In general the German tax law focuses on the strength of the tax subject and provides opportunities for deductions, saving and deferral structures. The tax saving structures should be well planned, implemented and supervised.
Often corporate tax
= nil in the start up period
- Deduction, saving and deferral opportunities
- Upfront legal certainty through advance rulings
- Different systems for corporations and partnerships/individuals
- around 25% on profits
Tax loss carry forward or
- Allowances for dividends
- Allowances for partnerships
Corporations like GmbH and AG resident in Germany are subject to tax on profits, consisting of corporate tax and business tax (altogether around 25% of profits). The taxes are levied on worldwide income, but Germany’s tax treaties substantially mitigate worldwide taxation. German resident corporations are therefore taxed on their foreign source income to the extent that it is linked to their activity in Germany.
Losses made in one financial year can be carried forward or backward and charged against profits of other financial years, so that the tax burden can be nil or very low during the first years after establishment.
50% of the corporate dividends for individuals and about 95% for corporations are tax-exempt. The corporation on one side and the director(s) or shareholder(s) on the other, are two different legal entities with separate profits or income. Structures that enable the transfer of profits from the corporation to the directors or shareholders and so reduce the company’s profits can lead to additional tax savings. The leasing of assets to the corporation or regular salaries are preferable ways to take the money out of the company.
Partnerships are not subject to corporate tax, but each partner’s share of earnings or losses is added to his individual taxable income. The individual losses can be set against other individual earnings which is a big advantage compared to corporations, where losses cannot be transferred to the individual sphere. In addition to that EUR 24,500.00 is business tax exempt, and the business tax rate for the additional profit increases from about 4% to 16%.
Business, e.g. the share of
the partnership’s profits
- Capital, e.g. dividends
- Property, e.g. rent received
- Others, e.g. pension
- 15% to 42% on sum of all income sources
- Various exemptions, allowances, deductions
German residents are taxed on their worldwide income. Non-residents and certain expatriates are taxable only on their German source income. The tax rate for the total sum of an individual’s income Taxable individual income.
ranges from the entry level of 15% to the top tax rate of 42%, depending on the total sum. EUR 7,664.00 (double with resident spouse) of your income and half of the dividends received are tax-exempt. Several other exemptions, allowances and deductions are available. Usually losses can be set against other individual earnings.
||26,000 EUR||60,000 EUR||0 EUR|
|Tax allowable expenses:||-920 EUR||-1,500 EUR||0 EUR|
|Self-employed income:||0 EUR||-20.000 EUR||10.000 EUR|
|Capital earnings:||0 EUR||0 EUR||2,000 EUR|
|Capital earnings tax exemption:||0 EUR||0 EUR||-2,000 EUR|
|Allowance for social insurance:||-2,021 EUR||-4,002 EUR||0 EUR|
|Sum:||23,059 EUR||44,498 EUR|
|Tax:||4,100 EUR||7,190 EUR|
International tax matters
For international business transactions the following opportunities can be taken into account to gain a safe and cost saving tax structure.
Tax legislation provides potential economic investors with a general advance “ruling” to give them upfront legal certainty. Prior to a particular investment project, any company, domestic or foreign, can obtain from the tax authorities a binding decision about its tax implications. Such a ruling gives the investor legal security regarding the tax treatment of its investment project.
Transactions with related companies
German companies that conduct a considerable value of transactions with related companies abroad are required to prepare an annual transfer pricing documentation which enables the fiscal authority to check whether profits are being shifted from one country to another. If so, the prices comparable to third party transactions will be the basis for the profit assessment by the fiscal authority. In order to avoid a higher tax burden in both countries, pricing agreements about the correct transfer prices can be made with the fiscal authorities of the involved country in advance.
Bilateral Double Taxation Agreements
Germany has signed several Double Taxation Agreements with other countries. They play a very important role for taxes on corporate profits or individual income. In many cases double taxation can be avoided by a tax planning strategy.
Value Added Tax
Value Added Tax is charged on sales and services and usually amounts to 19%, 7% or nil under certain circumstances. In general, the seller receives the VAT from the buyer and pays it to the tax office. If the buyer is an entrepreneur, he gets the input VAT back from the tax authority. The VAT code provides different regulations for national, European or global transactions and therefore different requirements for invoices, which are easy to meet with well prepared invoice forms.
In Germany there is no stamp duty for documents etc. like in Anglo-American influenced systems.
Conducting business is connected with the obligation to provide regular VAT returns during the year. Annual statements have to be provided to the fiscal authorities and tax prepayments on profits have to be done quarterly. The entrepreneur is obliged to withhold the tax on wages and to deduct social insurance contributions from each employee’s salary. An all inclusive tax consulting service is available for reasonable prices.
Fiscal offences & money laundering
Before a fiscal offence is disclosed by the authorities, you have the opportunity to provide them with an amended return in order to get an exemption from punishment. The fiscal authority’s and prosecutor’s practice regarding fiscal offences can be considered as quite mild regarding a conviction. Usually the first offence will not be reported by the fiscal authority to the prosecutor. The proceedings for the second offence are likely to be closed by the prosecutor, if the evaded sum is settled and a fine is paid. Nevertheless, the practice depends on the individual circumstances.
Regulations against money laundering require the beneficiary of international bank transfers exceeding an amount of EUR 12,500 to notify the transfer to the German Federal Bank, upon which the Bank usually does not start further research on the source. Cash exceeding EUR 10,000 per person is required to declare at the customs when entering the German border. The customs will register the cash import and ask for documents to clarify the legal source of the money, e.g. a bank statement or foreign exchange certificate of the country of origin should be available. Otherwise the customs may keep the money until such documents are submitted. If a required customs declaration has not been made, the customs may charge a fine amounting to around 5% to 10% of the total sum.