Germany tax system: audit, reporting and optimization of taxation of German companies and individuals: VAT, income tax and capital gains

Basic taxes (briefly)

Personal tax 14% - 45%
Corporate tax (in detail) Income tax is levied at a rate of 15%. The general income and trade tax rates can be around 30% in Berlin and 33% in Munich.
Capital gains tax. Details Capital gains derived from the sale of a domestic or foreign corporate subsidiary are effectively 95% tax-exempt.
VAT. Details The standard VAT rate is 19%. For some types of goods and services - 7%.
Other taxes Real property tax, inheritance tax, transfer tax, municipal trade tax, social security contribution
Government fee No
Stamp duty No

International tax agreement

Albania, Algeria, Argentina, Armenia, Aruba, Australia, Austria, Azerbaijan, Bangladesh, Belarus, Belgium, Bolivia, Bosnia and Herzegovina, Brazil, Bulgaria, Cameroon, Canada, Chile, China, Colombia, Costa Rica, Croatia, Cyprus, Czech Republic, Côte d'Ivoire, Denmark, Egypt, Ecuador, Estonia, Finland, France, Georgia, Ghana, Greece, Hong Kong, Hungary, Iceland, India, Indonesia, Iran, Ireland, Israel, Italy, 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, Oman, Pakistan, Panama, Paraguay, Philippines, Poland, Portugal, Romania, Russian Federation, Saudi Arabia, Serbia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Syrian Arab Republic, Taiwan, Tajikistan, Thailand, Trinidad and Tobago, Tunisia, Turkey, Turkmenistan, Ukraine, United Arab Emirates, United Kingdom, United States, Uruguay, Uzbekistan, Venezuela, Viet Nam, Yemen, Zambia, Zimbabwe
   
Andorra, Anguilla, Antigua and Barbuda, Bahamas, Bermuda, Cayman Islands, Cook Islands, Dominica, Gibraltar, Grenada, Guernsey, Isle of Man, Jersey, Liechtenstein, Monaco, Montserrat, Netherlands Attila, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Saint Maarten, San Marino, Turks and Caicos Islands, Virgin Islands (British)


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TAXATION

Individual Taxation

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% for income up to EUR 9,408 14% for income from EUR 9,408 to 57,051 42% for income from EUR 57,501 to 270,500 45% for income above EUR 270,500.
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.

Corporate Income Tax

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.

Social Security Contributions

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.

VAT

The standard VAT rate is 19%. The rate is 7% for some goods and services.

Inheritance and Gift Tax

This tax is levied at progressive rates from 7% to 50%. There are non-taxable thresholds (from EUR 20,000 to 50,000 depending on the value of the property and the degree of kinship). Additional non-taxable thresholds are available to spouses.

Property Tax

There are local property taxes levied at the municipal level.

Property Transfer Tax

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.

Withholding Tax

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). Interest paid to non-residents, other than interest on convertible or profit-sharing bonds and over-the-counter transactions, is generally free of withholding 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.

CFC Rules

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.

Double Tax Agreements

Germany has exchange of information relationships with 116 jurisdictions through:
  • 107 DTC: Albania, Algeria, Argentina, Armenia, Aruba, Australia, Austria, Azerbaijan, Bangladesh, Belarus, Belgium, Bolivia, Bosnia and Herzegovina, Brazil, Bulgaria, Cameroon, Canada, Chile, China, Colombia, Costa Rica, Croatia, Cyprus, Czech Republic, Côte d'Ivoire, Denmark, Egypt, Ecuador, Estonia, Finland, France, Georgia, Ghana, Greece, Hong Kong, Hungary, Iceland, India, Indonesia, Iran, Ireland, Israel, Italy, 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, Oman, Pakistan, Panama, Paraguay, Philippines, Poland, Portugal, Romania, Russian Federation, Saudi Arabia, Serbia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Syrian Arab Republic, Taiwan, Tajikistan, Thailand, Trinidad and Tobago, Tunisia, Turkey, Turkmenistan, Ukraine, United Arab Emirates, United Kingdom, United States, Uruguay, Uzbekistan, Venezuela, Viet Nam, Yemen, Zambia, Zimbabwe. 24 TIEA: Andorra, Anguilla, Antigua and Barbuda, Bahamas, Bermuda, Cayman Islands, Cook Islands, Dominica, Gibraltar, Grenada, Guernsey, Isle of Man, Jersey, Liechtenstein, Monaco, Montserrat, Netherlands Attila, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Saint Maarten, San Marino, Turks and Caicos Islands, Virgin Islands (British).

Foreign exchange control

No restrictions are imposed on the import or export of capital; however, it is necessary to file a declaration with customs for transfers of more than EUR 10,000.

ACCOUNTS AND AUDIT

Financial year

The duration of the financial year is determined by resolution of the meeting of shareholders, but cannot exceed 12 months. The first financial year may be shorter.

Presentation of financial statements

All German companies must keep accounting records and prepare financial statements to the extent that will explain the company’s operations and will reflect the financial position of the company. The reporting obligations of companies depend on their type and size: micro-, small, medium or large company. According to the Commercial Code, the financial statements filing period is 6 months for micro- and small companies and is 3 months for medium and large companies. The financial statements must be drawn up in the German language, in euros, signed by the company’s representatives at the general meeting and published electronically in the Federal Gazette within 12 months of the financial year-end. For listed companies and companies that have issued debt securities, the publication period is 4 months from the financial year-end.

Keeping of financial statements

The company is obliged to keep financial statements and related underlying documentation for 10 years after the end of the reporting period.

