Germany

Tax residency – A company is tax resident in Germany if it maintains its registered office or place of effective management in Germany.

Basis – Tax resident entities are taxed on their worldwide income.

Tax rate – The corporate income tax rate is 15%. There is also a 5.5% solidarity surcharge levied on the corporation tax and a municipal trade tax which ranges between 14% and 17%. The effective corporate tax rate is usually between 30% and 33%.

Capital gains – Generally, capital gains are treated as ordinary income and subject to the standard rates.  Capital gains from the sale of investments in other corporations may be exempt from corporation and trade taxes. However, 5% of the capital gains are added back to taxable income as non-deductible expenses.

Dividends – Dividends received are exempt from corporate tax provided that the recipient entity holds at least 10% of the shareholdings. For trade tax purposes, in addition to the 10% shareholding, other requirements must be met, such as an active income test for dividends from foreign sources. Portfolio dividends or dividends from securities held for trading are treated as ordinary income and taxed at standard rates.

5% of the tax-free gross dividend is added back to taxable income as non-deductible expenses.

Interests – Interests received are subject to corporate and trade taxes at standard rates.

Royalties – Royalties received are subject to corporate and trade taxes at standard rates.

Withholding Taxes – Dividends paid to non-residents are subject to 25% withholding tax (26.375% including solidarity surcharge). However a 40% refund for non-resident corporations is usually available, being an effective tax rate of 15.825% unless the rate is reduced due to a tax treaty, or dividends qualify for a tax exemption under the EU parent-subsidiary directive.

Interests from publicly traded debt, interests from financial institutions, convertible bonds and certain interests from profit participating loans paid abroad are subject to a 26.375% withholding tax unless the rate is reduced under a tax treaty or the EU interests and royalties directive applies.

Royalties paid to non-residents are subject to a 15.825% withholding tax unless reduced due to a tax treaty or the EU interests and royalties directive applies.

Foreign-source income – Foreign-source income is generally subject to corporate income tax unless a tax treaty provides otherwise. However, a total or partial tax relief in the form of tax credits or exemptions is available for foreign tax paid.

Income from foreign branches or partnerships is usually not subject to trade tax.

Foreign-source investment income from an EU/EEA subsidiary may not be attributable, provided that the subsidiary conducts commercial activities.

Losses – Losses may be carried forward indefinitely and may be carried back 1 year. Losses may be offset against profits up to EUR 1m without restriction. Profits exceeding EUR 1M may be offset by 60%.

Inventory – Inventory may be valued at lower cost, market selling value, or replacement price. Last in First Out (LIFO) is allowed. First in First Out (FIFO) is usually not allowed for tax purposes.

Anti-avoidance rules – Transactions between related entities must be conducted at arm’s length following the OECD’s principles and they must be properly documented. An exit tax may be imposed on the profit potential that is deemed to be transferred, based on the discounted cash flow value of the subsidiary before and after the restructuring.

There are no thin capitalization rules. However, interest expenses may be deductible up to 30% of taxable income before net interest expense, regular depreciation, and amortization (EBITDA). The difference between 30% of the EBITDA and the net interest expense may be carried forward and used in the following five years. This limitation does not apply if the interest burden is less than EUR 3M, the taxpayer is not a part of the group of companies and the equity ratio of the German borrower does not fall short by more than two percentage points of the worldwide group’s equity ratio.

There are also controlled foreign company rules, passive income from subsidiaries subject to an effective tax rate of less than 25% may be attributed to the German shareholder if the German shareholder holds more than 50% of the subsidiary.

Labor taxes – Employers and employees must contribute to the several social security funds and insurances:

Pension insurance: 9.3% and 9.3% on employee’s gross salary, respectively.

Unemployment insurance: 1.5% and 1.5% on employee’s gross salary, respectively.

Health insurance: 7.3% and 7.3% on employee’s gross salary, respectively.

Invalidity insurance: 1.275%, and 1.275% on employee’s gross salary, respectively.

The upper monthly salary limits are EUR 6,500 for the pension and unemployment insurances and EUR 4,425 for the health and invalidity insurances.

Tax Credits and Incentives – There are no relevant tax credits and incentives, other than a foreign tax credit for foreign tax paid.

Personal income tax – An individual is considered tax resident in Germany, if he or she is domiciled (permanent accommodation) or has habitual abode (spends more than 6 months) in Germany.

Tax residents are subject to tax on their worldwide income.

Income tax rates are progressive up to 45% plus a solidarity surcharge of 5.5%, resulting in a top marginal tax rate of 47.5%. There is also a church tax of 9%. Investment income, such as dividends or capital gains are generally taxed at an effective tax rate of 26.375%. Although individuals may opt to be taxed for their investment income at standard rates.

Other taxes – There is a real property tax levied by municipalities at a rate of 0.35% of the tax value of the property, multiplied by a municipal coefficient. Transfer of real properties is taxed between 3.5% to 6.5% of the sales price/ value of the property.

Inheritance and gift are subject to tax at progressive rates from 7% to 50%, although under certain conditions the inheritance of business property may be tax free.

The V.A.T. standard tax rate is 19%, with a reduced rate of 7% for certain goods and services. Certain transactions are exempt from V.A.T.