Reducing small business taxes is a high priority for many business owners. In today’s economy, every Euro counts, and tax breaks can make a big difference. There are several ways to reduce small business taxes, and the best approach depends on the individual business. However, some standard methods include taking advantage of deductions and credits and structuring the company as a GmbH. By reducing taxes, businesses can free up funds to reinvest in their growth and profitability. In today’s competitive market, reducing small business taxes can give businesses the edge they need to succeed. But first, let’s look at how the big companies are saving money.

How big companies save taxes

How big companies save taxes has been a topic of debate for many years. Some say that big companies use their size and power to unfairly advantage themselves, while others argue that they use the same tax breaks and loopholes available to all businesses. Whatever the truth, there is no doubt that large corporations can often minimize their tax liability in ways that smaller companies cannot. One common tactic is to shift profits to low-tax jurisdictions through creative accounting techniques. Another is to take advantage of tax breaks and incentives offered by governments. Whatever the methods used, it is clear that big companies have a significant advantage when it comes to saving taxes.

How does Apple save taxes?

Apple is one of the most profitable companies in the world, and it has used various strategies to save on taxes. Apple uses a three-step model to save taxes:

Step 1: Apple’s first step to save taxes is using tax havens. A tax haven is a country with low tax rates attractive to businesses. Apple has subsidiaries in countries like Ireland. The company has profited immensely by setting up a complex system of international subsidiaries, many of which are located in low-tax jurisdictions such as Ireland. One key player in this tax avoidance scheme is Apple Sales International (ASI), a subsidiary located in Ireland. ASI exists primarily on paper: it is responsible for buying finished Apple products from Chinese manufacturers and selling them to other Apple subsidiaries worldwide. By funneling profits through ASI, which is subject to Irish corporate tax rates of 12.5%, Apple has reduced its overall effective tax rate to an estimated 25% – far below the US corporate tax rate. In recent years, this strategy has saved the company billions of dollars in taxes.

Step 2: The second step is to use loopholes in international taxation systems. ASI and other daughter companies of Apple do not pay taxes in any country in the world. This is because Apple, as a global company, has established dependencies in various countries of the earth. These dependencies are subject to the respective national tax law of the state in which they are located. The tax laws of the different countries contradict each other to a certain extent – and this can be exploited. Apple uses a conflict between Irish and US tax law: According to US law, a company must register with the tax office in the country in which it was founded. According to Irish law, a company must register with the tax office in the country in which it is managed. By exploiting this loophole, Apple avoids paying taxes in either country.

Step 3: Use tax loopholes in your home country. They use a loophole in the tax code called “check-the-box.” Suppose subsidiaries of a corporation can show that their profits are being funneled up to other subsidiary companies of the same corporation. In that case, the corporation’s executives can claim that the government should ignore those profits for tax purposes. And that’s exactly what Apple does. They can do this with its subsidiary company Apple Operations International, or AOI. AOI was founded in 1980, and the US parent company Apple Inc. owns 97% of its shares; Apple UK owns most of the remaining shares. AOI is what’s called a holding company. Its primary purpose is to hold shares of Apple’s sub-subsidiaries. By doing this, they can funnel profits to AOI and avoid paying taxes. Essentially, they are using a loophole in the tax code to avoid paying taxes they would otherwise owe.

Reactions to Apple’s system of tax avoiding

A recent court ruling found that Apple didn’t have to pay back taxes to the Irish government. In response, German lawmakers are now proposing those license fees paid to companies in low-tax countries be added back to their taxable income in Germany. So Apple is simply moving its border shops to Belgium, the Netherlands, or Switzerland. This way, it can continue to avoid paying taxes on its profits.

Why does this form of reducing tax deductions not work for a small business owner or a GmbH in Germany?

The primary way that large corporations avoid paying taxes is by aggressive tax planning, which includes exploiting loopholes and deductions in various countries. They can do this because they have their own tax departments solely dedicated to finding these opportunities. While the initial cost of setting up these departments may be high, it is more than made up for by the amount of money they can save in taxes. In contrast, small businesses do not have the same resources. For a small business owner, dedicating the time and money necessary to find these tax breaks would not be worth it compared to the amount of money they would save. Consequently, reducing deductions for small businesses will not have the intended effect of increasing tax revenue.

Tax structuring in Germany for small businesses

Tax structuring in Germany is a complex process. There are many different types of taxes, including income tax, payroll tax, corporate tax, and value-added tax. Tax rates vary depending on the type of income, the amount of income, and the taxpayer’s status. In addition, there are special rules for businesses, investors, and self-employed individuals, such as self-employment tax. As a result, it is essential to seek professional help when planning your taxes. A qualified tax professional can help you determine which types of taxes you owe and how to minimize your tax liability. With careful planning, you can ensure that you pay only the taxes required by law.

Controlled Foreign Corporation Rules (CFC rules) – Hinzurechnungsbesteuerung

Controlled Foreign Corporation Rules, or CFC rules (in german “Hinzurechnungsbesteuerung”), are essential to securing tax revenue. The legislator wishes to avoid artificial situations created purely for tax optimization purposes. Therefore, international companies need to know the pitfalls of Controlled Foreign Corporation rules to avoid unexpected taxation from German authorities.

