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Taxation System in Germany

Corporate Tax

In Germany profits from the company are taxed at two categories as below;

A combined tax rate of 15.825% which includes 15% of corporate tax rate plus a 5.5% tax rate of solidarity surcharge.

The municipalities impose a trade tax which is levied by the local authority on the profits of a business, which is usually between 14% and 19%, also is imposed. The tax on municipal trade cannot be deducted as a business expense.

On the international income received by resident, corporations are taxed. Though, tax treaties may possibly eliminate foreign-source revenue from German taxation. Income from German permanent establishment which falls under German-sourced income is taxed under Non-resident companies.

Generally, corporate income tax is exempt from the dividends acquired by German companies or branches of non-resident corporations not considering the fact how long the membership in the subsidiary has been held.

Germany Quick Tax Facts for Companies
Corporate income tax rate15% 
Branch tax rate15% 
Capital gains tax rate15%
Solidarity Subcharge5.5% of corporate income tax
Trade tax14%-19% (typical rate in main cities)
Basis Worldwide
Abroad Participation ExemptionYes
Loss relief
- Carryforward
Indefinit
− Carryback1 year
Double taxation relief
Yes
Tax consolidationYes
Transfer pricing rulesYes
Thin capitalization rulesNo
Controlled foreign company rulesYes
Withholding Tax
− Dividends25% (26.375%, including the solidarity surcharge)
− Interest0%/25% (26.375% including the solidarity surcharge)
− Royalties15% (15.825%, including the solidarity surcharge)

− Branch remittance taxNo
Capital taxNo
Real estate transfer tax3.5%-6.5%
Stamp Duty2%/5%
VAT
19% (standard rate)/ 7% (reduced rate)

Withholding Taxes

Dividends

  • Curbing tax rate for the dividend is 25% (26.375%, with the solidarity surcharge). A refund of 40% is for sure to non-resident companies (accountable to anti-abuse policies) ahead of request to the Federal Central Tax Office, which will probably end in an efficient withholding tax rate of 15.825% on dividends for non-resident businesses in non-treaty/non-EU directive circumstances.
  • Under tax treaty the tax rate can be reduced.
  • Supporting the EU parent-subsidiary order, local withholding tax is decreased to zero if the profit is appropriated to a qualifying EU investor that has held no less than 10% of the capital of the backup at the date of instalment of the profit or the date of the determination to make the benefit Distribution.

Interest

Interest on withholding tax is not levied generally in Germany, excluding for interest received from certain securitized or scheduled loans or bonds (primarily publicly operated bonds)

Royalties

For the royalties paid to a non-resident company for the statutory withholding tax, the rate is 15% (15.825%, plus the solidarity surcharge). Under a tax treaty or the EU interest and royalties directive (IRD) may reduce the withholding tax on royalties.

Branch Remittance Tax

In Germany branch remittance tax is not imposed.

Wage Tax/Social security Contributions

The wage tax that is the tax on employment income is withdrawn by the boss from the member of staff’s gross income and forwarded to the tax authorities. Whereas tax on wage is withheld on part of the employee, the social security contributions are partly accepted by the employer, as they are separated among the employer and the employee

Wage Tax rate

Each and every employee who is working in German company pays personal taxes, which are calculated on a progressive range. The rates are:

 

For the residents earning up to €8,130 annually is 0%;

For the residents earning between €8,130 and €52,882 annually will be14%;

For residents earning between €52,882 and €250,731 annually it will be 42%;

For the residents earning more than €250,731 annually may have to pay 45%.

Social Security Contribution

Health insurance: Health insurance is mandatory for every individual residing in Germany. Workers with yearly gross pay of up to EUR 56,250 (2016) have to be joined in the public sector health insurance plan. The periodical contributions of 14.6% of gross salary of the month (maximum of EUR 4,237.50) are separated evenly among employers and employees who each one donate 7.3%.

Value Added Tax

At each stage of production and distribution chain, a sales tax known as Value added tax (VAT) is levied. Generally, in the course of the business activity carried in Germany VAT is imposed on most supplies of goods and services provided by an entrepreneur.

In Germany, the usual rate of the VAT is 19%, with a condensed rate of 7% related to certain consumer goods and essential services (like food, magazines and newspapers, books, entertainment, hotel accommodation and local public transport).

A few supplies are tax-exempted or zero-rated. Zero-rating (exclusion with input tax recovery) primarily is appropriate to intra-EU supplies; sell overseas to non-EU nations and cross-border transportation of goods to and from non-EU countries.

If a company’s total turnover has not gone beyond EUR 17,500 in the previous year and is anticipated not to surpass EUR 50,000 in the existing year then they are deemed as Small entrepreneurs resident in Germany are exempted from the VAT.

Filing and payment

The corporate taxes are calculated on a yearly basis in Germany, but advance compensation is compulsory in quarterly instalments (on 10 March, 10 June, 10 September and 10 December). The due date for Municipal taxes is on 15 February, 15 May, 15 August and 15 November. A closing tax return usually must be filed by 31 May of the subsequent year. A fine amount of up to 10% of the assessed tax is imposed by the tax authorities for not or late filing, which will not be more than EUR 25,000.

Accounting, Filing and Auditing Requirements

Large and medium-sized companies (corporations and certain partnerships) should prepare their yearly financial statements (balance sheet, profit & loss statement, related notes) jointly with management details, within three months from the end of the financial year.

Before the financial reports and the management statement of large and medium-sized units have to be audited by a legal auditor prior to the adoption of the report by the board or the shareholders.

Small entities are organizations that don’t surpass two of the accompanying three criteria, for no less than two financial years on their balance sheet dates:

  1. Net turnover of EUR 12 million,
  2. Total resources of EUR 6 million and
  3. A yearly normal of 50 workers.

Small entities, the period is stretched out to up to a half year must set up their yearly financial statements  (balance sheet, profit & loss statement, related notes)

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