An Overview of Tax Compliances in Germany

Germany follows the residential rule. It taxes resident individuals on its worldwide income and non-resident individuals on its German source income only. Germany has entered into several double tax treaties, and most of these treaties exempt income attributable to a foreign permanent establishment (PE). Non-residents’ income from PE or property is assessed as German source income. Withholding tax is levied on royalties and dividends. However, interest paid abroad is free from German tax. Two taxes are levied on business profits in Germany, namely corporation tax and trade tax.

Different Types of Taxes in Germany

1. Personal Tax

Residents pay income tax on their global income, whereas non-residents pay tax on income arising from German sources only. Their income is taxed at progressive rates as mentioned below in a tabular form:

Above the income tax so calculates, a solidarity surcharge tax is levied at the rate of 5.5%. A church tax at the rate of 8% or 9% is paid by the members of officially recognized churches. If the business income exceeds EUR 24,500, then it is subject to trade tax at a base rate of 3.5%, but the municipalities can increase it multiple times. A solidarity surcharge at the rate of 25% applies to the following:

1. Gains from the sale of financial instruments e.g., shares
2. Dividends
3. Interest

Any gain arising from the sale of other assets (movable) within one year of ownership and in the case of immovable property if it is sold within less than 10 years of ownership, is taxed at the ordinary progressive rate.

2. Corporate Income Tax

The worldwide income of a resident corporation is taxed in Germany, whereas for non-residents, only their German source income is taxed in Germany. Corporate Income Tax is levied at the rate of 15%. A solidarity surcharge is also paid at the rate of 5.5% on and above the corporate income tax. Business tax or trade tax is levied at the rate of 3.5%. A municipal tax at a rate ranging from 12 and 20% is levied. The total corporate income tax and trade tax can range from 30 to 33 %, depending on the place. Almost 95% of the gains arising from the sale of investment by companies to other companies are exempt from taxation. Almost 95% of dividends from substantial participation are exempt from taxation. The substantial participation starts from 10% for corporate tax purposes and 15% for trade tax purposes.

3. Value-Added Tax

The standard rate of Value-Added Tax (VAT) in Germany is 19%. A reduced rate of 7% is applicable on food, books, hotel accommodation, cultural services, and other goods and services.

4. Social Security Contributions

The following are the social security contributions levied in Germany:

• Pension insurance is payable on income up to EUR 85,200 at the rate of 18.6%. This contribution is made equally by the employer as well as the employee.
• Unemployment insurance is payable on income up to EUR 85,300 at the rate of 2.4%. Even this contribution is made equally by the employer and the employee.
• Health Insurance is payable on income up to EUR 58,050 at the rate of 15.9%. Even this contribution is made equally by the employer and the employee.
• Long-term care insurance is payable on income up to EUR 58,050 at the rate of 3.05%. The contribution is made equally by the employer and the employee.
• Occupational injury insurance is payable by the employer at rates depending on the sector of the economy.
• Insolvency insurance is payable by the employer on income up to EUR 85,200 at the rate of 0.06%.

5. Withholding Tax

A tax at the rate of 25% is levied on dividends, interests, and profit-sharing bonds. However, a refund of withholding tax paid more than the corporate income tax at the rate of 15% can be sought by companies. Interest paid to non-residents except interest on convertible or profit-sharing bonds and over-the-counter transactions is considered as free from withholding tax. No withholding tax is levied on loans secured by German immovable property but it is subject to corporate tax payable at the rate of 15%. Royalties are taxes at the rate of 15%. The tax rates levied can be reduced under the double tax treaties and EU directives.

6. CFC Rules

Controlled Foreign Companies are foreign companies where the German tax residents have more than 50% interest. The CFC income is included in the tax base of the German taxpayer only if it qualifies as passive income and is taxed below 25%. Several exemptions are granted to CFCs. If CFCs are located in the EU/EEA and the taxpayer can prove its real economic activity, then CFS rules do not apply.

Other Taxes

1. Inheritance and Gift Tax
2. Property Tax
3. Property Transfer Tax
4. Municipal Trade tax
5. Windfall Tax

Tax Filing Period

The deadline for filing a tax return expires on the 28^th/29^th of February of the second year from the end of the tax year. This is so when the tax return is prepared by a certified tax adviser.

Tax Filing in Germany

Taxpayers in Germany have to submit an annual income tax return (Einkommensteuererklärung) to the Federal Central Tax Office. One can check if he has paid the correct amount of tax for the previous financial year by submitting a tax declaration. If one has filed the correct tax return, he will receive a tax refund.