Business (Corporate) Taxes in Germany
Last updated: 11 May 2020 / by Sam Williams
According to Benjamin Roosevelt, the only two things in life which are certain are taxes and death. In Germany, that is definitely the case as the country has one of the highest levels of taxation in the world.
Personal taxes in Germany can quickly add up with extras such as the solidarity surcharge and church tax on top of the general levies. If you are thinking about setting up your own business, it’s not just personal taxes you’ll have to consider. For German business owners, there are also corporate taxes, which can place a heavy burden on your profits.
The corporate tax rate in Germany is complex, and the amount you must pay can vary depending on several factors. Our guide provides an overview of business taxes in Germany, with everything you need to know to get started.
Corporation Tax (Körperschaftsteuer): An Overview
In Germany, the amount of corporation tax you need to pay is based on your net profit over a year. This applies whether your business is agricultural, commercial, professional, industrial or another category.
German taxation law defines a business as an independent and enduring activity which occurs on the open market, and where the goal is to earn profit.
Even if you meet the German legal definition of a business, you may not have to pay corporation tax as it does not apply to everyone.
Are You Liable for Corporation Tax?
Although corporation tax applies to businesses, not every business will be liable to pay it. If your registered or management office is in Germany, and you are one of the following types of business, you will be liable for corporation tax:
- Commercial enterprises being run by legal entities
- Trusts, societies and other legal entities
- Mutual insurance companies
Other types of businesses such as GmbH, UG and AG will be liable for corporation tax.
If your business generates income while in Germany but your offices are elsewhere, you will only be liable for corporation tax on the German profits. If your business is registered in Germany, you will pay German corporation tax on your worldwide profits.
The rate for corporation tax is set nationally at 15%. However, when combined with other applicable corporate taxes, the total business tax rate is approximately 29%. This makes Germany one of the countries in Europe with the highest level of business taxes.
Trade Tax (Gewerbesteuer)
Other than freelancers, agricultural, forestry and not-for-profit organizations, all businesses in Germany will be liable to pay trade tax (gewerbesteuer).
The obligation for trade tax starts as soon as the business begins if you are a sole trader or a partnership. In other cases, it begins when the business is listed in the Trade Register (Handelsregister).
Unlike corporation tax, trade tax is payable on a local level; municipal tax is another name for trade tax.
Your trade tax liability is calculated based on your trading income, minus the applicable tax-free allowance. The starting rate is 3.5% before the specific municipal tax rate (the Hebesatz). This varies between 2x – 5x, giving a final trade tax of between 7-20%. Location is the main factor that determines how much you will have to pay. As a rough guide, expect to pay more trade tax in urban areas.
The official name for VAT in Germany is Umsatzsteuer (USt), but many people still refer to it by the old name of Mehrwertsteuer (MWst).
Not every business will have to pay VAT. If you are either a freelancer or defined as a small trader (kleinunternehmer) you will not need to charge VAT. You can still choose to do so as it has some financial benefits, but be aware that it also adds significant paperwork. Once you have opted in or out of paying VAT, you won’t be able to change your mind for five years, so it’s important to think about it carefully.
If you fall within the category that you must pay VAT or choose to do so, an extra 19% must be charged on top of your standard fees. For some services and goods this is reduced to 7% (examples include newspapers, hotels, translation). This surplus payment must not be used by your business but set aside for payment to the tax office. You can make VAT payments monthly, quarterly or annually.
When you do your invoicing, you must list VAT separately.
Some goods and services are exempt from VAT. These include:
- Buying and selling of real estate
- Financial services (including insurance)
- Professional services (such as doctors)
- Intra-EU deliveries (the receiving customer pays the VAT in their country)
Other Types of Corporate Taxes
Corporation tax, VAT and trade tax are the main three types of corporates taxes, but there are some others too:
If your business is connected to a religious organization, you may have to pay church tax (Kirchensteuer) of 8-9%.
