Germany has a competitive business taxation framework. Business taxes are levied at federal and local level.
At federal level, companies must pay corporation tax which is levied on taxable profits. In addition, companies must pay a solidarity surcharge.
Capital yields tax
Where a German subsidiary opts to pay a dividend to a foreign parent company, capital yields tax becomes payable. This is a withholding tax which is applied when dividends are transferred from a German subsidiary to a foreign parent company.
Germany is party to a number of double taxation agreements. These allow for the tax on dividends paid by a German subsidiary to a parent company to be reduced and for it to be offset against the tax burden in the parent company’s country.
Dividends paid by a German subsidiary to a US parent company, for example, are subject to a reduced tax rate of 5% provided the US company holds a 10% share in the German subsidiary. In certain circumstances, the tax rate can even be reduced to 0%.
Within the EU, dividend payments from subsidiaries to parent companies are generally tax-free, provided certain conditions are met.
Dividend payments to shareholders in Germany are taxed at a flat-rate plus the solidarity surcharge. This is also a withholding tax. If a double-taxation agreement exists between Germany and another country in which the shareholder is resident, a lower rate of tax may be payable.
Under certain circumstances parent companies and subsidiaries can form a group for accounting and tax purposes. This allows the profits and losses to be transferred between the parent and subsidiary company. Despite such a transfer framework, all entities of the group must submit a tax return.
Tax on partnerships
The income from partnerships is taxed differently to that of companies. As partnerships are not independent legal entities their income is taxed in the hands of the owners. The rate of tax is calculated based on the owner’s personal tax band. The tax falls on the taxable profits of the partnership. A percentage of the tax paid is added and constitutes the solidarity surcharge.
In addition to federal taxes, a trade tax is also levied by local authorities. All business entities in Germany must pay trade tax, regardless of whether they are a company or partnership. Trade tax is calculated using a base rate multiplied by a multiplier. The multiplier is set by the local authorities and can vary across the municipalities. The solidarity surcharge is not paid on trade tax. Trade tax paid by owners on partnership profits can be offset against personal income tax.
Businesses must add VAT to the price of their goods or services once their revenue exceeds a certain minimum threshold (output tax). The current rate of VAT is 19%. A reduced rate of VAT can be charged for certain goods and services, such as newspapers and some foods. Some services, such as banking and healthcare, are completely exempt from VAT.
Businesses also have to pay VAT on many of the items they buy (input tax), however input tax can be offset against output tax.
Employee income tax
If a business has employees, it is obliged to deduct their income tax directly from their salary and to pay it to the tax office on a monthly basis.
The team of German lawyers at WILDE BEUGER SOLMECKE cooperates with a network of contacts to assist clients with tax matters. For more information contact us on 0221 / 951 563 0 (Beratung bundesweit) or use our contact form.