EU member states must notify cross-border tax arrangements, and similarly, domestic taxpayers must notify their competent finance office of any facts relating to abroad. This includes, for example, establishing foreign branches or acquiring interests in foreign companies. This ensures that profits are taxed correctly and that companies cannot avoid taxation by moving their profits offshore. The CFC rules have been controversial, as they can create a significant compliance burden for companies with complex international structures. However, the rules are essential in ensuring that companies pay their fair share of taxes.

Controlled foreign corporation rules, or CFC rules, can be a big problem for foreign or multinational companies. Follow the rules to avoid having to pay a lot of money back. Before starting a business in another country, getting expert advice on CFC rules is critical. A good advisor can help you understand how the rules work and what you need to do to comply with them. They can also help you plan to minimize your risk of getting into trouble with the CFC rules. So if you’re thinking of doing business in a foreign country, get professional advice on the Controlled Foreign Corporation Rules first.

Tax Saving Tips for Entrepreneurs, Small Business Owners & Startups

Taxes can be stressful for anyone, but they can be incredibly daunting for entrepreneurs, small business owners, and startups. With so many potential deductions and credits available, it can be challenging to know where to start. However, by taking advantage of some of the following tax-saving tips, you can help reduce your tax bill and ease some of the stress of tax season.

We have put together a few tips on saving on your taxes without having to set up a whole tax department. You can just choose the tips that are best for you.

Be careful with your income and expenditure accounting

One way to save on taxes is to take advantage of all the deductions and credits that you are eligible for. For example, if you are a small business owner, you may be able to deduct the cost of business expenses (Geschäftsausgaben), such as office supplies and equipment. You can also claim credits for hiring employees, promoting a retirement plan for your employees, or paying them a higher gross income. In Germany, there is a wide range of deductible business expenses. For example, yes, you can even deduct the costs for a “business dog” if this is important for the implementation of your business. You can significantly reduce your tax bill by doing your research and claiming all the deductions and credits you are entitled to.

Another way to save on taxes is to ensure that you keep good records. This includes carefully tracking your income and expenses and keeping receipts for everything. Having accurate records will not only help you prepare your taxes more quickly, but it will also help you if the tax office ever audits you.

Use the business tax rates in different cities

Another way of saving taxes is to take advantage of the different trade tax rates (Hebesatz) in the various districts or cities in Germany.

The business tax rates in different districts or cities can significantly impact the amount of taxes a business owns. The trade tax rate, or rate of taxation for businesses, is lower in some areas of Germany than in other districts. This can result in savings of up to 8 percent on the taxes owed by a business. In addition, this form of tax relief is perfectly legal.

Many municipalities in Germany offer lower trade tax rates for businesses. For example, Grünwald, Gräfelfing, and Pöcking (at lake Starnberg) are close to Munich but offer much lower rates than the provincial capital. Another example from Berlin is the district Schönefeld. Businesses can save money on their taxes by taking advantage of the lower trade tax rates available in these districts.

The business tax rates in different districts or cities can confuse foreign entrepreneurs. The good news is that you can get a rapid and easy overview at our
German Trade Tax Calculator. Our calculator uses the different trade tax rates of the respective municipality or district to calculate the tax burden for your company. So you can see precisely how significant the influence of the respective tax rate is on your tax burden.

When deciding where to locate your business, it pays to do your research and compare the options available. With a little effort, by simply using our German Trade Tax Calculator, you can find the district or city that offers the best tax rate for your business.

Do you prefer to locate your company in an area with a high business tax rate? No problem, shift your profits through a subsidiary located in an area with a lower tax rate. If this subsidiary owns the licenses, you can reduce your tax burden by paying royalties to this subsidiary.

Take advantage of the tax-optimized managing director’s salary

If your company is located in an area with an unfavorable trade tax rate, you can minimize taxes by paying yourself a salary as a managing director. In Germany, the income tax rate is progressive, meaning that the higher your income, the higher your personal tax rate. The tax rate starts at 14% and rises to the top tax rate of 42%. You can take advantage of this clear progression and pay yourself an optimal salary as a CEO.

Save money with a holding company

A holding company is an excellent way to keep more of your profits because it avoids double taxation. Profit distributions from subsidiaries of your holding company are almost tax-free, as you only have to pay a 5% tax on the profit distribution. The holding company keeps the profits. Thus, you do not pay out the money but use this store of money to invest in real estate, companies, and things subject to appreciation.

Strategies for a small business to save tax on your business income

There are many ways to save taxes, even for small business owners. Reducing taxes and finding the best tax plan could be very individual – so get in touch with an expert and find the best small business tax-saving strategies for you!

Sources:

• https://www.spiegel.de/wirtschaft/unternehmen/apples-steuertricks-in-der-uebersicht-a-901015.html
• https://en.wikipedia.org/wiki/Ireland_v_Commission