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Germany Country Profile

Germany Country Profile

Key tax factors for efficient cross-border business and investment involving Germany.

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EU Member State

Yes.

Double Tax Treaties

With:

Albania Georgia Luxembourg South Africa
Algeria Ghana Macedonia Spain
Argentina Greece Malaysia Sri Lanka
Armenia Hungary Malta Sweden
Australia Iceland Mauritius Switzerland
Austria India Mexico Syria
Azerbaijan Indonesia Moldova Taiwan
Bangladesh Iran Mongolia Tajikistan
Belarus Ireland Montenegro Thailand
Belgium Israel Morocco Trinidad & Tobago
Bolivia Italy Namibia Tunisia
Bosnia & Herzegovina Ivory Coast Netherlands Turkey
Bulgaria Jamaica New Zealand Turkmenistan
Canada Japan Norway UK
China Jersey Oman(a) Ukraine
Costa Rica Kazakhstan Pakistan United Arab Emirates
Croatia Kenya Philippines Uruguay
Cyprus Rep. of Korea Poland US
Czech Rep. Kosovo Portugal     Uzbekistan
Denmark Kuwait     Romania     Venezuela
Ecuador Kyrgyzstan Russia Vietnam
Egypt Latvia Serbia Zambia
Estonia Liberia Singapore Zimbabwe
Finland Liechstenstein Slovakia  
France Lithuania Slovenia  


(a) Treaty not yet in force. 
  

Most important forms of doing business

Stock corporation (AG)

Limited company (GmbH)

Limited partnership with a limited company as general partner (GmbH & Co. KG)

Limited partnership (KG)

General partnership (OHG)

Societas Europae (SE)

Legal entity capital requirements

AG: EUR 50,000

GmbH: EUR 25,000

SE: EUR 120,000

Residence and tax system

A corporate entity is resident in Germany for tax purposes if either its place of incorporation (registered seat) or its place of central management is in Germany. Resident companies are taxed on their worldwide income. Non-residents are taxed only on their German source income, as defined in German tax law.

Compliance requirements for CIT purposes

Companies can choose their balance sheet date at will, meaning that the fiscal year does not have to coincide with the calendar year. The fiscal year should not however exceed 12 months. Changing from a fiscal year which coincides with the calendar year to a fiscal year which deviates from the calendar year is subject to approval by the tax authorities. 

In general, CIT returns for tax years beginning 2018 have to be filed within seven months of the end of the calendar year, i.e. generally by July 31 of the following year. An extension to the last day of February is available for tax returns prepared by tax advisors. CIT returns for tax years prior to 2018 have to be filed within five months of the end of the calendar year, i.e. generally by May 31 of the following year. An extension to December 31 is available for tax returns prepared by tax advisors; further extensions may be available under certain circumstances and upon approval by the tax authorities. 

CIT generally accrues at the end of the fiscal year. However, when assessed, there are four advance payments due (March 10, June 10, September 10, December 10). Electronic filing of the CIT return required.

Corporate income tax rate

23-37 percent. This is a combined rate consisting of 15 percent CIT, a solidarity surcharge that applies as a percentage of the CIT (5.5 percent of 15 percent = 0.825 percent) plus 7-21 percent trade tax depending on local trade tax multiplier.

Withholding tax rates

On dividends paid to non-resident companies

Generally 26.375 percent, i.e. 25 percent withholding tax (“WHT”) plus 5.5 percent solidarity surcharge on WHT (exemptions available under the EU Parent-Subsidiary Directive, if applicable and certain requirements are fulfilled). Reduction of WHT is available under most German tax treaties for qualified dividends (e.g. ownership threshold). In addition, foreign corporations may claim a refund of two-fifths of the WHT on the basis of domestic German tax law (subject to certain substance requirements).

On interest paid to non-resident companies

Generally no WHT on straight-forward loans under domestic law (certain exceptions apply).

