Mazars in GERMANY

Corporate taxes and other direct taxes

Companies are subject to German taxation if they have either their statutory seat in Germany or the main management decisions are taken in Germany. In this case the worldwide income is subject to German taxation. Besides, companies with a branch or permanent establishment in Germany are taxed based on the income realised in Germany. The corporate income tax rate amounts to 15% plus solidarity surcharge of 5.5%. The solidarity surcharge was introduced to finance the German reunification. Therefore, the total tax burden is 15.825%. In addition the local municipalities collect trade tax. The average trade tax burden is 15.5%.

In Germany, the determination of the taxable income is generally based on the result of the commercial profit and loss statement. However, the taxable income (which generally represents the reference base of the main taxes) tends to differ from the profit and loss disclosed in the commercial financial statements. The taxable profit is to be established from the changes in net capital employed during the financial year, from which the deposits are deducted and to which withdrawals are added. The assessment rules governing the assets and liabilities are therefore essential when calculating the taxable profit. Capital gains on tangible assets are fully liable to corporate income tax and to trade tax. Capital losses are fully tax deductible. Some income does not have to be taken into account in the taxable income, e.g. 95% of dividends received from corporations originated in Germany or abroad by a corporation as well as capital gains from selling these (if the participation in capital amounts to at least 10% and none of few general exemptions apply). The carry-back system allows for tax losses recorded in a financial period to be offset against earlier tax profits. Losses reduced by carry-back may be carried forward without limit, whereas their offset in one year is limited to € 1 million plus 60% of the income exceeding € 1 million.

Furthermore, the tax law in Germany distinguishes between partnerships and corporations. A partnership is in general liable to trade tax. The result of a partnership will be liable to income tax, if the shareholders are individuals, and to corporate income tax, if the shareholders are corporations on the level of the shareholder. The partnership itself neither pays income nor corporate income tax.

Transfer pricing in German
Arm’s length principle since 1995
Documentation liability since 2003
APA since 2006
Country-by-Country liability from FY 2016
Master file-local file (OECD BEPS 13) applicable from FY 2017
Penalty
Lack of documentation bases of taxation can be estimated by the tax authorities +
surcharge between 5% and 10% of the income adjustment maximum of 1 Million EUR
Tax shortage from EUR 100,000 tax reduction - imprisonment or/and high fine
Related parties 25% < Direct or indirect control or personally related
Safe harbours  

Level of attention paid by Tax Authority:

9/10

VAT and other indirect taxes

The VAT rate is in general 19%. A reduced rate of 7% applies for certain basic foodstuffs, books, newspapers, antiques, live animals, hotel accommodation and for some other items. Banking services and insurance premiums are exempt from VAT. In addition to VAT, various excise taxes and customs duties on imported goods as well as real estate transfer tax and land tax are mentioned as so-called “indirect” taxes. If goods are exported outside the EU, the customers are not subjected to VAT. In the other hand, any related input tax may still be fully deducted from amounts payable to the tax authorities. Imports into Germany outside the EU are subject to an “import VAT” on entry. Sales within the EU are also tax-free in the B2B sector. If persons or goods are transported from or to another EU country, this carriage is subject to German VAT, unless the carrier has made the transaction subject to the VAT of another EU country.

The real estate transfer tax is levied on the sales price or other transfer value on each change of ownership in land and buildings. The basic rate of real estate transfer tax rate is 3.5%. Each federal state in Germany has the right to apply a different rate of the real estate transfer tax on his territory.

VAT options in Germany  
Distance selling EUR 100,000/ year
Call-off stock N/A
VAT group registration N/A
Cash accounting* N/A
Import VAT deferment N/A
Local reverse charge Construction works, emission permits, gold, cleaning of buildings,
turnover covered by the Real Estate Transfer Tax Act,
natural gas and electricity
Option for taxation
- letting of real estate
- supply of used real estate** N/A
VAT registration threshold EUR 17,500/year

Personal income tax / Social security system

Taxable income of individuals can stem from the following categories: income from business, income from self-employment, income from dependent employment, investment income, agricultural and forestry income, income from real estate and other leases and other income. The rate of income tax varies according to progressive taxation brackets. There is a tax-free base allowance in accordance with the minimum subsistence level of € 9,000 for single individuals in 2018. The minimum tax rate has been 14% since 2009, whereas the maximum tax rate has been 45% since 2009. Some expenses, e.g. special expenses or exceptional expenses may be deducted to calculate taxable income. There is a second tax regime for investment income which mainly refers to dividends, interest etc. which is subject to 25% withholding tax. Individuals living in Germany may be liable to church tax. The rate varies between 8% and 9% of the income tax and is not collected if the taxpayer declares that he has no religious faith. Furthermore, solidarity surcharge is due of 5.5% of the payable income tax. Losses can be carried back for one assessment period up to a maximum of € 1 million (married couples € 2 million) and be carried forward indefinitely. However, minimum taxation is applicable (i.e. loss carry-forward can be utilized up to € 1 million unlimited, and the exceeding income can only be offset by 60%).

Individuals who are permanently resident - independent of citizenship - in Germany and individuals who have their customary place of residence in Germany are liable to unlimited taxation for German income tax purposes. The tax liability relates to the worldwide income unless restrictions according to the Double Taxation Agreements are applicable. Individuals who are neither resident nor have their customary place of residence in Germany are subject to limited tax liability in Germany for income they derive from German sources.

Active incomes fall under the scope of the social security system. The German social security system is broken down into four main elements like as retirement insurance, unemployment insurance, invalidity insurance, and healthcare insurance. The social contribution is split equally between employer and employee, although childless employees over 23 are required to bear an additional 0.25% premium for the invalidity insurance. The statutory minimum for health insurance is 14.6% and is divided equally, but most health funds require a supplement of, typically 0,9% to be borne in half by the employee and half by the employer. The total of social contributions amounts to a minimum of 38.65% of an employee’s gross salary.

Wage-related taxes in Germany Minimum wage Average wage in private sector
EUR   in EUR   in EUR
    1 610   3 150
TOTAL WAGE COST 1 922 119,38% 3 774 119,81%
Employer's  and other contributions* 312 19,38% 624 19,81%
GROSS SALARY 1 610 100,00% 3 150 100,00%
Employees' contributions** 198 12,30% 388 12,32%
Healthcare insurance 132 8,20% 244 7,75%
Personal income tax and solidarity surcharge*** 105 6,52% 480 15,24%
         
NET SALARY 1 174 72,98% 2 037 64,69%

*consists of retirement insurance, unemployment insurance, invalidity insurance and healthcare insurance

**includes retirement insurance, unemployment insurance, invalidity insurance

***calculation without church tax/ for a single 25 year old and without children

GERMANY
Mazars GmbH & Co. KG
Wirtschaftsprüfungs-
gesellschaft
Steuerberatungsgesellschaft
Alt-Moabit 2 | 10557 Berlin | Deutschland
Dr. Christian Birkholz
Attorney, Tax advisor Partner