Germany: Tax system

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 10 million, in response to the COVID-19 crisis), but this provision does not apply for trade tax. Losses may be carried forward indefinitely up to EUR 1 million plus 60% of current income exceeding that amount. 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 the German Research Allowance Act (Forschungszulagengesetz), a tax-free subsidy of 25% of salaries and wages for certain R&D purposes shall be guaranteed up to a limit of EUR 1 million/year (until 30 June 2026).

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 90% 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 1.3% 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 (EUR 7,050 in 2022 in the western part of Germany and EUR 6,750 in 2022 in the eastern part of Germany for the pension and unemployment insurances and EUR 4,837.50 in 2022 for the health and invalidity insurances).

Other Domestic Resources

Federal Central Tax Office

Consult Doing Business Website, Summary of taxes and mandatory contributions

Country Comparison For Corporate Taxation

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 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

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 deductible. 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; Child allowance (per child registered in Germany and per parent) EUR 4,194.
The monthly exemption limit for non-cash benefits (i.e. job tickets, merchandise, gas vouchers, etc.) is EUR 50. If the value of these benefits exceeds the exemption limit, the entire amount is subject to tax.

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 9,984; 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 the need for proof.
Employees working from home due to the COVID-19 pandemic who don’t have a separate office room in their home can claim a flat rate of EUR 5 per day spent working from home and entrepreneurs can claim this lump sum as a business expense (capped at EUR 600/year).

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 (increased to EUR 10,000,000 until the end of 2023 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 a rate of 0.35% multiplied by a coefficient according to the municipality.
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% capped at EUR 58,050 annually including the employer's share (the health funds may levy a supplement of 1.2% 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.