Introduced in 1991, the solidarity surcharge (solidaritaetszuschlag – often abbreviated to Soli) is a supplement of 5.5%, which is added to income tax and certain business taxes. This liability is calculated automatically and is payable at the same time as the rest of your business taxes.
You may not have to pay any solidarity surcharge from 2020, in line with the changes described below. If you do still have to pay a solidarity surcharge, you may be paying a reduced amount.
Dividend tax may apply to some businesses. 95% of dividends are exempt from corporate taxation unless you have included them as a tax-deductible expense.
Capital Gains Tax
Capital gains received by a company, which have arisen from the sale of business assets, are typically regarded as ordinary income. Gains made can be used to offset the cost of purchasing replacement property.
Corporation and trade taxes do not apply to capital gains made from selling investments. This also means that you cannot treat any losses as tax-deductible.
Changes in the Law (2020)
There have been recent reforms on corporate taxes in Germany, so you might notice some changes in 2020 compared to past rates. These changes came following pressure from industry bodies who were unhappy that other EU countries were lowering corporation taxes, leaving Germany at a competitive disadvantage.
These reforms include abolishing the solidarity surcharge for the majority as well as introducing the research and development tax credit described below (under tax credits).
According to government calculations, approximately 88% of the self-employed (including freelancers) will no longer have to pay the solidarity surcharge. A further 6.8% will be paying less than before.
Despite the changes, Germany remains a country that charges high levels of tax and bodies such as the Taxpayer’s Federation and the Federal Association of German Industry continue to campaign for further drops.
Claiming Corporate Tax Exemptions in Germany
There are some exemptions from business taxes in Germany, including:
- 95% of dividends (domestic and foreign)
- 95% of capital gains which arose from the sale of company shares
Investment grants given to invest in new federal states
- Capital contributions (company-level) for either capital increase or company formation.
- Capital repayments (shareholder-level) from the company if dividend distributions are not included. If the book value of the individual’s investment is exceeded, only the surplus amount is taxable.
Corporate Tax Credits
If you pay a business tax in Germany, you will be eligible to claim corporate tax credits. This credit is worked out by multiplying your basic municipal tax by 3.8. There is a maximum you can receive, which is calculated based on the business income you generate compared to the total taxable income.
An example: you earn 60% of your taxable income from an employed position and earn the remaining 40% from your business. If your tax liability is €100,000, the maximum tax credit you could receive would be €40,000 (40% of your income tax liability).
These tax credits cannot lead to a refund of income tax and cannot be used to offset income tax in a different year.
An additional tax credit is available from 2020 which is solely for research and development. If your business is in this industry, you can claim a tax credit worth 25% of the salaries paid to your research staff. This tax credit is capped at €500,000.
Filing Your Corporate Tax Return
You will need to use the ELSTER (ELektronische STeuerERklärung) website to make your corporate tax return, as well as paying your corporate tax. The website is in German. If you need to pay VAT or submit employee tax statements, you can do these through ELSTER too.
Before you can make your return or pay what is due, you’ll have to follow the registration process. As well as entering your data onscreen, you will also need to verify your email and wait for an activation code through the post. This can take up to 14 days to receive so do not wait until your tax return is due to start the process.
When you file your corporate tax return, you can enter all the data on ELSTER with no need to follow it up in paper form. The site acts as a form of electronic signature.
After you submit your return, the tax office will calculate your tax liability. This will lead to either a request for payment or details of any tax refund due to you.
Overpayment of tax is more common than many realize because the tax due for the year is paid in advance. Four installments in March, June, September and December must be paid based on an estimate before your true tax liability is calculated in the following May.
Disguised employment is one area of concern for freelancers. Where the tax office considers you are evading the proper taxes by registering as a freelancer but acting as an employee, financial penalties will apply.
In the same way, you must be careful about not making excessive payments to shareholders or affiliated companies as a means of reducing the tax liability. If the tax office considers that you are attempting to hide the profits, the full sum will become liable for business taxes.
A professional German tax advisor can help you to manage your tax liability without violating the law.