If you own a company in Germany, here’s a guide to personal tax liabilities and German corporate tax rates for self-employed workers.
Businesses operating in Germany are subject to German corporate tax rates. For individuals carrying on business activities, the same general principles for determining industrial, commercial, agricultural, and professional profits apply as for corporate entities. The taxable profit is the total income realised from carrying on business activities, and 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 defined as any independent and lasting activity exercised with the intention of earning profit by participating in the open market and which does not qualify as professional or agricultural or forestry activities.
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German corporate tax rates
Germany’s corporate tax rate at a national level is set at 15%. However, additional local trade taxes are set by local municipalities.
Municipal business tax is levied on all business enterprises in Germany, regardless of their legal form. Individuals are also liable for municipal business tax on their business, in addition to the German corporate tax rate of 15%. The business tax is levied on a taxpayer’s business income. The municipal business tax is a lump-sum tax, which may be credited against income tax.
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.
The effective German corporate tax rates depends on a federal rate (Steuermesszahl) and a municipal coefficient (Hebesatz). The amount of business tax is determined by applying first the basic federal German corporate tax rate to taxable business income, which results in a basic tax amount. The coefficient is then applied to this basic tax amount to determine the actual tax burden. The coefficient is fixed by the municipalities and may vary according to their financial needs from 200% to 490%.
The effective German corporate tax rate varies from community to community but averages 14% to 17% of income.
Filing your German business tax return: How to register, declare and pay tax
You can register, make tax declarations and pay tax online the ELSTER website (in German). For an easy business tax or self-employed tax return solution in English, wundertax has invented an online, secure, do-it-yourself system that will guide you through the process step by step in a language you understand. Check out their video tutorial on how to do your tax return in Germany:
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.
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.