Key tax factors for efficient cross-border business and investment involving Germany.
With the following countries, territories and jurisdictions:
|Bosnia & Herzegovina||Ivory Coast||North Macedonia||Turkmenistan|
|China||Jersey||Pakistan||United Arab Emirates|
|Cyprus||Rep. of Korea||Portugal||Uzbekistan|
Notes: (a) Treaty signed but not yet in force.
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)
AG: EUR 50,000
GmbH: EUR 25,000
SE: EUR 120,000
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.
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.
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.
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).
Generally no WHT on straight-forward loans under domestic law (certain exceptions apply).
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.
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.
Exemption method (effectively 95 percent), special rules for trade tax purposes, but a participation exemption under a tax treaty may be available:
Exemption (effectively 95 percent) applies for CIT as well as trade tax purposes.
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: There is an additional restriction on loss deductions for corporations. Direct or indirect acquisitions of more than 50 percent of a corporation´s shares or voting rights within a five-year period by a person or related party triggers a total forfeiture of losses for corporate and trade tax purposes (the change-of-control rule). The rule also applies when shares are transferred to a group of purchasers with convergent interests.
There are exceptions to loss forfeiture provisions:
The Lower Tax Court of Hamburg has referred the full forfeiture of losses provision to the Federal Constitutional Court for review. The outcome of these proceedings will be monitored.
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) having their place of management in Germany.
For tax purposes, a taxpayer must generally register with the competent tax authorities (in principle within one month of the relevant reportable event).
Real estate transfer tax (RETT) applies on:
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, Rhineland-Palatinate, Saxony-Anhalt, Bremen, Lower Saxony: 5 percent; Berlin, Hesse, Mecklenburg-Western Pomerania: 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.
The discussion about the tightening of the RETT in the area of share deals continues. The legislative process, which was pushed forward in 2019, is currently on hold.
Real estate tax (RET) 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.
On April 10, 2018, the German Constitutional Court decided the provisions on the evaluation of property for reason of German RET as unconstitutional. The German legislator has therefore revised the respective regulations for determining the tax base (assessed value of the property) in 2019. Accordingly, new assessed values of the properties will apply from January 1, 2022 which will constitute the new tax base from January 1, 2025. In principle, the new assessed value of the property is based on a value-based model, whereby the federal states have the option of deviating from the federal regulation and introducing their own models.
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 (investment character, 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.
In its judgment of February 26, 2019 in Case X (C-135/17) the Court of Justice of the European Union (CJEU) ruled as follows on the question whether the German CFC rules applying to passive income with an investment character in cases involving non-EU-EEA countries are compatible with the freedom of capital:
In its judgement of May 22, 2020 (I R 11/19), the BFH ruled that at least in the years under dispute (2005 to 2007), the adding back of passive income with an investment character is not in violation of the free movement of capital.
The standstill clause is not applicable because the CFC rules had been fundamentally changed by virtue of the German Tax Reduction Act as at 1 January 2001. But in the Federal Tax Court's opinion there was no agreement on exchange of information with Switzerland in the years under dispute because all agreements of a sufficient nature did not take effect until thereafter and explicitly do not provide for administrative assistance in relation to past matters.
A ministerial draft bill for an Act on the implementation of the ATAD (published in December 2019) intends to amend German CFC rules and will also consider the principles of the BFH judgement I R 11/19.
Yes ("arm’s length principle").
New documentation requirements in line with OECD BEPS Action 13 have been in place since December 27, 2016:
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 exemption for non-group businesses and the escape clause do not apply to companies where the "shareholder debt financing"- test is not met.
The German Federal Tax Court has asked the German Federal Constitutional Court to rule on whether the German thin capitalization rules breach the principles of equality before the law and are thus unconstitutional. It remains to be seen how the Federal Constitutional Court will rule.
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.
It remains to be seen whether a corresponding legislative change will follow.
Yes, but generally for a fee payable to the tax authorities.
Yes, on January 1, 2020, the Act on tax incentives for research and development entered into force. The Purpose of the Act is to introduce tax incentives for research and development (R&D) by way of a so-called “research allowance” that shall be equally available to all enterprises irrespective of their size, their respective profit situation and the purpose of the enterprise, provided that they are subject to tax in Germany. The grant is linked to personnel expenditure for R&D activities and amounts to 25% of the expenditure, maximally EUR 500,000.
The Act will be applied initially for only six months. The period of application shall be extended by the period of time for which the European Commission declares the period of validity of the General Block Exemption Regulation (GBER) applicable to the research allowance.
Generally no direct tax incentives; tax incentives are however offered in very limited circumstances (e.g. special depreciations and investment deductions).
The standard rate is 19 percent, and the reduced rate is 7 percent.
Provisions of the EU-ATAD will continue to be implemented into German tax law (e.g. extension of already existing anti-hybrid rules, amendments / revisions to German CFC transfer pricing and exit taxation rules). A ministerial draft bill for an Act on the implementation of the ATAD was published in December 2019.
Source: German tax law and local tax administration guidelines, updated 2020.
For country specific information and updates on the EU Mandatory Disclosure Rules please visit KPMG’s EU Tax Centre’s MDR Updates page.
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