Just like individuals, companies also pay taxes in Germany. In Germany, companies are taxed based on their global income. Understanding company income tax in Germany is not only for companies in practice but also for anyone looking to start, expand, or invest in a business in Germany. The country has the largest economy in Europe by a significant margin. Likewise, Germany is known for its strong regulatory framework, stable market, and attractive business opportunities. As a company owner, entrepreneur, or investor, especially those just starting out, the tax system might feel complex at first. However, understanding how company tax works in Germany while following tax regulations is a game-changer for businesses.
What is a Company Income Tax in Germany?
To understand the entirety of company income tax in Germany, it’s important to know what a company tax is and who is liable to it in Germany. From the term, you can tell it is not associated with personal income or investment. A company income tax in Germany is a national tax on the profits of corporations and legal entities in the country. This fee is fixed at 15% on taxable income. In addition, a solidarity surcharge, the Solidaritätszuschlag, of 5.5% is added to the corporate income tax (Körperschaftsteuer). This means a total of 0.825% on any taxable income, bringing the corporate tax total to 15.825%.
Who is Liable For Company Income Tax in Germany
It is important to know that not all companies or corporate bodies are liable, for instance, sole proprietors and some partnerships with permanent establishment in Germany don’t pay company income tax; rather, their profits are taxed under personal income at the owner or partner level. So, who is liable for company income Tax in Germany? Let’s find out:
1. Corporations Registered in Germany
All legally established corporations in Germany, or those with an executive base in Germany, are fully liable for company income tax on their global income. However, dividends taxed abroad may be exempt from company income tax in Germany. Some of these business entities include: a GmbH (limited liability company); a stock corporation (AG); an entrepreneurial company (UG); and other corporations.
2. Foreign Corporations Established in Germany
Not just German corporations are liable for corporate income tax; foreign corporations and multinational groups with a permanent establishment in Germany are, too. This includes business abroad with a branch office in Germany, a factory, or workshop, etc. In this case, only the income generated within Germany is subject to German company income tax.
3. Entities Treated as Corporations for Tax Purposes
There are some organisations, such as foundations, charities, NGOs, that do not work like traditional companies but are treated as corporations under the German tax law. Most of the time, they are largely exempt from corporate and trade taxes. In the case where they earn any taxable income, they will be liable to the corporate tax law. Taxable income in this case means money they got from business activities unrelated to the corporation. In summary, they must pay tax on any economic activity they do outside of the charity and NGO activity at a subsidised corporate tax rate of 7%.
Basics of Corporate Taxation in Germany
In Germany, company taxation follows a two-part system, which is made up of the federal and local taxes. The federal tax is the 15.825% we talked about earlier, comprising the corporation tax and the solidarity surcharge. Also known as the municipal trade tax (Gewerbesteuer), the local tax is a must-pay for corporations operating in Germany. The municipal trade tax varies from municipality to municipality and is imposed on businesses in Germany.
The municipal trade tax is calculated using a base rate of 3.5%. This rate is then multiplied by a local rate set for each municipality in which the corporation is located. Depending on the city or town, the effective municipal trade tax rate ranges from 7% to 17%. When combined, the local and federal taxes can total a range between 29% to 33%.
When calculating trade tax, there are certain costs that are added back to a company’s trade income. The prominent one is the 25% of financing expenses above €200,000 must be included to determine the tax base. Also, when calculating corporate income tax, the trade tax cannot be deducted. This, in turn, increases a company’s total tax liability.
It is important to know that Germany’s corporate tax system is governed by three main laws, which include:
1. The Corporate Income Tax Act
Known as Körperschaftsteuergesetz – KStG in German, the corporation tax act regulates how companies in Germany are charged for corporate income tax. With this act, all entities subject to corporate tax must be defined. Likewise, taxable income and all applicable income must be defined. This act also set out rules on profit determination, loss carryforwards, and exemptions in a way that is structured and consistent.
2. The Trade Tax Act (Gewerbesteuergesetz – GewStG)
The Trade Tax Act governs municipal trade tax and applies to all commercial business operations. This act explains how the municipal trade tax is calculated. It includes the base municipal trade tax rate and the role of the municipal multipliers. The Trade Tax Act also specifies which expenses must be added back when calculating taxable profits. It also clarifies what trade tax is not deductible for corporate income tax purposes.
