Thinking about starting your own business in Germany? Find out everything you need to know when it comes to paying your way with our expert guide to corporate tax in Germany.
Anyone running a business or carrying on a trade is subject to corporate tax in Germany.
The German corporate tax rate is made up of a business tax and a municipal business tax, along with an additional solitary surcharge.
As a result, the amount of corporate tax you pay can vary depending on where you are in the country. This detailed guide covers the following topics:
- The corporate tax system in Germany
- Who pays corporate tax in Germany?
- Corporate rates in Germany
- Corporate tax exemptions and corporate tax credits in Germany
- VAT in Germany
- Corporate tax year in Germany
- How to file your corporate tax return in Germany
- Other types of business tax in Germany
- Corporate tax advice in Germany
- Useful resources
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The corporate tax system in Germany
In Germany, companies pay corporate tax based on their net income over the course of one business year.
For individuals running their own business activities, the same general principles for determining industrial, commercial, agricultural and professional profits apply in the same way as for corporate entities.
Companies pay tax on total income, which includes the distributed profit shares of general and limited partnerships, as well as profits earned by sole proprietors.
Under the Income Tax Law, a business is classified as any independent and lasting activity done with the intention of earning profit by participating in the open market.
Several corporate tax reforms have come into force in Germany this year. As of 2020, a new research and development tax credit has been introduced, and the solidarity surcharge has been abolished for most income groups.
Who pays corporate tax in Germany?
If the management office or registered office is located in Germany, the following types of businesses are fully liable to pay corporate tax:
- Mutual insurance companies;
- Legal entities such as societies and trusts;
- Commercial enterprises run by public legal entities.
Companies that generate income in Germany, but don’t have management or registered offices in the country, are only liable to pay corporate tax on their German income.
Corporate tax for sole traders and limited companies
You’ll need an official tax number, which must be included on all invoices.
Tradesmen will have registered with the trade office – the trade office will pass on your details to the tax office, which will then issue your tax number.
Once you’ve registered, you’ll have to complete annual tax returns and pay income tax in installments in advance. Profits are taxed at the personal tax rate.
Many self-employed workers are exempt from making state social security contributions in Germany, but as it’s the law to have health and care insurance, you will have to make alternative arrangements.
Some self-employed people also need to pay contributions to the state pension fund.
Self-employed workers can claim some services and items necessary for their work as tax-deductible expenses. This includes things such as stationery, office space and equipment, work-related travel, childcare costs and health, pension and other insurance contributions.
You’ll need to save your receipts and other relevant documentation in order to prove the expenses are real.
Corporate tax for freelancers
Things work a little differently for freelancers. They do not have to register at the Commercial Registry, and also don’t have to become a member of or contribute to the Chamber of Commerce.
In addition to this, freelancers don’t need to prepare annual financial statements for taxation purposes or pay a trade tax. Instead, a simple profit-and-loss assessment is sufficient.
Freelancers in Germany need to register with the local tax authorities, their professional association and an accident insurance company (if they employ other people).
The tax authorities will assess your income tax quarterly payments, which is based on your income after expenses have been deducted.
While freelancers are generally not liable to the German social security system, they should consider making their own arrangements for things like:
- private health insurance;
- health insurance which also covers the risk of illness and the loss of income should you become sick;
- disability insurance to cover the risk of monetary loss if illness means you can’t continue working;
- life insurance to supplement retirement income.
Corporate tax for artists and journalists
Artists and journalists have to make contributions to the government-backed social security system. This covers pensions, a contribution to health insurance and care insurance for old-age nursing care.
If you don’t make these arrangements, a law called the Social Law for Artists (Kuenstlersozialversicherungsgesetz) means freelance artists or journalists who are not contributing to their social insurance, such as a pension scheme, need to join the government’s Kuenstlersozialkasse.
The contributions depend on your income. There is also a ceiling on the total annual income that contributors are able to make, which changes each year. Like employees, freelancers need to pay 50% of the total contribution.
In 2020, the total contribution rates for Kuenstlersozialkasse are:
- Pension insurance: 18.6%. The 2020 annual income ceiling is €82,800
- Health insurance: 14.6%. The 2020 annual income ceiling is €56,250.
- Care insurance: 3.05% for parents, or 3.30% for those without children. The 2020 annual income ceiling is €56,250.
Corporate tax rates in Germany
Germany’s combined corporate income tax rate is the third-highest among European OECD countries, at 29.8%.
At a national level, the corporate tax rate is set at 15%, with additional local trade taxes set by local municipalities.
The business tax is levied on a taxpayer’s business income; the municipal business tax is charged as a lump-sum which may be credited against income tax.
The tax you owe is determined by applying the federal rate (Steuermesszahl) to the taxable business income, which results in a basic tax amount.
The municipal coefficient (Hebesatz) is then applied to the basic tax amount to determine the actual amount of tax that’s owed.
The municipalities fix the coefficient which varies according to their financial needs.
