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flag Germany Germany: Tax system

In this page: Corporate Taxes | Accounting Rules | Consumption Taxes | Individual Taxes | Double Taxation Treaties | Sources of Fiscal Information

 

Corporate Taxes

Tax Base For Resident and Foreign Companies
Resident and non-resident companies are subject to the same tax treatment. A company is resident for tax purposes in Germany if it is effectively managed or if its place of incorporation is in Germany.
The German law (in line with OECD's provisions) defines a permanent establishment as any fixed business facility serving the corporate purpose.
 

Tax Rate

Corporate Tax (Körperschaftssteuer) Standard rate is 15% (15.825% including a 5.5% solidarity surcharge). Effective rate including trade tax (assessed independently by each municipality from 7% to 17.5%) is estimated at about 30-33%
Trade tax (Gewerbesteuer) - levied on companies and individuals carrying out commercial activities through a subsidiary or a permanent establishment in Germany. The basis is the adjusted profit for corporation tax purposes A combination of a uniform tax rate of 3.5% (base rate) and a municipal tax rate (Hebesatz). Rates are between 12.6% and 20.3% (averages between 14% and 17% of income)
25% of all financing costs over EUR 100,000 are added back to taxable income. However, in response to the COVID-19 pandemic, the tax-exempt amount of trade tax add-backs was increased from EUR 100,000 to EUR 200,000 from the tax year 2020 onwards.
For further information concerning the tax measures taken in order to address the impact of the COVID-19 crisis, please consult the following link.
 
Tax Rate For Foreign Companies
There is no distinction between German companies and foreign companies. Non-resident companies are only taxed on their Germany-sourced income, while resident companies are taxed on their worldwide income.
Both corporation tax and trade tax are imposed on the taxable income of a foreign company's German branch.
Capital Gains Taxation
Capital gains are typically taxed at the same rate as ordinary income at 15% (or 15.825% with the solidarity surcharge). A 95% tax exemption (a 100% exemption with a 5% add-back as a non-deductible business expense) applies to the sale of shares by a company, regardless of how long the participation in the subsidiary has been held. Such an exemption does not apply to banks, financial institutions and finance companies, life or health insurance companies and pension funds.
Main Allowable Deductions and Tax Credits
In general, all expenses incurred in the course of business operations are deductible. Germany offers unilateral tax relief, allowing companies to credit foreign taxes paid up to the amount that is subject to domestic tax or to deduct foreign tax as a business expense. Net operating losses up to EUR 1 million can be carried back one year for corporation tax (for losses incurred in 2020 and 2021 the limit has been increased to EUR 5 million, in response to the COVID-19 crisis), but this provision does not apply for trade tax. Losses up to EUR 1 million may be carried forward indefinitely. For net operating losses exceeding EUR 1 million, at least 40% of the taxable income is subject to taxation ("minimum taxation" principle). Deduction of net interest expense is generally limited to 30% tax EBITDA.

Start-up and formation expenses are deductible. Bad debts incurred on business activity with unrelated parties are deductible if it is apparent that they are irrecoverable and all attempts to pursue the debt have failed or been abandoned.

Donations to charity organizations that respect certain parameters, whether in cash or in kind, are deductible up to the higher of 20% of otherwise net taxable income or 0.4% of the total of sales revenue and wages and salaries paid during the year.

Paid taxes are deductible, except for corporation tax, trade tax, and the VAT on most non-deductible expenses. Fines and penalties are not deductible. The deductibility of certain royalty payments to related parties has limitations. Payments to foreign affiliates can be deducted, provided the amounts are at "arm’s length".

According to a Federal decree, taxpayers having income from agriculture or forestry, trade, self-employment, or rent or lease and expect to suffer losses due to the COVID-19 pandemic in 2020, which may be carried back to 2019, may apply for a reduction of income or corporation tax prepayments for 2020 (to EUR 0) and for a retroactive reduction of income or corporation tax prepayments made for 2019 based on a lump-sum loss carry-back (15% of the tax base for the prepayments in 2019). Furthermore, enhanced depreciation rates were introduced for movable assets acquired or made in the period between 31 December 2019 and 1 January 2022 of up to the factor of 2.5 compared to currently applicable depreciation rates (up to a maximum of 25% per year).

