Germany tax system - taxation of German companies and individuals: VAT, income tax and capital gains. Tax treaties of Germany.

Residents pay income tax on their worldwide income, while non-residents on income from German sources.

The income of individuals is taxed at progressive rates:

• 0% on income up to EUR 9 744;
• 14% on income from EUR 9 744 to EUR 57 918;
• 42% on income from EUR 57 918 to EUR 274 612;
• 45% on income from EUR 274 612.

A 5,5% solidarity surcharge tax is also levied on the amount of income tax. Its rate is being gradually reduced and its tax base is being limited.

Members of officially recognised churches pay church tax at the rate of 8% or 9% depending on the area of residence.

Business income in excess of EUR 24 500 is subject to trade tax. The base rate is 3,5%, but municipalities can increase it multiple times: 2 – 5,5 times.

The 25% rate plus solidarity surcharge tax applies to:

• Gains from the sale of financial instruments (for example, shares).
• Dividends.
• Interest.

Gains from the sale of other assets are taxed at ordinary progressive rates if movable property is sold after less than one year of ownership and if immovable property is sold after less than ten years of ownership.

Resident companies pay corporation tax on their worldwide income, while non-residents on their German source income.

Corporation tax is levied at the rate of 15%. A solidarity surcharge tax is also paid at the rate of 5,5% of the corporation tax, which results in the effective tax rate of 15,825%.

Business tax (trade tax) is levied at a base rate of 3,5% and at a municipal rate usually ranging between 12% and 20%. The base of this tax is somewhat different from the base for corporation tax.

The total of corporation tax and trade tax rates can be around 30% in Berlin and 33% in Munich.

95% of the company's gains from the sale of investments in other companies is exempt from taxation.

95% of dividends from substantial participation can be exempt from taxation. Substantial participation starts at 10% for corporation tax purposes and at 15% for trade tax purposes.

The following social security contributions are levied in Germany:

• Pension insurance payable at the rate of 18,6% on income up to EUR 85 200 (lower in some federal states). The contribution is paid by the employer and the employee in equal proportions.
• Unemployment insurance payable at the rate of 2,4% on income up to EUR 85 200 (lower in some federal states). The contribution is paid by the employer and the employee in equal proportions.
• Health insurance payable at the rate of 15,9% on income up to EUR 58 050. The contribution is paid by the employer and the employee in equal proportions.
• Long-term care insurance payable at the rate of 3,05% (3,3% for childless individuals over 22 years old) on income up to EUR 58 050. The contribution is paid by the employer and the employee in equal proportions.
• Occupational injury insurance payable by the employer at rates depending on the sector of the economy.
• Insolvency insurance payable by the employer at the rate of 0,06% on income up to EUR 85 200.

The standard VAT rate is 19%.

The rate is 7% for some goods and services.

This tax is levied at progressive rates from 7% to 50%.

There are non-taxable thresholds (from EUR 20 000 to EUR 50 000 depending on the value of the property and the degree of kinship). Additional non-taxable thresholds are available to spouses.

There are local property taxes levied at the municipal level.

The transfer of German immovable property is taxed at rates from 3,5 to 6,5% of the transaction value. This tax is also levied on indirect transfers of immovable property through transactions with 95% or more shares in immovable property companies.

This tax is expected to be reduced.

Dividends and interest on convertible and profit-sharing bonds are taxed at the rate of 25% (26,375% including solidarity surcharge tax), but companies can apply for a refund of withholding tax paid in excess of the corporation tax rate of 15% (15,825% including solidarity surcharge tax).

Tax on loans secured by German immovable property is usually not withheld, but is subjected to corporation tax payable at 15% rate (15,825% including solidarity surcharge tax).

Royalties are taxed at 15% (15,825% including solidarity surcharge tax).

Tax rates may be reduced under double tax treaties and EU directives.

Foreign companies more than 50% controlled by German tax residents are regarded as controlled foreign companies for tax residents who hold an interest (even a small one) in such foreign companies.

The CFC’s income is included in the tax base of a German taxpayer if it qualifies as passive income and is taxed at a rate below 25%.

There are a number of exemptions. In particular, if a CFC is located in the EU/EEA and the taxpayer can prove its real economic activity, the CFC rules may not apply.

Germany has concluded 96 Double Tax Treaties (DTC) and 16 Tax Information Exchange Agreements (TIEA) with the following jurisdictions:

96 DTC: Albania, Algeria, Argentina, Armenia, Australia, Austria, Azerbaijan, Bangladesh, Belarus, Belgium, Bolivia, Bosnia-Herzegovina, Bulgaria, Canada, China (People’s Republic of), Costa Rica, Croatia, Cyprus, Czech Republic, Denmark, Ecuador, Egypt, Estonia, Finland, France, Georgia, Ghana, Greece, Hungary, Iceland, India, Indonesia, Iran, Ireland, Israel, Italy, Ivory Coast, Jamaica, Japan, Kazakhstan, Kenya, Korea (Republic of), Kosovo, Kuwait, Kyrgyzstan, Latvia, Liberia, Liechtenstein, Lithuania, Luxembourg, Macedonia, Malaysia, Malta, Mauritius, Mexico, Moldova, Mongolia, Montenegro, Morocco, Namibia, Netherlands, New Zealand, Norway, Pakistan, Philippines, Poland, Portugal, Romania, Russia, Serbia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Syria, Taiwan, Tajikistan, Thailand, Trinidad and Tobago, Tunisia, Turkey, Turkmenistan, Ukraine, United Arab Emirates, United Kingdom, United States, Uruguay, Uzbekistan, Venezuela, Vietnam, Zambia, Zimbabwe.

16 TIEA: Andorra, Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Dominica, Gibraltar, Grenada, Guernsey, Isle of Man, Jersey, Liechtenstein, Monaco, St. Lucia, St. Vincent and the Grenadines, Turks and Caicos.

Germany has also signed and ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). The MLI entered into force for Germany on April 1, 2021.

There are no exchange control in Germany.