Corporate tax in Germany
In Germany, corporate tax (Körperschaftsteuer) is paid by the legal entities and institutions whose place of management is located in Germany and whose activities generate income. These are GmbH (comparable to LLC), AG (joint-stock company), and public organizations. Permanent establishments of foreign companies that receive profits in Germany are also subject to taxation.
What is taxable
Legal entities in Germany pay income tax on the basis of the Corporate Income Tax Act (KStG).
Corporate tax is calculated on the basis of taxable income, that is, profits less special expenses. Thus, it corresponds to personal income tax. Deductible expenses depend on the form of the legal entity, but there are also expenses not deductible from taxable income.
Corporate tax is imposed on the following incomes:
- Income from operating activities;
- Investment income;
- Income from capital gains.
Companies that are registered in Germany or are managed from Germany are recognized as tax residents. Tax residents pay tax on all income earned both in Germany and abroad. Thus, if a company is headquartered in Germany, the income it earns abroad is also subject to corporate tax. Non-residents pay tax only on income earned in Germany.
Who is liable for corporate tax
- Corporations (AG, KGaA, GmbH);
- Funds and associations, including mutual insurance associations and pension funds;
- Public corporations, if they are commercially active (e.g., transportation and utilities);
- Other private sector entities.
Exemptions from the tax
Federal companies, professional associations, political parties, religious and charitable organizations are exempt from paying this tax. Small business owners and freelancers also do not pay corporate tax, since they are already subject to income tax. Members of a partnership pay tax on income from its activities, depending on their status: legal entities pay corporate tax and individuals pay income tax.
Amount of corporate tax
The corporate tax has a flat rate of 15%. There is also a solidarity surcharge (Solidaritätszuschlag) of 5.5% of the corporate tax. The solidarity surcharge was introduced after the reunification of Germany to finance the less developed eastern states.
The trade tax (Gewerbesteuer) is also levied on business income. It is a municipal tax with the rate varying from region to region. It is calculated according to the following formula: trade tax rate = basic rate 3.5% × municipal multiplier. The total rate of the trade tax varies from 7 to 14%. All companies that derive income from commercial activities must pay the tax.
The corporate tax rate of 15% is combined with a solidarity surcharge (5.5% of the corporate tax rate) and reaches 15.825%. The total tax burden given the trade tax for companies operating in large German cities can be as high as 30%. In some German municipalities, the rates of the trade tax are much lower and the total tax burden is only 22.8%.
When and how to pay
The corporate tax is paid in advanced payments which are paid quarterly – on March 10, June 10, September 10 and December 10. To determine the exact amount of corporate tax, the payer must fill out a six-page tax return by July 31 of the following year. The return, along with the annual financial statements, is filed online with the tax office.
Based on the results of the audit, the taxpayer is sent a corporate tax assessment, which indicates the amount of the refund or surcharge. If the taxpayer has overpaid the tax, then the tax service will refund the money. In the case of underpayment, an additional amount will have to be paid