Planning to begin a new business of your own in Germany? Explore all the information you need to be aware of with our expert guide on corporate tax in Germany before you start your journey.
Anyone operating a business in Germany or carrying out a trade is liable for corporate tax in Germany. The rate of corporate tax in Germany is a combination of municipal business tax and federal business tax. The corporate tax amount an individual has to pay can vary as it is dependent of your location inside the country.
The below mentioned brief guide will cover all the topics regarding business tax that are essential for your knowledge.
- 1 The Corporate Tax System in Germany
- 2 Who Pays Corporate Tax in Germany?
- 3 Corporate Tax Rates in Germany
- 4 Corporate Tax Credits and Exemptions in Germany
- 5 VAT in Germany
- 6 Corporate Tax Year in Germany
- 7 How to File Corporate Tax Return in Germany
- 8 Other Business Tax Types
- 9 Corporate tax fines in Germany
The Corporate Tax System in Germany
Businesses and companies have to pay corporate tax (Körperschaftsteuer) depending upon their net income for a period of one business year. Same principles as for corporate entities will apply for determining commercial, industrial, agricultural and professional profits for individuals who are operating their personal business and related activities.
The tax paid by companies is for total income which also consists of distributed profits of both limited and general partnerships. Also added are the sole proprietor profits.
Who Pays Corporate Tax in Germany?
If the company has a registered office or management office located within Germany, then following business types are subject to pay the corporate tax:
- Insurance companies
- Trusts and Societies (Legal entities)
- Commercial Enterprises (which are operated by public entities)
If a company is generating income in Germany but they don’t have any registration or management office there, they are then required to pay corporate tax but on their German income only.
Corporate Tax for Limited Companies & Sole Traders
Self employed workers and business owners have to register with tax office and then obtain an official tax number for themselves. Tradespeople on the other hand have to register at the trade office. After that, the trade office passes their details to the tax office, which later issue them a tax number.
Once the registration process is completed, we will finish annual tax returns. Then we will pay income tax return in installments. It has to be paid in advance. As for the profits, they are taxed at personal tax rate instead of corporate tax rate.
For self-employed workers in Germany, there is an exemption from making social security contribution. But as per lawful requirement of German health insurance, it is compulsory to make alternative arrangements.
There are some self-employed workers who have to pay into German pension fund as well. These workers can avail few services and necessary items for their work purpose in terms of tax-deductible expenses. These items include stationery, office equipment, office space, traveling related to work, cost of childcare, pension, healthcare and some other contributions related to insurance.
The receipts and related other documentation need to be kept safe so that it can be proven later that the expenses were real.
Corporate Tax for Freelancers
Things are a bit different for freelancers. They are not liable to get themselves registered with the Commercial Register (Handelsregister) and also exempt from becoming a Chamber of Commerce (commonly known as IHK in Germany) member or contributing to it.
Along with this, freelancers do not have to create annual financial statement. They don’t require for either tax purpose or paying trade tax. A simple P&L (profit and loss) assessment is enough and valid.
In Germany, freelancers do require registering with the local tax office and their respective professional association. They also need accident insurance company if they plan to employ other people as well.
The income tax of freelancers is assessed by tax authorities in quarterly payments. It is based on the freelancer income after the expenses have been deducted.
In general, freelancers are not required to pay German social security system. However, they should make arrangements by themselves for:
- Health insurance that covers income loss and risk of illness if an individual becomes sick
- Private health insurance
- Life insurance for retirement income
- Disability insurance that covers risk of monetary loss if an individual is unable to continue work because of illness
Corporate Tax for Journalists and Artists
In Germany, journalists and artists have to contribute to the social security system of the government. The contribution goes to the health insurance, pensions and the insurance for nursing care of old-age people.
If an individual is not making these arrangements, then a law, also known as Social Law for Artists (Künstlersozialversicherungsgesetz) which says that those freelance journalists or artists not contributing in social insurance like pension scheme have to become part of government owned Künstlersozialkasse.
The contribution in this regard is dependent of one’s income. For the total annual income, there is specified ceiling. The ceiling changes every year.
Corporate Tax Rates in Germany
The combined corporate tax rate of Germany is one of the highest among Europe. The current ratio of 15% is set for national corporate tax. Later added is a 5.5% charge solidarity surcharge which makes the rate 15.825%.
There is an additional trade tax for municipalities that have more than 80,000 inhabitants. The trade tax amount varies from area to area. The variation range is from 8% to 20%.
One can identify how much they owe when they apply the federal rate (Steuermesszahl) to their company’s business income. The result is called basic tax amount.