3. The Fiscal Code
Also known as the General Tax Act, the Fiscal Code serves as the general legal framework for tax administration in Germany and also plays a role in company income tax. This does not focus on tax per se but rather outlines taxpayer rights and obligations. It governs filing deadlines, audit procedures, penalties, and enforcement measures.
Value-added Tax (VAT)
Aside from the federal and municipal taxes, corporations are obligated to follow the VAT directive. VAT is the consumption tax on the exchange of goods and services. Companies are obliged to add VAT to the prices of their goods and services. Germany’s VAT system follows the European Union-wide rules. This rule focuses on digital compliance. As a result, corporations and businesses are required to use electronic invoicing and real-time reporting. Doing this makes it easier for German tax authorities to assess tax with transparency while reducing tax fraud.
There are certain thresholds you must meet to charge and remit VAT. For small business owners, companies must register for VAT if their taxable turnover exceeds €25,000 in the previous year and €100,000 in the current year. The frequency of VAT returns depends heavily on the size of the business. Also, while some companies may be required to file VAT monthly, others may be required to file quarterly or annually.
Tax Deductions
When it comes to company income tax in Germany, there is a possibility of tax reduction, which is an opportunity for capital income tax relief. Tax deductibility reduces your annual tax burden if you meet certain conditions. Corporate tax reduction in Germany means reducing taxable profit through standard business expenses, loss carryovers, and specific breaks like partial exemption from dividends received. The key strategy here is to deduct all these expenses before calculating the base 15% federal tax, the additional surcharge, and the trade tax.
Tax Declarations: How to File Company Income Tax in Germany
As a corporation liable to company income tax in Germany, you must submit a tax return to the German tax authority once a year. When making a tax declaration, you have to file an annual return at a German corporate tax rate of 15%, a solidarity surcharge 5.5% of the corporate tax income, and the trade tax, usually around 14-17%. The declarations must be submitted electronically via the ELSTER portal before the deadline. If you have a tax advisor, you might get an extension on your deadline.
Every legal entity and partnership liable to corporation tax in Germany must file its tax return. The declaration process involves:
1. Register Your Company
Once the corporation has been established in Germany, the first step is to register your company with the local tax office, known as the Finanzamt in German. Your registration data is sent to the tax authorities, which then send a registration questionnaire to gather more information about your business. The questionnaire requires you to share information about your business activities and shareholders. Once filled, you will return it to the tax office where you registered.
2. Get Your Tax Number
After reviewing the information you provided, the local tax office will assign you a corporate tax number, which is different from your personal tax number. Once you have your tax number, it must always appear on all official company documents.
3. Use ELSTER (Elektronische Steuererklärung)
ELSTER is an electronic submission portal officially used in Germany to file tax returns, submit tax-related forms, and handle other tax-related tasks. It can also be used to communicate with German tax authorities without going to their office. Other advantages of the website include error checks, faster processing, and reduced paperwork. With this portal, you can declare and file your company income tax.
Using the ELSTER, you can submit your financial statements to the commercial register within 12 months of the fiscal year end. Once you’ve submitted your financial statement on the portal, you will wait for it to be assessed. After assessment, you will receive a tax assessment notice with specific bank details for your Finanzamt. You can pay your tax via bank transfer using the provided bank details. You can also use the direct debit method, which is automatic and more convenient.
4. Submit Your Financial Statements and Pay Your Tax
Using the ELSTER, you can submit your financial statements to the commercial register within 12 months of the fiscal year end. This usually includes the company’s trade income, business expenses, client gifts, profit and loss statements, and other financial breakdowns regarding the company. Once you’ve submitted your financial statement on the portal, you will wait for it to be assessed. After assessment, you will receive a tax assessment notice with specific bank details for your Finanzamt. You can pay your tax via bank transfer using the provided bank details. You can also use the direct debit method, which is automatic and more convenient.
Conclusion
The German market is undoubtedly a solid one among countries in the European Union. Building a business in a country like Germany is a good business decision, but understanding how German corporate income tax works is a much better idea. If you have your corporation in Germany, you must know that the company income tax in Germany includes the corporate income tax, an additional surcharge, and the trade tax. All of these are well-structured and well-regulated. For a thriving business in the German market, it’s important that you meet the country’s legal tax obligations, and working with a professional tax adviser will make it easier.
