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Profits tax in Germany

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Profits tax in Germany
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In this article, we’ll describe the types of profits tax in Germany and what are the profits tax rates for individuals and legal entities.

Companies and individuals pay income tax in Germany; the rate varies depending on the type of tax, the amount of income and the tax class.

All taxes in Germany can be divided in three groups:

  • profits taxes,
  • property taxes,
  • transaction and consumption taxes.

Property taxes include land and property tax (Grundsteuer), vehicle tax and inheritance and gift tax. Transaction and consumption taxes include VAT and property acquisition tax.

Types of profits tax

The main types of profits tax include:

  • personal income tax (Einkommensteuer and Lohnsteuer),
  • corporate tax (Körperschaftsteuer),
  • trade tax (Gewerbesteuer).
Income tax
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Income tax

German tax residents pay income tax on all worldwide income, irrespective of the country in which it is earned. At the same time, persons who are resident in Germany for more than 6 months per year automatically become tax residents. Non-residents pay tax only on income earned in Germany.

There are two types of income tax in Germany:

  • Lohnsteuer — for employees;
  • Einkommensteuer — for entrepreneurs, freelancers, lawyers, tax advisers, doctors owning their own practice.

German tax residents pay no income tax on the part of their income that does not exceed the non-taxable minimum of €9,744 per year for a single person and €18,816 per year for a couple (as of 2021). Anything above this amount is subject to income tax.

Germany uses a progressive taxation system. For income tax, this means that the more money a person earns, the higher the tax rate.

The tax rate varies from 14% to 45% depending on the level of income. However, the maximum rates do not apply to the whole amount, but to the difference between the amounts taxed at the lower rate and the higher rate.

To calculate the exact amount of income tax, use the tax calculator on the website of the German Ministry of Finance.

Income tax scale for German residents

Taxable income, € per year

Tax rate, %

Less than 9,744

0

9,744 to 14,754

14–24

14,754 to 57,919

24–42

57,919 to 274,613

42

More than 274,613

45

The employer sends the employees’ income tax returns to the tax office themselves. The tax is calculated on the basis of wages, tax class, tax deductions, solidarity surcharge and church tax. Other taxpayers generally use the services of tax advisers, who complete and send their returns to the tax office using a special electronic form.

Tax returns must be paid after the end of the tax year, which coincides with the calendar year. The tax return is sent to the taxpayer by 31 December and can be paid by 31 July.

Corporate tax
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Corporate tax

Corporate tax (Körperschaftsteuer) is levied on corporate profits, investment returns and capital gains.

Corporate tax is paid by cooperatives and corporations (AG, KGaA, GmbH), funds and associations (such as mutual insurance associations and pension funds) and public law corporations if they are commercially active (such as transport companies and utilities) as well as other private law entities.

German tax residents pay tax on all worldwide income earned in Germany and abroad. Companies that are incorporated or managed from Germany are considered tax residents. Thus, if the company is headquartered in Germany, the income it earns abroad is also subject to German corporate tax. Non-residents who do not have a German office or permanent establishment pay tax only on income that is earned in Germany.

Corporate tax is paid at a flat rate of 15%. A solidarity surcharge (Solidaritätszuschlag) of 5.5% of corporation tax is also added to the tax. This brings the total tax burden to 15.825%. The solidarity surcharge was introduced after German reunification to support the less developed eastern states of the country.

The corporate tax is paid quarterly in advance on 10 March, 10 June, 10 September and 10 December. The taxpayer fills in the tax return by 31 July of the following year and submits it online together with the annual financial statements to the tax office. If a tax consultant fills in the tax return, more time is granted. In that case, it has to be filed by the last day of February of the following year. The tax office checks the documents and sends the taxpayer an estimate of the amount of the refund or surcharge.

Trade tax
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Trade tax

The trade tax (Gewerbesteuer) is payable by all companies that generate income from commercial activities. It is a municipal tax and its rate varies in different regions. For example, the basic rate of 3.5% is multiplied by the municipal multiplier. The rate of trade tax is usually between 7% and 14%.

In larger cities, such as Munich and Berlin, the rate is usually high. The trade tax is lower in smaller provincial towns. In addition, there are special regions where the tax rate is lower. For example, many companies register in Grunwald and open an office there to pay less tax.

Companies that manage their own real estate exclusively are exempt from the trade tax. Thus, a company's income from the management of its own real estate is not taxable. In addition to the management of its own real estate, a company may also receive income from the management and use of capital property; from the maintenance of residential buildings; from the construction and sale of one- and two-family houses, apartments in multi-unit dwellings. However, income from such activities does not lower the tax base.

Corporate and trade tax returns must be submitted together by 31 July of the year following the year of payment of these taxes. Advance payments are made quarterly, based on the forecasted level of income.

If the tax return reveals that the tax has been overpaid, the tax office will refund the difference to the taxpayer. In the case of underpayment, a notice will be sent to the taxpayer stating that a supplementary payment has to be made.

Thus, the total tax burden for an active company in Germany may constitute around 33% if it is located in a region with a high trade tax.

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