The basic tax amount is later added with the municipal coefficient (Hebesatz) that determines actual tax amount that has to be paid.
It is safe to say that corporate tax rate in Germany does vary on significant level. According to KPMG, businesses are generally paying between 23% – 37%.
Corporate Tax Credits and Exemptions in Germany
Corporate Tax Credits in Germany
In Germany, the corporate taxpayers can avail credit amount i.e., 3.8 times the basic amount paid for municipal business tax. The tax credit maximum amount one can receive is dependent of the amount of business income a company is generating. That amount is compared with the total taxable income.
To have a better understanding, lets take an example. A taxpayer is earning 55 percent of their taxable income from an employment. They also happen to run a business which provides for the remaining 45 percent taxable income. Now if the income tax liability is 50,000 euros, the maximum amount of business tax credit they can obtain is 22,500 euros which happens to be 45 percent of the 50,000.
These tax credits cannot be used to refund income tax. They also cannot be set against another year’s income tax.
On the other hand, the municipal tax credit can be used for the purpose of overcompensation as the amount can be more than municipal business tax. In this manner, the taxpayer can utilize their credit completely against income tax for the year.
A new research and development tax credit has been introduced by government back in 2020. It provides opportunity for businesses to obtain a tax credit of about 25 percent salaries and wages paid to research staff. The new increased limit for credit amount is 1 million euros. The previous set limit was 500,000 euros.
VAT in Germany
Individuals or companies who are earning more than gross 22,000 euros in a financial year, or those who are expected to exceed the earning of 50,000 euros in the next year have a compulsory value added tax that needs to be paid on goods and services. Value-added tax (VAT) in Germany is known as Umsatzsteuer (USt). Many people in Germany still call it by the old name, Mehrwertsteuer (MwSt).
The USt rate is currently 19% which businesses have to pay. Though, if a business is providing services like journalism, translating, food supply or creating artwork, they can pay at 7 percent.
After the COVID-19 pandemic, German government took an initiative and reduced the rate for hospitality companies to 7 percent till 31st December 2022.
In Germany, VAT has some exemptions as well for certain goods and services. Below mentioned is the list of following.
- Services by certain professionals (for example doctors)
- Intra-EU deliveries (since EU customer pay VAT)
- Real estate, both buying and selling
- Insurance and financial services
Corporate Tax Year in Germany
The tax year in Germany is the same as the calendar year. There is an option for taxpayers to choose a different financial year. This is only possible after they have registered their business with the Commercial Register. Companies are liable to pay tax on their profit inside a calendar year when the financial year ends.
For example, if the financial year of a company is set to end on 31st January 2021, they have to pay the tax on profit which was generated between 1st February 2020 and 31st January 2021. This will be for the tax year 2021.
How to File Corporate Tax Return in Germany
Employers, individuals, entrepreneurs and associations use ELSTER to register, pay online tax and make tax declarations. The registration process comprises of a few steps, after the registration data is sent, there will be a confirmation email received through the portal of ELSTER. The activation code will be received by letter.
The ELSTER certificate is the authenticator of all the provided information and it serves as e-signature for security purposes.
After this, the next step is concerned with tax office. They decide how much tax one needs to pay. They provide applicant with an assessment which includes a payment demand or information regarding getting a refund for overpaid tax.
The instance of overpayment can happen since tax is paid a year in advance, in four different installments. These installments are due in March, June, September and December.
Other Business Tax Types
Capital Gains Tax
When companies sell business assets, these capital gains are considered as ordinary income. The gains can also be offset against a replacement property. If an investment sale gets capital gains, then they are exempt from trade taxes. In this manner, any loss associated with it is not deductible.
Trade tax must be paid by all commercial businesses in trade, industry, craft and services. The base rate is 3.5 percent all across Germany. There is an added multiplier by every single municipality which can later vary.
There is an allowance for annual tax-free trade tax for over 24,500 euros.
Corporate tax fines in Germany
If a tax return is filed late, then there is a fine to face which goes up to 10 percent of the tax amount due. The maximum amount it can go to is 25,000 euros. For paying late, there is a penalty of 1 percent per month.
Corporate tax is considered tricky in Germany, especially when there are complex circumstances. a professional accountant can be utilized in this situation as it can be really helpful. For finding an appropriate accountant, German Federal Chamber of Tax Consultants (Bundessteuerberaterkammer) can be contacted. German Association of Tax Advisors (Deutscher Steuerberaterverband) can also be contacted in this regard.