This guide explains companies’ liabilities for corporate tax in Germany, including which income is exempt from German corporate tax in the form of allowances and deductible expenses.
Anyone carrying on a trade or business is subject to corporate taxes in Germany. Germany’s corporate tax rate is composed of both a business tax and municipal business tax, plus an additional solidarity surcharge on corporate tax in Germany.
German corporate tax and company law
Within German company law, businesses fall into two categories:
- Companies (incorporated businesses)
- Partnerships (unincorporated businesses)
There are several main differences between companies and partnerships regarding German corporate taxes:
- Companies provide for limited liability of their shareholders, while partnerships generally require unlimited liability of the partners.
- Companies are required to have a certain minimum share capital due to their limited liability. This is not necessary for partnerships as the creditors can be satisfied with the property of the partner who has unlimited liability.
- Companies have a distinct legal personality and are taxed, whereas partnerships have only a partial legal personality. Partnerships may, for example, acquire immovable property or conclude contracts. Partnerships, however, are transparent; their profits and losses are attributed directly to the partners for both civil law and tax law purposes.
The basics of German company law are laid down in the Civil Code (Bürgerliches Gesetzbuch, BGB) and completed by special statutes for the different types of entities, such as:
- Stock Company Law (Aktiengesetz, AktG) for stock companies (AG);
- Limited Liability Company Law (Gesetz betreffend die Gesellschaften mit beschränkter Haftung, GmbHG) for limited liability companies (GmbH); and
- Commercial Code (Handelsgesetzbuch, HGB) for partnerships.
Except for civil law partnerships, new businesses must apply for entry in the Commercial Register (Handelsregister) and register with the local trade office and the tax authorities, irrespective of its business form.
Corporate tax in Germany
Resident companies are subject to corporate income tax on their worldwide income. Foreign-source income, such as income from foreign permanent establishments, is usually excluded from the German taxable base under tax treaties. If a treaty does not exist or its provisions do not apply, unilateral relief provisions allow a foreign tax credit under certain conditions.
All types of income realised by a company are deemed business income, whether they stem from the actual business activities or from investments (dividends, interest, rental income). Business income is subject to both the corporate income tax and the business tax.
Under both commercial and tax law, a company must keep its books on the accrual basis. The profits are determined using the net worth comparison method. According to this method, profits are the difference between net assets at the end of the previous year and net assets at the end of the current year.
For tax purposes, this net asset difference is reduced by capital contributions (because they are tax free) and increased by withdrawals (because they must be financed out of taxed income).
The financial statements of a company must be drawn up on the basis of the generally accepted accounting principles of commercial law. The commercial accounts are also binding for tax purposes unless specific tax rules provide otherwise. This means the commercial balance sheet and the tax balance sheet are identical in most cases.
If there are deviations, companies must prepare both a commercial balance sheet (Handelsbilanz) and a tax balance sheet (Steuerbilanz). This can be done either by preparing two different sets of financial statements or simply by explaining the tax deviations in an appendix to the corporate income tax return.
Filing US taxes from Germany
Despite the fact that every US citizen and Green Card holder is required to file a tax return with the IRS even when living abroad, many expatriates still fail to do so. Many are unaware of these obligations, thinking that as an expat they do not need to pay or file tax returns in the US. You do! For more information and help filing your US tax returns from Germany, contact Taxes for Expats and see our guide to taxes for American expats.
Solidarity surcharge on corporate tax in Germany
Both resident and non-resident companies are subject to a solidarity surcharge of 5.5%.
The assessment base for the solidarity surcharge is the total corporate income tax due by the taxpayer after deducting tax credits.
If non-residents who benefit from a tax treaty are subject to a solidarity surcharge, the total tax including the surcharge may not exceed the maximum treaty rate that Germany is allowed to charge.
Germany corporate tax rates
The national German corporate tax rate is set at 15%. Businesses also need to pay a solidarity surcharge of 5.5% on their corporate tax (around 0.825% in total).
Additional trade tax rates are set by local municipalities average 14–17%, which are not deductible as business expenses.
Thus the combined German corporate tax rate – corporate income tax, trade tax, solidarity surcharge – amounts to around 30–33%.
The taxable income for the business tax is generally determined in the same manner as for income tax purposes, subject to certain adjustments. These adjustments refer to certain expenses, which may be deducted for income tax purposes but not for business tax purposes and vice versa. A personal exemption of €24,500 is granted to individuals and partnerships.
German corporate tax rate credits
The taxpayer is entitled to a credit calculated as 3.8 times the basic amount for the municipal business tax. The credit is subject to a maximum that is determined by the proportion business income bears to all taxable income.
For example, if a taxpayer earns 55% of his taxable income from employment, runs a business that provides the remaining 45% of his taxable income, and has an income tax liability of €50,000, the maximum business tax credit is €22,500 (45% of €50,000).
Any excess credit cannot result in a refund of income tax, nor may it be carried over to be set against income tax of another year. Despite this limitation, the municipal business tax credit may result in overcompensation depending on the municipal coefficient when the tax credit is greater than the municipal business tax and the taxpayer can use the credit fully against his income tax liability for the year.
Exempt income from German corporate tax
The most important types of income that are exempt from corporate tax in Germany include:
- At the company level: capital contributions upon formation or capital increase, whether or not in return for shares, other membership rights or simply in connection with an increase in the capital reserves.
- At the shareholder level: capital repayments from the company if they do not contain dividend distributions. They are taxable, however, to the extent they exceed the book value of the shareholder’s investment, eg. as a result of former depreciation of the investment.
- 95% of domestic and foreign dividends.
- 95% of capital gains derived from the sale of shares in a company.
- Investment grants for investments in the new federal states.
German corporate tax year
The tax year in Germany is equal to the calendar year. A taxpayer may adopt a financial year that deviates from the calendar year once their business is registered in the Commercial Register (Handelsregister), which is mandatory for companies.
The profit of a business is subject to tax in the year in which the financial year ends, ie. the profit of a company whose financial year ends on 31 January 2019 is subject to tax in the tax year 2019, even if most of the profit was derived in 2018. As a practical matter, this leads to the postponement of the filing obligation.