On patent royalties and certain copyright royalties paid to non-resident companies

Generally 15.825 percent, i.e. 15 percent withholding tax (“WHT”) plus 5.5 percent solidarity surcharge on WHT (exemptions available under domestic law implementing the EU Interest-Royalties Directive, if applicable and certain requirements are fulfilled). Reduction of WHT under most German tax treaties available.

On fees for technical services

No

On other payments

Unless modified by a tax treaty: Supervisory board fees are subject to withholding tax at a rate of 30 percent (plus 5.5 percent solidarity surcharge on WHT). Income from artistic, athletic, acrobatic or similar performances performed in Germany and income from the utilization of such performances is subject to withholding tax at a rate of 15 percent (plus 5.5 percent solidarity surcharge on WHT). 

Residents in the EU/EEA can choose to deduct business expenses directly related to the payments mentioned above (net taxation). In such cases, where tax is withheld on the net amount, a standard tax rate of 30 percent applies for individuals and 15 percent for non-resident corporate entities. A solidarity surcharge of 5.5 percent of the tax rate applies.

Branch withholding taxes

No

Holding rules

Dividend received from resident/non-resident subsidiaries

Exemption method (effectively 95 percent), special rules for trade tax purposes, but participation exemption under a tax treaty may be available:

  • Participation requirement: 10 percent for corporate income tax at the beginning of the tax assessment period (from resident/non-resident subsidiaries); 15 percent for trade tax as of the beginning of the tax assessment period (from non-resident subsidiaries) (10 percent for participations in EU/EEA corporations at the beginning of the tax assessment period); 15 percent for trade tax at the beginning of the tax assessment period (from resident subsidiaries).
  • Minimum holding period: none for corporate income tax; as of the beginning of the calendar year for trade tax (none for participations in domestic and EU/EEA corporations);
  • Taxation requirement: none for corporate income tax and trade tax;
  • Active income requirement: none for corporate income tax; for trade tax purposes, active income requirement applies to dividends received from a non-EU subsidiary. However, an applicable tax treaty might overrule the active income requirement under domestic law;
  • In principle, an anti-hybrid rule applies for German CIT purposes (currently not for trade tax purposes) which implies that the effective 95 percent participation exemption for a dividend is not available at the level of the German company receiving the dividend if the payment was treated as a tax-deductible expense at the level of the foreign distributing entity ("corresponding principle"). The anti-hybrid rules also apply to recently concluded and future DTTs.

Capital gains obtained from resident/non-resident subsidiaries

Exemption (effectively 95 percent) applies for CIT as well as trade tax purposes.

Tax losses

Carry-forward: losses may be carried forward indefinitely.

Carry-back: As of fiscal year 2013 losses up to an amount of EUR 1,000,000 can be offset against the profits of the preceding year for CIT purposes. Losses for trade tax purposes cannot be carried back.

Minimum taxation: 40 percent of the income exceeding EUR 1,000,000 cannot be sheltered by tax loss carry-forwards, but is subject to taxation at regular rates.

Restrictions: a direct or indirect transfer of shares or voting rights in the loss making company may (partially or fully, depending on the change in ownership percentage) restrict the utilization of losses for corporate and trade tax purposes unless the group exemption applies (change-of-control-rules). Unused tax losses are not forfeited upon a share transfer up to the amount of the loss company’s built-in gains that are taxable in Germany.

Please note: In its recent decision of March 29, 2017, the Federal Constitutional Court ruled that provision § 8c (1) sent. 1 KStG/CIT (detrimental changes in ownership regarding shareholdings of up to 50%) is unconstitutional. The legislator has to introduce revised provisions by December 31, 2018 at the latest, which will apply retroactively for the period January 1, 2008 through December 31, 2015. For the time being, the German tax authorities will therefore not apply the respective Provision for "direct changes in ownership prior to January 1, 2016 pending a Revision of the Provision". Currently, no draft bill has been presented in this respect. Meanwhile, the Lower Tax Court of Hamburg has also referred the full forfeiture of losses (changes in ownership of more than 50%) - § 8c (1) sent. 2 KStG/CIT, to the Federal Constitutional Court for review. The outcome of these proceedings will be monitored. An exception also applies for share transfers outside a group scenario, if the transfer is performed after December 31, 2015 and provided that the transferred entity has maintained the same business operations since its formation or for a period of at least 3 years prior to the transfer

Tax consolidation rules/Group relief rules

Yes, if certain requirements are fulfilled and a profit and loss pooling agreement is entered into for a minimum period of 5 years, profits/losses of a controlled company are attributed to the controlling company. However, tax consolidation is only possible with subsidiaries (corporations for German tax purposes) that have their place of management in Germany.