Other Corporate Taxes
A municipal trade tax is levied by municipalities at a minimum rate of 7% (averages between 14% and 17% of income).
A tax on property is levied by local authorities at a rate of 0.35% of the tax value of the property, multiplied by a municipal coefficient. A real estate transfer tax applies with rates varying between 3.5-6.5%, including on indirect transfers from the acquisition of at least 95% of the shares in property-owning companies.
Employers are liable for social security contributions, as follows:

- Pension insurance: 9.3%
- Unemployment insurance: 1.2%
- Health insurance: 7.3% (the health funds may levy a supplement of 1.1% on average)
- Invalidity insurance: 1.525% (with a surcharge of 0.25% in some cases)
The upper monthly salary limit varies according to the region.

Other Domestic Resources
Federal Central Tax Office
Consult Doing Business Website, Summary of taxes and mandatory contributions
 

Country Comparison For Corporate Taxation

  Germany OECD United States
Number of Payments of Taxes per Year 9.0 10.1 10.6
Time Taken For Administrative Formalities (Hours) 218.0 163.6 175.0
Total Share of Taxes (% of Profit) 48.8 41.6 36.6

Source: Doing Business - Latest available data.

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Accounting Rules

 

Accounting System

Accounting Standards
European companies listed on the stock exchange must establish their annual consolidated accounts on the basis of IAS/IFRS standards. SMEs can use German GAAP (requirements of the German Commercial Code) or, in their consolidated financial statements, IFRS Standards as adopted by the EU.
Accounting Regulation Bodies
DRSC, Deutsches Rechnungslegungs Standards Committee (German Standardisation Bureau)
Accounting Law
The main legal sources of German accounting are:
- the Stock Corporation Law of 1965 (AktG)
- book III of the German Commercial Code (Handelsgesetzbuch - HGB).
Difference Between National and International Standards (IAS/IFRS)
IFRS Standards are required for all domestic public companies and listings by foreign companies (except in the case of a foreign company whose home jurisdiction’s standards are deemed by the EU to be equivalent to the IFRS Standards). IFRSs are not required for SMEs.
Accounting News
International Accounting News on Germany
 

Accounting Practices

Tax Year
The tax year is 12 months or the period for which accounts are prepared, if shorter. The tax accounting period may not exceed 12 months in total.
Accounting Reports
Unlimited liability companies, partial liability companies (Einzelkaufleute, OHG, KG), and limited liability companies (Gmbh and AG) must draw up the following accounting documents:
- a balance sheet (Bilanz) in the format decreed by the 4th European Directive of 1978, adapted to German law in 1985
- a profit and loss account (Gewinnund Verlustrechnung)

Limited liability companies (Gmbh and AG) must also draw up the following documents:
- notes to the accounts (Anhang)
- an annual report (Lagebericht)

The financial flow table or cash flow table is obligatory only for companies listed on the stock exchange.

Taxpayers are required to maintain their books in Germany, although electronic bookkeeping may be transferred abroad if prior approval is obtained from the tax authorities.

Publication Requirements
The reporting obligations of companies depend on their legal form: small, medium, or large company (as determined according to its balance sheet, net turnover and staff employed).

Limited liability companies (Gmbh and AG), with the exception of small companies and groups of companies, must publish annual accounts and have them inspected by an outside auditor.
Unlimited liability companies (except KGaA) have no obligation to publish their accounts or to have them audited.

Large and medium-sized entities (corporations and certain partnerships) must prepare their annual financial statements, together with a management report, within three months from the end of the financial year. For small entities, the period is extended to up to six months and a management report need not be prepared. Small entities are entities that do not exceed two of the following three criteria for at least two consecutive financial years on their balance sheet dates: net turnover of EUR 12 million, total assets of EUR 6 million and an annual average of 50 employees. Listed companies and companies that have issued debt securities as domestic issuers additionally have to prepare a half-yearly financial report covering the first six months of the financial year.The financial statements and the management report of large and medium-sized entities need to be audited by a statutory auditor before they can be adopted by the board or the shareholders. All companies, except certain partnerships, are obliged to publish their financial statements and their management report without delay after presenting them to the shareholders, but not later than 12 months from the end of the financial year, by submitting them electroncally to the electronic federal gazette. For listed companies and companies that have issued debt securities as domestic issuers, the time limit for publication is four months from the end of the financial year. Half-yearly financial reports generally must be published within two months after the end of the reporting period and be submitted to the electronic company register. Penalties are imposed if the deadlines are not met.

