. For example:
- There is no withholding tax on dividends paid by a German subsidiary to its EU parent company if certain conditions are met (such as holding at least 10% of the shares for at least 12 months).
- German corporations have no capital gains tax on disposals of shares in foreign subsidiaries if certain conditions are met.
- There is no tax on interest and royalty payments made by German corporations to their EU affiliates if certain conditions are met (such as having an arm’s length interest rate).
- There is no CFC (controlled foreign company) taxation on income earned by low-taxed foreign subsidiaries if certain conditions are met (such as having active business operations).
Corporate taxation in Germany can be a complex topic, but this guide has hopefully given you a better understanding of how it works. If you still need to figure out anything or need help with your company’s taxes, we recommend contacting a professional tax consultant.
Fully qualified tax accountant under German law and specialist advisor for international tax law. More than 15 years of professional tax experience.