Germany is not considered to be a low-tax jurisdiction. However, under certain conditions foreign companies may profit from favourable tax regulations. This is due to the fact that Germany’s income taxes for corporations are fragmented.
Germany has a classic corporation tax system (corporate income tax). Corporate profits are taxed at the level of the company. Dividends are taxed in the hands of individuals at a special income tax rate. The corporation tax rate is 15%. Corporations are also subject to a solidarity surplus charge. The charge is calculated at a rate of 5.5% on the corporation tax. The combined rate is 15.83%.
Every company with substantial business activities in Germany is subject to the business or trade tax. The tax base is determined in the same way as the corporation tax but with some adjustments. The tax rate is a split into two separate rates. The federal rate is 3.5%. The basic tax amount is multiplied by an individual tax rate set by municipalities. Municipalities are cities, towns and other rural communities. Every municipality can set its own multiplier. In general the big cities have the highest rates and small communities in remote areas the lowest. The effective tax rate varies from about 14% to 17%. . More about the tax rate in the article Local German Business Tax.
A corporation which is a ‘tax-resident’ in Germany is subject to the following income taxes:
Effective tax rate
|Solidarity Surplus Charge||
14 % – 17 %
|Combined Tax Rate||
30 % – 33 %
These taxes are not deductible from their own tax bases.
If foreign companies carry out business activities in Germany through a branch (permanent establishment) they are subject to the same tax rates. However, non-resident companies with business activities in Germany might not be subject to the business tax. Only companies with a substantial commercial activity are subject to the business tax but not every commercial activity in Germany is deemed to be substantial.
Example: A foreign company starts its business activities in Germany by employing German sales staff. The company does not have an office or other fixed address premises in Germany. The sales staff places orders, develops new customer relationships and is entitled to sign sales contracts on behalf of its employer. Germany has agreed a double taxation treaty (DTT) with the home state of the foreign company. The foreign company has not established a branch (permanent establishment) but has a permanent representative in the sense of the DTT. The foreign company is subject to German corporation tax and solidarity surplus charge but not to business tax. The combined tax rate is only 15.83%.
Nevertheless, foreign companies should be very cautious. German tax authorities might search for indications that there is a permanent establishment in Germany. A flat or apartment of an employee might constitute a permanent establishment if the company rents a room in the flat or reimburses corresponding expenses!
|Solidarity Surplus Charge||Solidaritätszuschlag|
|Business or Trade Tax||Gewerbesteuer|
Author: Peter Scheller, German Tax Adviser – Master of International Taxation, www.scheller-international.com