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Germany

General Information

  • Country Name: Federal Republic of Germany
  • Currency: Euro (EUR, €)
  • Primary Tax Authority: Federal Ministry of Finance (Bundesministerium der Finanzen)
  • Key Legislation:
    • Grundgesetz (GG): The German Constitution sets the foundational principles for taxation in Articles 104a-108. These provisions establish the allocation of taxation powers between the federal government and the federal states (Länder).
    • Abgabenordnung (AO): This is the core tax procedural law governing tax administration, including the rights and duties of taxpayers, tax assessment, and appeal processes.
    • Einkommensteuergesetz (EStG): Regulates personal income taxation.
    • Körperschaftsteuergesetz (KStG): Governs corporate income tax.
    • Gewerbesteuergesetz (GewStG): Governs trade tax, applied by municipalities.
    • Umsatzsteuergesetz (UStG): Governs VAT in line with the EU VAT Directive.
    • Finanzgerichtsordnung (FGO): Regulates the procedures for tax litigation in financial courts.

Tax Authority and Collection Competence

  • Fiscal Authority Allocation:
    • In Germany, the tax system is decentralized. The power to levy taxes is shared between the federal government and the states (Länder).
  • Taxes Collected by Federal Authorities:
    • Income tax, corporate tax, VAT, and customs duties are primarily collected by federal authorities, though revenue sharing between the federal and state governments is common.
  • Taxes Collected by State/Local Authorities:
    • Trade tax (Gewerbesteuer) is collected by municipalities.
    • Property tax (Grundsteuer) is also administered by local authorities.
    • Real estate transfer tax (Grunderwerbsteuer) is collected by the states.
  • Revenue Sharing Mechanisms:
    • Personal income tax and VAT revenues are shared between federal and state governments based on predetermined formulas set in the constitution and fiscal agreements.

Corporate Income Tax (CIT)

  • Standard CIT Rate: 15%
  • Solidarity Surcharge: 5.5% of CIT, resulting in an effective rate of 15.825%
  • Trade Tax (Gewerbesteuer): Varies by municipality, typically between 7% and 17%. The effective combined corporate tax rate ranges between 30% and 33%.
  • Taxable Income Definition: All worldwide income of resident corporations is subject to taxation. Non-resident companies are taxed on German-sourced income.
  • Deductible Expenses: Business-related expenses, depreciation, interest (subject to restrictions), and salaries are deductible. Certain expenses like entertainment costs are only partially deductible.
  • Loss Carryforwards/Carrybacks: Losses can be carried back one year (up to €1 million) and carried forward indefinitely (subject to annual limitations of €1 million + 60% of income exceeding €1 million).
  • Tax Incentives: R&D tax incentives, specific allowances for SMEs, and investment allowances in certain sectors.

Value-Added Tax (VAT)

  • Standard VAT Rate: 19%
  • Reduced Rate: 7% (e.g., for food, books, medical supplies)
  • Scope of VAT: Applies to most goods and services supplied in Germany. Cross-border sales within the EU may benefit from VAT exemptions under the reverse-charge mechanism.
  • Exemptions: Healthcare, education, certain banking/financial services, and real estate leasing/sales.
  • International VAT Treatment: Exports are zero-rated, while imports are subject to VAT, usually collected by customs.

Personal Income Tax (PIT)

  • PIT Rates: Progressive rates from 0% to 45%. The top rate applies to incomes above €277,826 (for singles) in 2023.
  • Solidarity Surcharge: 5.5% on PIT for higher-income earners.
  • Taxable Income Thresholds: Income below €10,908 (single) or €21,816 (married) is tax-free (basic allowance 2023).
  • Deductions and Exemptions: Social security contributions, mortgage interest (for rental properties), and a variety of personal expenses (e.g., childcare, charitable donations).
  • Treatment of Foreign Income: Residents are taxed on worldwide income. Relief through tax credits or exemptions is provided under Double Tax Treaties (DTT).
  • Special Rules for Expatriates: Certain expatriates may benefit from allowances for housing, relocation, and schooling costs.

