Germany Country Profile - 2021
Germany Country Profile - 2021
Key tax factors for efficient cross-border business and investment involving Germany.
- EU Member State
- Double Tax Treaties
- Most important forms of doing business
- Legal entity capital requirements
- Residence and tax system
- Compliance requirements for CIT purposes
- Corporate income tax rate
- Withholding tax rates
- Holding rules
- Tax losses
- Tax consolidation rules/Group relief rules
- Registration duties
- Transfer duties
- Controlled Foreign Company rules
- Transfer pricing rules
- Thin capitalization rules
- General Anti-Avoidance rules (GAAR)
- Specific Anti-Avoidance rules/Anti Treaty Shopping Provisions / Anti-Hybrid rules
- Advance Ruling system
- IP / R&D incentives
- Other incentives
- Other relevant points of attention
- Contact us
EU Member State
Double Tax Treaties
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.
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, corporate income tax (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 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
On other payments
Unless modified by a tax treaty: supervisory board fees are subject to WHT 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 WHT 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
Dividend received from resident/non-resident subsidiaries
Exemption method (effectively 95 percent), special rules for trade tax purposes, but a participation exemption under a tax treaty may be available:
- Participation requirement: 10 percent for CIT at the beginning of the tax assessment period (from resident/non-resident subsidiaries); 15 percent for trade tax at the beginning of the tax assessment period (from resident (since 2020: all) and non-resident subsidiaries) (up to and including 2019: 10 percent for participations in EU/EEA corporations at the beginning of the tax assessment period).
- Minimum holding period: none for CIT and trade tax;
- Taxation requirement: none for CIT and trade tax;
- Active income requirement: none for CIT and trade tax;
- 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 Double Tax Treaties (DTTs).
Capital gains obtained from resident/non-resident subsidiaries
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:
- Built-in gain clause: 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;
- Group exemption provision: there is no detrimental change in ownership if 100 percent of the shares in the transferee and transferor are held directly or indirectly by the same person (top management of the group). The group exemption provision also applies to group internal acquisitions which involve the group´s parent company (top management);
- Restructuring clause: provides for an exception if a (detrimental) change in ownership occurs for the purposes of restructuring the business operations of the loss-making corporation;
- An exception also applies for share transfers outside a group scenario, if the transfer is performed after December 31, 2015 and 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.
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.
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) 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).
On the transfer of shares
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 (share deal)/or 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.
The "Law on the amendment of the Real Estate Transfer Act (RETTA)" was promulgated in the Federal Law Gazette on May 17, 2021.
Among others, the Act provides for the following measures:
- lowering the relevant investment level from 95 percent to 90 percent;
- expanding the special provision for shareholder changes in partnerships owning real estate (RE-partnerships) to include corporations owning real estate (RE-corporations) but with introduction of a so-called stock exchange exceptions clause;
- extending the current holding periods from five to ten years.
The amended RETTA is applicable for the first time to acquisition transactions realized after June 30, 2021. However, special transitional rules have to be noted.
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.
Real estate taxes
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.
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 (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 ("motive test").
Guidance of the Germany Federal Ministry of Finance dated March 17, 2021 extends the motive test to third-country subsidiaries in all pending cases. The background to this is the Court of Justice of the European Union (CJEU) decision of February 26, 2019 (C-135/17), according to which the German CFC rules may unjustifiably restrict the free movement of capital with regard to third-country companies.
A government draft bill for an Act on the implementation of the ATAD (published in the Official Gazette on June 30, 2021 amends German CFC rules. However, the fundamental principles remain unchanged.
Amendments include a change of the control criterion as well as the introduction of a shareholder-based approach, the elimination of the concept of lower tier intermediary companies (direct income inclusion concept) and the revision of the catalogue of active/passive income. Furthermore, the motive test shall be revised and extended for certain passive income to third-country companies. Under the proposed rules, a tax return for the application of the CFC rules will be required if the motive test can be performed. Henceforth, mere notification shall be sufficient in these cases. The notification must include the information relevant for the examination of the prerequisites of the motive test; in particular, name, address, economic activity of the foreign company, participation relationships and identifiers of the shareholders in the foreign company.
The revision of the CFC rules shall first be applicable for the assessment period for which intermediary income is to be imputed that accrued in a fiscal year of the intermediary company commencing after December 31, 2021.
Transfer pricing rules
General transfer pricing rules
Yes ('arm’s length principle').
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 Limitation 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.
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.
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 (‘substance test’).
On May 28, 2021, the upper house of the German parliament (Bundesrat) passed the 'Act to Modernise the Relief from Withholding Tax and the Certification of Capital Gains Tax' in the version proposed by the Finance Committee. One of the key points of the act is the revision of the German anti-treaty/directive shopping rule.
Most of the amendments represent a significant tightening of rules. In essence, however, it remains the case that no WHT reduction is granted if a company with little obvious function is interposed between the shareholder and the distributing or paying domestic company. The explanatory memorandum to the Act explains that the amendments result from existing CJEU and the need to combat abuse.
According to the amendment, a foreign entity, irrespective of the provisions of existing double tax agreements, is not entitled to claim WHT relief to the extent that:
- persons holding shares in the company would not be entitled to relief if they earned the income directly (‘personal entitlement to relief’); and
- the source of the income has no material connection to an economic activity of the foreign entity (‘material entitlement to relief’).
For personal entitlement to relief, the shareholder needs to have an entitlement to relief under the ‘same entitlement provision’. The materiality stipulation shall not be fulfilled if the foreign entity's economic activity solely consists of providing support services to one or more subsidiaries (e.g. in accounting or legal advice). Ultimately, there must be an economically plausible reason for precisely why the foreign entity keeps the source of income.
The anti-treaty/directive shopping rule shall not be applicable if it can be shown that none of the main purposes for the interposition of the foreign entity constitutes a tax advantage. Further tightening is provided for the exception in the form of the stock exchange clause which, according to the explanatory memorandum, is henceforth only applicable to the foreign entity. The listing of a shareholder on a stock exchange, however, does not suffice.
The revised version of the anti-treaty/directive shopping rule shall apply to all open cases. To avoid inadmissible retroactive effect in those cases in which the new version would leave the taxpayer in a worse position, a procedure for assessing the most favourable tax treatment is intended, insofar as the capital gains or remuneration was received prior to the new version entering into force – i.e. up to and including the date of promulgation of the law in the German Federal Law Gazette.
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
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. (since July 1, 2020: EUR 1,000,000).
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.
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, amendments / revisions to German CFC, transfer pricing and exit taxation rules). A government draft bill for an Act on the implementation of the ATAD was published in March 2021.
Option for corporate taxation for commercial partnerships: on May 21, 2021, the lower house of the German parliament (Bundestag) passed the Act Updating Corporate Tax Law (KöMoG). The essence of the draft bill is the introduction of an option for corporate taxation for commercial partnerships. The transition from transparent taxation as a partnership to corporate taxation is treated as change of form for tax purposes. To ensure that this fictitious change of form is 'tax neutral', the requirements of the German Reorganisation Tax Act must therefore be met.
Source: German tax law and local tax administration guidelines, updated 2021.
Mandatory Disclosure Rules Updates
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