Registration duties

For tax purposes, a taxpayer must generally register with the competent tax authorities (in principle within one month of the relevant reportable event).

Transfer duties

On the transfer of shares

No

On the transfer of land and buildings

Real estate transfer tax (RETT) applies on:

  • the transfer of German real estate;
  • the (direct or indirect) transfer of 95 percent or more of the interest in a partnership owning German real estate to new partners within a period of five years;
  • the (direct or indirect) aggregation at the level of the purchaser of  95 percent or more of the shares in a corporation/interest in a partnership owning German real estate; 
  • the (direct or indirect) economic transfer of 95 percent or more of the shares in a corporation/or interest in a partnership owning German real estate.

RETT is generally levied at 3.5 percent of the purchase price or the applicable tax value. The tax rate can, however, differ in each German federal state (Bavaria, Saxony: 3.5 percent; Hamburg: 4.5 percent; Baden-Württemberg, Mecklenburg-Weston Pomerania, Rhineland-Palatinate, Saxony-Anhalt,  Bremen, Lower Saxony: 5 percent; Berlin, Hesse: 6 percent; Brandenburg, North Rhine -Westphalia, Saarland, Schleswig-Holstein, Thuringia: 6.5 percent).

An exemption for intragroup business reorganizations is available if certain conditions are met.However, please note that the Court of Justice of the European Union (CJEU) is currently examining whether the intragroup exemption is unlawful state aid under EU law (e.g., due to the selective impact of the exemption clause). It is currently hard to predict when the CJEU will decide on this case and what its ruling will be. If the CJEU does indeed rule that the intragroup exemption is unlawful state aid, Germany will be ordered to recover the state aid from the relevant taxpayers (RETT not imposed under the exemption clause, plus interest), as of the date of granting. The EU Commission can recover state aid for a period up to 10 years from the day it was granted. This even affects cases with binding rulings or time-barred assessments. 

Stamp duties

No

Real estate taxes

Real estate tax is payable by the owner of the property irrespective of residence and is levied on the assessed value of the property using the basic rate of 0.35 percent for real estate and 0.6 percent for agricultural property. Municipalities apply their respective multipliers to the resulting base amount. The multipliers vary by municipality and may be different for industrial or agricultural property. Real estate tax rates for industrial property typically range from 0.5 to 3 percent.

Controlled Foreign Company rules

In general, when German resident taxpayers, directly or indirectly, own more than 50 percent of the shares in a foreign corporate subsidiary (vote or value) that (i) is subject to a low rate of taxation (effective tax rate less than 25 percent), and (ii) earns income from passive activities not included in Section 8 (1) of the German Foreign Transactions Tax Act, any qualifying passive income is subject to taxation in Germany. Exceptions to the 50 percent threshold apply for certain types of passive income (e.g., interest income), thus, a lower participation can be sufficient to trigger CFC taxation. EU/EEA subsidiaries carrying out a genuine economic activity may be exempted from CFC rules.

Transfer pricing rules

General transfer pricing rules

Yes ("arm’s length principle").