Statutory requirements

The main legislative acts regulating German accounting are:
  • Joint Stock Companies Act 1965 (AktG) German Commercial Code (Handelsgesetzbuch - HGB).
The annual financial statements must comply with local accounting standards (German commercial GAAP) or international financial reporting standards (IFRS). IFRS standards are required for all domestic public companies and for listings of foreign companies. The German Commercial Code contains strict disclosure rules for the annual financial statements of companies.

What companies are required to submit financial statements

  • Limited Liability Company (GmbH); Joint Stock Company (AG); Open Trading Company (OHG); Limited Partnership (KG).
Limited liability companies (Gmbh and AG), with the exception of small companies, must publish annual accounts and have them audited by external auditors. Unlimited liability companies (except KG) are not required to publish or audit their accounts.

Categories of companies

The classification of companies into micro-, small, medium and large ones depends on whether or not at least two of the three specified thresholds are exceeded. The company’s category changes when the company exceeds or falls below two of the three criteria in two consecutive years. Micro-companies:
  • balance sheet total up to EUR 350,000 turnover up to EUR 700,000 average number of employees up to 10
Small companies:
  • balance sheet total from EUR 350,000 to EUR 6,000,000 turnover from EUR 700,000 to EUR 12,000,000 average number of employees from 10 to 50.
Medium-sized companies:
  • balance sheet total from EUR 6,000,000 to EUR 20,000,000 turnover from EUR 12,000,000 to EUR 40,000,000 average number of employees from 50 to 250
Large companies:
  • balance sheet total over EUR 20,000,000 turnover over EUR 40,000,000 average number of employees over 250
The content of the annual financial statements, depending on the classification by size. Micro-companies:
  • significantly abbreviated balance sheet profit and loss account
Small companies:
  • abbreviated balance sheet profit and loss account notes to the balance sheet
Medium-sized companies:
  • abbreviated balance sheet profit and loss account notes to the balance sheet management report
Large companies:
  • unabbreviated balance sheet profit and loss account notes to the balance sheet management report

Consolidated financial statements

The consolidated financial statements and the group’s management report must be audited by an auditor. If not audited, the consolidated financial statements cannot be approved. A parent company is exempt from the obligation to prepare consolidated financial statements if 1. at least two of the following three criteria apply at the closing date of its annual financial statements and at the previous closing date:
  • a) The total assets on the balance sheets of the parent company and the subsidiaries to be included in the consolidated financial statements do not exceed in aggregate EUR 24,000,000. b) The sales of the parent company and the subsidiaries to be included in the consolidated financial statements do not exceed in aggregate EUR 48,000,000 in the twelve months preceding the reporting date. c) The parent company and the subsidiaries to be included in the consolidated financial statements had on average no more than 250 employees in the twelve months preceding the reporting date;
or 2. at least two of the following three criteria apply at the closing date of the consolidated financial statements to be prepared by it and at the previous closing date:
  • a) The balance sheet total does not exceed EUR 20,000,000. b) The sales do not exceed EUR 40,000,000 in the twelve months preceding the reporting date. c) The parent company and the subsidiaries included in the consolidated financial statements had on average no more than 250 employees in the twelve months preceding the reporting date.

Audit

Section 316 of the Commercial Code requires the annual financial statements to be audited by an external independent auditor. An audit of annual financial statements is mandatory for large and medium-sized companies. In making its report, the auditor must apply the international auditing standards adopted by the European Commission in the manner provided for in Article 26(3) of Directive 2006/43/EC. Based on the results of the audit, the auditor draws up an objective written report, and if there are no objections, issues an auditor’s opinion.

Annual Return

German GmbHs are required to prepare and submit an Annual Return. The Annual Return is publicly available.

Country-by-Country reporting

Country-by-Country Reporting (CbCR) aims to provide tax authorities with additional information on multinational corporations. The Bundeszentralamt fur Steuern (BZSt – Federal Central Tax Office) is the central body for the exchange of these reports in Germany. CbC reports must only be submitted by companies that are the parent companies of a group that includes at least one foreign company or one permanent establishment abroad. In addition, sales in the previous period must be at least EUR 750 million.

TAX RETURNS

German companies must file the following tax returns with the German tax office:
  • provisional monthly value added tax (VAT) returns; annual VAT returns; annual corporate income tax returns.

Corporate Income Tax (CIT)

The tax period is a calendar year. Tax returns are filed for the company's financial year, not exceeding 12 months, ending in the relevant calendar year. The standard filing date for a CIT return is 31 July of the year following the reporting year. Quarterly provisional CIT payments are made during the year (by the end of March, June and September), with final payment by the end of December.

Value Added Tax (VAT)

Companies with a taxable turnover not exceeding EUR 17,500 in the previous calendar year and estimated turnover not exceeding EUR 50,000 in the current calendar year can choose a special scheme for small businesses without VAT. Provisional VAT returns are submitted quarterly or monthly (if the tax exceeds EUR 7,500 for the previous calendar year) before the tenth day of the month following the reporting period. VAT must be paid by the same date. Also, every taxpayer must submit an annual VAT return. In addition, if a company buys and sells goods and services from/to companies incorporated in other EU countries, it is necessary to register in the INTRASTAT and VIES systems and submit information to the tax office using the prescribed forms.

    Taxes of Germany

    Min. rate for corporate tax ~30%
    Capital gains tax Regular rate
    VAT 19%
    Withholding tax 25%/0%/15%
    Exchange control No
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