 

Accountancy Profession

Accountants
The accountancy services (Book-keeping, accounting, controlling, payroll) and related services can be offered by companies or individuals adhering to one of the following (legally regulated) professions: Public Accountants, Management Accountants, Independent Accountants, Commercial Accountants, etc. A valid business license is required to provide such services. The type of licence defines the scope of services allowed.
Professional Accountancy Bodies
WPK - Wirtschaftsprüferkammer, Chamber of Auditors
IDW - Institut der Wirtschaftsprüfer, Institute of Chartered Accountants
Member of the International Federation of Accountants (IFAC)
Germany is a member of the International Federation of Accountants (IFAC).
Member of Other Federation of Accountants
Member of the Federation of European chartered accountants.
Audit Bodies
The preparation of the annual accounts must take within three months after the end of the financial year for medium and large companies, and within six months later for small companies. You can contact an external auditor: PriceWaterhouseCoopers; Ernst & Young; KPMG; Deloitte
 
 

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Consumption Taxes

Nature of the Tax
Value Added Tax (VAT), also refered to as Umsatzsteuer (USt) or Mehrwertsteuer (MwSt).
Standard Rate
19%
Reduced Tax Rate
A reduced rate of 7% applies to food, agricultural products, public transport, books, e-books and magazines, hotels (short-term accommodation) and certain cultural services, social services, medical equipment for disabled persons and firewood.
Intra-EU supplies, exports to non-EU countries, cross-border transport of goods to and from non-EU countries are generally zero-rated.

In light of the COVID-19 epidemic, the Federal government decided to temporarily reduce the VAT rates from 19% to 16% (standard rate) and from 7% to 5% (reduced rate) in the period between 1 July and 31 December 2020. Furthermore, the rate on meals (excepting beverages) provided in restaurants and through other catering services were temporarily reduced from 19% to 5% for services provided between 1 July and 31 December 2020 and to 7% for the period until 31 December 2022.

Exclusion From Taxation
Certain financial transactions and services, insurance and medical services, cultural and educational services as well as transactions covered by property tax are exempted from VAT.
Some supplies are zero-rated (intra-EU supplies; exports to non-EU countries and cross-border transports of goods to and from non-EU countries).
Method of Calculation, Declaration and Settlement
VAT is calculated on the selling price and generally levied on supplies of goods and services in Germany, on intra-EU acquisitions and certain imports from outside the EU.

There is no VAT registration threshold, as all taxable persons that carry out taxable transactions in Germany have to register for VAT purposes. In general, preliminary VAT returns are filed on a monthly or quarterly basis by the tenth day of the following month. Each taxpayer must file an annual return for each calendar year. To obtain a VAT refund, a company must have a tax identity number.

The tax administrations of each German Federal States (Länder) have published application forms for deferment of tax.

Other Consumption Taxes
Germany levies several environmental taxes, including those on mineral oil, gas, coal and electricity. A motor vehicle tax is imposed on the ownership of motor vehicles.
General insurance premiums also incur a 19% tax.
Excise duties apply on fuel, electric power, alcoholic products and tobacco.
There are no stamp duties in Germany (except for the real estate transfer tax).

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Individual Taxes

Tax Base For Residents and Non-Residents
An individual is considered resident in Germany if he/she has a residence in the country or a habitual abode in Germany (for example, when the individual stays in the country for more than six months in a calendar year, or for six consecutive months).
 

