Germany offers a competitive system of corporate taxation. The average tax burden is just below 30 percent.
All corporations – including the limited liability company (GmbH), the stock corporation (AG) and German permanent establishments of foreign corporations – are subject to corporate income taxation. Income taxation of corporate companies generally consists of three components: corporate income tax, solidarity surcharge, and trade tax.
Due to locally set varying trade tax levels, there is no consistent nationwide tax rate for corporate income taxation. Corporate income tax rate plus solidarity surcharge are however determined nationwide. The German corporate tax average is 29.9 percent.
Corporate Income Tax
All corporations are liable to corporate income tax. This is levied as a flat nationwide rate of 15 percent on the taxable profits of the company.
Companies Liable to Corporate Income Tax
Corporate companies, such as the limited liability company (GmbH) or the stock corporation (AG), based in Germany or with an executive board in Germany are liable to corporate income tax on globally generated income. Dividends that have been generated and taxed abroad may be exempt from taxation in Germany or taxes paid in a foreign country can be offset against taxation in Germany.
Corporate companies who are not based in Germany nor have an executive board in Germany are only liable to corporate income tax on income generated inside Germany (e.g. via a permanent establishment, dividends or licenses).
Corporate Income Tax Rate
Corporate income tax is levied as a flat nationwide tax at a rate of 15 percent of taxable corporate income. Taxable income (i.e. annual business profit) forms the tax base for corporate income tax. Under German commercial law, corporate company annual profit is calculated according to the accrual basis accounting method. This is recorded in the annual financial statement and forms the basis for determining taxable income.
However, German tax law provides different accounting options and income correction rules, meaning that the taxable income usually differs from the annual profit determined in the financial statement under commercial law. For more information please also refer to our chapter on tax deductions.
In addition, a solidarity surcharge (Solidaritätszuschlag) is added on top of the corporate income tax. The surcharge is a fixed and flat nationwide component of company taxation and set at a rate of 5.5 percent of the 15 percent corporate income tax (not the income); creating a total of 0.83 percent of taxable income. Taken together, the corporate income tax and solidarity surcharge amount to a total taxable rate of 15.83 percent.
All commercial business operations are liable to trade tax. Although trade tax is regulated by federal law, it is a municipal tax with rates varying at the municipal level.
Trade Tax Rate
Irrespective of their legal form, all commercial business operations in Germany are liable to trade tax (Gewerbesteuer). The trade tax rate is set by local authorities which means it can vary from one municipality to the next. The rules for determining the taxable income (business profits plus certain statutory additions and allowances) are the same throughout Germany. Moreover, the trade tax rate is the same rate for all businesses within one municipality. The minimum trade tax rate must be at least seven percent. There is no statutory ceiling of the trade tax rate, but the German average trade tax rate is slightly above 14 percent. As a rule, the trade tax rate tends to be higher in urban locations than in rural areas. The solidarity surcharge is not levied on trade tax.
Determining the Trade Tax Rate
The trade tax rate depends on two factors:
- the multiplier (Hebesatz) stipulated individually by every municipality
- the tax base rate of 3.5 percent (across Germany)
The taxable income of the company is multiplied with the tax base rate (3.5 percent) which results in the so-called tax base amount. The tax base amount is then multiplied with the applicable municipal multiplier; which results in the sum total of trade tax which is due. The multiplier is set by each municipality. On average, it is slightly above 400 percent, but may not total less than 200 percent. There is no upper limit for the municipal multiplier.
Model calculation: A GmbH with an annual taxable income of EUR 1,000,000 is based in city A. City A has stipulated a municipal multiplier of 400 percent. The tax base amount for the GmbH is 3.5 percent of its annual taxable earnings or EUR 35,000. The EUR 35,000 is multiplied by the municipal multiplier of 400 percent, resulting in a total trade tax amount for the GmbH of EUR 140,000.
Taxation of Dividends
Germany provides an extensive network of double taxation agreements to ensure that double taxation in international business can be avoided.
Corporate Shareholders - Withholding Tax
If a German subsidiary company distributes profits to its foreign parent corporation (a dividend payment) then a 25 percent rate of withholding tax (Kapitalertragssteuer) is payable in Germany.
Within the EU, dividend payments between a corporate domestic subsidiary company and a corporate foreign parent company are tax-free over and above a 10 percent stake.
In the event of the existence of a double taxation agreement (DTA) between the Federal Republic of Germany and another country, the withholding tax in the DTAs is usually levied at a significantly lower rate, e.g. 15, 10, 5 or even 0 percent. Withholding tax still paid in Germany can be credited against existing foreign tax obligations or the parent company has been exempted from dividend-payable tax in the respective DTA state. Different rules may apply for dividend payments by partnerships.
In cases where there is no applicable DTA between Germany and the foreign nation, two fifths of the withholding tax paid can be reimbursed if the creditor of the dividend-paying German corporation is a foreign corporation.
Private Shareholders – Final Withholding Tax
Profits which are distributed to private shareholders are liable to a final withholding tax (Abgeltungssteuer) of 25 percent plus the solidarity surcharge. The final withholding tax is retained by the debtor of the dividend or the institution managing the deposit (for instance a bank) and then paid to the tax office. However, the application of a DTA may lead to a lower withholding tax if the private stockholder resides in another country.