Corporate tax exemptions and corporate tax credits in Germany
Corporate tax exemptions in Germany
Several types of income are exempt from corporate tax in Germany. The most important ones include:
- company-level capital contributions upon the company’s formation or capital increase. This is regardless of whether the contribution was in return for shares, other membership rights or just in connection with an increase in the capital reserves;
- shareholder level capital repayments from the company if they do not contain dividend distributions. If they exceed the book value of the shareholder’s investment, the amount that exceeds it is taxable;
- 95% of domestic and foreign dividends;
- 95% of capital gains from the sale of shares in a company;
- investment grants for investments in the new federal states.
Corporate tax credits in Germany
Corporate taxpayers in Germany can claim a credit, which is calculated as 3.8 times the basic amount paid for the municipal business tax.
The maximum amount of tax credits you can receive depends on how much business income you make compared to the total taxable income.
For example, take a taxpayer who earns 55% of their taxable income from employment, and runs a business that provides the remaining 45% of taxable income. If they have an income tax liability of €50,000, the maximum business tax credit they’ll get is €22,500, which is 45% of €50,000.
Tax credits cannot result in a refund of income tax, and cannot be set against income tax of another year.
That being said, the municipal tax credit may result in overcompensation as it can be greater than the municipal business tax that you owe. This means the taxpayer can use the credit fully against their income tax liability for the year.
As of 2020, a new research and development (R&D) tax credit is available; businesses can claim a tax credit worth 25% of the wages and salaries paid to research staff.
The maximum R&D tax credit you can receive is €500,000.
VAT in Germany
Companies or individuals that earn €17,500 (gross) in one financial year, or are likely to exceed €50,000 in the next financial year, must pay VAT (Mehrwertsteuer) on goods and services.
Businesses pay VAT at a rate of 19%, but if you provide services such as translating, journalism, supplying food or making artworks you can pay at 7%.
You must include VAT as a separate entry on your invoices.
There are a few goods and services that are exempt from VAT in Germany, these include:
- intra-EU deliveries (that’s because the EU customer pays VAT at their end);
- services provided by certain professionals, such as doctors;
- financial and insurance services;
- buying and selling real estate.
As part of Germany’s Climate Action Program 2030, train travel will soon be subject to the reduced VAT rate of 7%, and aviation tax will be increased.
Corporate tax year in Germany
The German tax year is the same as the calendar year. Taxpayers can choose a different financial year once they have registered the business in the Commercial Register (Handelsregister).
Companies must pay tax on the profit in the calendar year when its financial year ends.
For instance, if a company’s financial year ends on 31 January 2020, it must pay tax on the profit earned between 1 February 2019 and 13 January 2020 for the 2020 tax year. That’s despite the fact that it made most of the profit in 2019.
As a result, this means the tax filing obligation is usually delayed by several months.
How to file your corporate tax return in Germany
Individuals, employers, entrepreneurs, and associations can use the ELSTER website (in German) to register, make tax declarations and pay tax online.
There are several steps in the registration process. After sending the registration data, you must send a confirmation mail via the ELSTER portal and activation code by letter.
Therefore, it’s best to register in plenty of time before the return is due on 31 May.
The ELSTER certificate authenticates the information you’ve provided and serves as an electronic signature for security.
The next step is for the tax office to decide how much tax you need to pay. You’ll receive an assessment including a demand for payment, or information on getting a refund for any tax you’ve overpaid.
Over-payment can occur because you have to pay the tax a year in advance, in four installments. These are due on the 10th of March, June, September, and December.
Other types of business tax in Germany
Some businesses will also have to pay dividend tax. Dividends for both resident and foreign corporations in Germany are generally 95% tax-exempt, unless you include them as tax-deductible expenses for the payer.
Capital gains tax
In general, capital gains received by companies from selling business assets are treated as ordinary income. The gains can be offset against the cost of a replacement property.
Capital gains from the sale of investments are exempt from corporation and trade taxes, and therefore any associated losses are not deductible.
The solidarity surcharge (Solidaritaetszuschlag) is an additional fee on income tax, capital gains tax, and corporate tax.
This is charged at a flat rate of 5.5%, and is paid at the same time as the tax is charged on; there’s no tax return required for reporting or paying it.
Trade tax must be paid by all commercial businesses in industry, trade, crafts, and services.
There’s a 3.5% base rate throughout Germany, and then each municipality adds a multiplier, which can vary.
Partnerships have an annual tax free trade tax allowance of €24,500. Some trade tax exceeding that can often be offset against personal income tax.
Corporate tax advice in Germany
Corporate tax in Germany can be tricky, particularly if you have complicated circumstances. Using the services of a professional accountant can help.
To find an appropriate professional near you, you can contact the German Federal Chamber of Tax Consultants (Bundessteuerberaterkammer or BSTBK; link in German) and the German Association of Tax Advisors (Deutscher Steuerberaterverband or DStV).
American expats living in Germany who need to fill in their US tax return can get support and advice on their tax obligations back home from Taxes For Expats.