Additional Mandatory Contributions

  • Overview:
    In Germany, mandatory social security contributions are required alongside income tax. These contributions fund various social insurance programs, including health insurance, pension insurance, unemployment insurance, and long-term care insurance. They are typically mandatory for individuals earning employment income or similar forms of income.
  • Social Security Contribution Rates:
    • Total Contribution Rate: Approximately 39.95% of gross salary.
      • Health Insurance: 14.6% (plus an average additional contribution of 1.3% from the employee).
      • Pension Insurance: 18.6%.
      • Unemployment Insurance: 2.6%.
      • Long-Term Care Insurance: 3.05% (plus 0.35% for childless individuals over 23).
  • Mandatory Participation:
    • Social security contributions are generally required for individuals in dependent employment. Freelancers, self-employed individuals, and civil servants are subject to different rules, with some exemptions or voluntary participation options.
    • Types of Income: The contributions primarily apply to wages and salaries. Certain other income sources (e.g., rental income, investment income) are generally not subject to these contributions.
  • Contribution Thresholds:
    • Contributions are calculated up to a certain ceiling (Beitragsbemessungsgrenze), which is adjusted annually. For 2024:
      • Health and long-term care insurance: €66,600 (annual income).
      • Pension and unemployment insurance: €88,200 (annual income in West Germany), €85,200 (East Germany).
  • Tax Deductibility:
    • Social security contributions are partially tax-deductible for income tax purposes. Contributions to pension insurance, for example, are largely deductible as special expenses (Sonderausgaben). Other social security contributions, such as health and long-term care insurance, may also be deductible within specific limits.
  • Employer and Employee Contributions:
    • Employer Share: Contributions are generally split between the employer and the employee. For example, health insurance is divided equally, with the employer paying half (7.3% plus half of the additional rate) and the employee the other half.
    • Employee Share: The employee bears half of most contributions, though additional health insurance contributions (above 14.6%) are solely paid by the employee.

Withholding Taxes

  • Dividends: 25% withholding tax, plus 5.5% solidarity surcharge, resulting in 26.375%. Reduced rates under DTT may apply.
  • Interest: 0% generally, except for specific bonds or profit-sharing loans (25% withholding tax).
  • Royalties: 15% withholding tax (plus solidarity surcharge), typically reduced under DTT.
  • Payments to Non-Residents: Generally subject to withholding tax, but reduced rates apply based on DTT provisions.

Transfer Pricing Rules

  • Documentation Requirements: Germany follows the OECD guidelines. Companies must maintain documentation for all related-party transactions.
  • Arm’s Length Principle: All transactions between related entities must adhere to the arm’s length principle.
  • Penalties for Non-Compliance: Failure to comply can result in fines and adjustments to taxable income. In severe cases, penalties up to €100,000 may apply.

Special Tax Regimes

  • Free Trade Zones: None specifically designated for tax purposes. However, various investment incentives may be available in economically underdeveloped regions.
  • Industry-Specific Tax Incentives: R&D incentives, tax relief for renewable energy investments, and benefits for cultural and film industries.
  • Taxation of Trusts/Foundations/SPVs: Germany does not have a specific “trust” regime. Private foundations are taxed favorably, with income taxed at a flat rate of 15%, subject to certain conditions.

Other Taxes

  • Real Estate Transfer Tax: The real estate transfer tax rate varies between 3.5% and 6.5%, depending on the federal state.
  • Capital Gains Tax:
    • On financial assets: Gains from the sale of financial assets (e.g., stocks) are taxed at a flat rate of 25% (plus solidarity surcharge and, if applicable, church tax).
    • On real estate: Capital gains from the sale of real estate are taxed if the property is sold within 10 years of acquisition, unless it was owner-occupied. The rate depends on the individual’s marginal income tax rate.
  • Inheritance and Gift Tax: Inheritance and gift taxes in Germany are progressive and depend on the value of the gift/inheritance and the relationship between the giver and the recipient. Rates range from 7% to 50%.
  • Trade Tax: Businesses are subject to trade tax, which varies by municipality, ranging from 7% to 17.5%.
  • Church Tax: Individuals who are registered members of certain churches must pay church tax, which is 8% or 9% of their income tax liability, depending on the federal state.

Double Taxation Agreements (DTAs)

  • Key Partner Countries: Germany has over 90 DTAs, including with the US, UK, China, and EU countries.
  • Reduced Withholding Tax Rates under DTAs: Typically, dividends and royalties are taxed at lower rates (5-15%) depending on the specific treaty.
  • Tax Treaty Benefits Application Process: Companies must submit specific forms to claim DTA benefits, including a certificate of residence.

Local Taxes

  • Trade Tax (Gewerbesteuer): Varies by municipality; it is based on a rate applied to taxable income (adjusted profit). Rates range from 7% to 17%.
  • Real Estate Transfer Tax: Varies by federal state, from 3.5% to 6.5%.
  • Property Tax (Grundsteuer): Levied on property owners based on the value of the real estate.

Compliance and Reporting

  • Corporate Tax Filing Deadlines: Annual corporate income tax returns must be filed by July 31 of the following year. Extensions may be available.
  • VAT Filing Requirements: Monthly or quarterly VAT returns must be submitted depending on turnover. An annual VAT return is also required.
  • Penalties for Late Filing/Non-Compliance: Penalties for late tax filing range from €50 to €25,000, depending on the severity of the delay and the tax amount owed.

Recent Developments

  • Recent Tax Law Changes: Germany has introduced stricter regulations for hybrid mismatches and increased scrutiny of cross-border tax planning under the OECD BEPS framework.
  • Upcoming Reforms: Germany is working on digitizing its tax administration and implementing changes to corporate tax rules as part of the EU’s Anti-Tax Avoidance Directive (ATAD).
  • Global Tax Initiatives: Germany is a strong supporter of OECD’s BEPS and Pillar Two initiatives for establishing a global minimum corporate tax.

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