Tax Rate

Personal Income Tax for single taxpayers Progressive rate from 14% to 45%
From EUR 0 to EUR 9,744 0%
From EUR 9,745 to EUR 57,918 Geometrically progressive rates between 14% and 42%
From EUR 57,919 to EUR 274,612 42%
Above EUR 274,612 45%
Personal Income Tax for married taxpayers
From EUR 0 to EUR 19,488 0%
From EUR 19,489 to EUR 115,836 Geometrically progressive rates between 14% and 42%
From EUR 115,836 to EUR 549,224 42%
Above EUR 549,224 45%
Solidarity Contribution is added as a mandatory surcharge 5.5% of the amount of the income tax
No solidarity surcharge is levied any longer for individuals filing separately and having an income tax burden up to EUR 16,956, and for married filing jointly taxpayers with an income tax burden of up to EUR 33,912
If the aforementioned thresholds are exceeded, a sliding scale is applied
Church Tax (applicable to resident members of certain officially recognised German churches) 8 or 9% of the annual income tax liability. It varies according to the district of residence
Trade Income Tax
(levied on business income)
For individuals and partnerships a tax-free amount of EUR 24,500 applies
Each municipality is responsible for the final tax assessment
 
Allowable Deductions and Tax Credits
Statutory pension contributions (under certain limits), certain private insurance contributions, education (30% of tuition fees, excluding housing, care, and food; capped at EUR 5,000 per year/child) and training expenses, alimony (capped at EUR 13,805), donations (up to 20% of adjusted gross income), and church tax are deductbile. Additionally, resident taxpayers are granted personal allowances, as follows:
Employee's allowance EUR 1,000; Investor's allowance (for interest, dividends, and capital gains) EUR 801; Lump-sum special expense deduction EUR 36.

Actual expenses for child care can be deducted up to a maximum of EUR 4,000 per year/child (for children under 14 years or for handicapped children).

Deductions are provided for parents and children with low income (documentary evidence of low income is required), up to EUR 9,744; and for children older than 18 who are being educated in Germany or certain foreign countries, up to EUR 924 per year. A lump sum deduction of EUR 36 for a single person or EUR 72 for married couples is provided without need for proof.

Losses not offset in the year in which they occur can either be carried back to the previous year up to EUR 1,000,000 (for 2020 and 2021 this amount is increased to EUR 10,000,000 in response to the COVID-19 crisis) or carried forward indefinitely.

Special Expatriate Tax Regime
Income tax is payable by German resident individuals on their worldwide income. Non-resident individuals are only required to pay taxes on German-sourced income.
There is no specific tax regime for expatriates in Germany. However, the country has signed double taxation agreements with many countries in the world. For more information refer to the Ministry of Finance.
Capital Tax Rate
Inheritance and gift tax ranges from 7% to 50% with conditional exemptions (tax-free amounts between EUR 20,000 and EUR 500,000 apply, depending on the value and the degree of the relationship between donor and beneficiary).
A small property tax applies, with rates set by the municipalities.
A real estate transfer tax is applied with rates ranging from 3.5 to 6.5% to the transfers of German properties.

Employees contribute to the social security contributions as follows:

- Pension insurance: 9.3%
- Unemployment insurance: 1.2%
- Health insurance: 7.3% (the health funds may levy a supplement of 1.1% on average)
- Invalidity insurance: 1.525% (with a surcharge of 0.25% in some cases).
In general, self-employed individuals are not obliged to pay mandatory social security contributions.

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Double Taxation Treaties

Countries With Whom a Double Taxation Treaty Have Been Signed
Federal Ministry of Finance, List of double Taxation Treaties signed by Germany (website in German)
Withholding Taxes
Dividends: 25% (26.375% with solidary surcharge)
Interest: 0/25% (26.375%, including the solidarity surcharge; generally only interests paid by banks to residents is subject to a withholding tax)
Royalties: 0 for residents/15% for non-residents (15.825% with solidarity surcharge)
Bilateral Agreement
The United Kingdom and Germany are bound by a double taxation treaty.

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Sources of Fiscal Information

Tax Authorities
Overview of Germany's tax measures in response to Covid-19
Federal Central Tax Office
Tax Information Centre
Federal Customs Administration
Bundesministerium der Finanzen, Website of the Federal Ministry of Finance
Other Domestic Resources
Tax Information Centre
Country Guides
PwC Tax Summary - Germany

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Latest Update: May 2022