Documentation requirement

New documentation requirements in line with OECD BEPS Action 13 have been in place since December 27, 2016:

  • Country-by-Country Report: compulsory for MNE groups provided that total consolidated group revenue equals or exceeds EUR 750 million. The reporting requirement applies for fiscal years commencing after December 31, 2015 if the obligation to report falls with the ultimate parent entity or surrogate parent entity and for fiscal years commencing after December 31, 2016 if another local entity is required to report. The report must be filed within one year of the end of the reporting fiscal year. Notification requirements applicable to fiscal years commencing after December 31, 2016. Penalties of up to EUR 10,000 apply.
  • Master File (MF)/Local File (LF): taxpayers belonging to multinational enterprise groups are required to prepare a MF for fiscal years commencing after December 31, 2016, if their revenue equals or exceeds EUR 100 million. In general, the MF is due within 60 days of receiving a request from the tax authorities intending to perform a tax audit (shorter deadline for extraordinary business transactions). Taxes and penalties apply for non-compliance.  

Thin capitalization rules

Interest expenses are fully deductible from the tax base only to the extent that the taxpayer earns positive interest income in the same financial year. Interest expenses in excess of interest income, i.e. net interest expense, is deductible only up to 30 percent of tax Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”). Tax EBITDA is defined as taxable profit before application of the interest deduction ceiling, increased by interest expenses and by fiscal depreciation and reduced by interest earnings. Unused tax EBITDA can be carried forward for a maximum period of five years.

Non-deductible interest expenses may be carried forward, thereby increasing the interest expenses in the following year, but are not taken into account to determine the tax EBITDA.

The earnings stripping rules do not apply where one of the following exceptions is met:

  • The interest expense exceeds positive interest income by less than EUR 3,000,000 (tax threshold); or
  • The business in question is not part of a controlled group; or
  • The business in question is a part of a controlled group and the equity ratio of the business is not more than 2 percentage points less than that of the group (escape clause).

The exemption for non-group businesses and the escape clause do not apply to companies where the "shareholder debt financing"- test is not met.

General Anti-Avoidance rules (GAAR)

According to the German GAAR, tax laws may not be circumvented by abusing structuring options available within the bounds of the law. An abuse is present where an inappropriate legal structure has been chosen which, compared to an appropriate structure, results in a tax benefit for the taxpayer or a third party not contemplated by the law. This does not apply where the taxpayer is able to demonstrate valid non-tax reasons for the structure.

Specific Anti-Avoidance rules /Anti Treaty Shopping Provisions / Anti-Hybrid rules

  • Anti - Treaty/Directive Shopping rules: reduced WHT rates under a DTT or EU Directive do not apply if the shareholders of a foreign company would not be entitled to the refund or exemption if they derive the income directly and the foreign company’s gross earnings for the fiscal year in question are not derived from its own business activities and, as regards these earnings, (i) there are no economic or other valid reasons for interposing the foreign company, or (ii) the foreign company does not participate in general commerce by means of a business organization with resources appropriate to its business purpose. A preliminary ruling is currently under investigation by the Court of Justice of the European Union (CJEU), the outcome of which might impact the current rules. (Note: The CJEU already ruled in the Deister Holding Case (C 504-16) that the old version of the Anti-Treaty/Directive shopping rules according to Sec. 50d (3) Income Tax Act, which applied through to the 2011 assessment period, is contrary to both the Parent-Subsidiary Directive and the freedom of establishment).
  • Switch-Over clause: in specific cases, the credit method is applied instead of the exemption method provided by the DTT.

Advance Ruling system

Yes, but generally for a fee payable to the tax authorities.

IP / R&D incentives

No

Other incentives

Generally no direct tax incentives; tax incentives are however offered in very limited circumstances (e.g. special depreciations and investment deductions).

VAT

The standard rate is 19 percent, and the reduced rate is 7 percent.

Other relevant points of attention

Provisions of the EU-ATAD will continue to be implemented into German tax law (e.g. extension of already existing anti-hybrid rules, amendements / revisions to German CFC rules). The Multilateral Instrument (MLI) signed by Germany on June 7, 2017 is currently being ratified (e.g. Germany opted for including the PPT in its CTAs) .

Contact us

Gerrit Adrian 

KPMG in Germany

T: +49 69 9587-2944​

E: gadrian@kpmg.com 

 

Roman Meissner

KPMG in Germany

T: +49 89 9282-3713

E: RMeissner@kpmg.com

 

 

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