tax guide - germany

8/10/2019 Tax Guide - Germany

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Germany Business and Taxation Guide

Business and Taxation

Guide to

Germany


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Preface

This guide was prepared by Falk GmbH & Co. KG in 2011. Here is a complete list of Praxity

participating firms in Germany:

Falk GmbH & Co. KG

Contact: Gerhard Meyer ([email protected])

Website: www.falk-co.de

FIDES Treuhand GmbH & Co. KGContact: Dr. Christoph Lffler ([email protected])

Website: www.fides-treuhand.de

Mazars GmbH

Contact: Uwe Wolf ([email protected])

Website: www.mazars.de

Praxity 2011

This guide is intended as a general guide only and should not be acted upon without further

advice.


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Contents Page

1.

General information 51.1 Opportunities and possible obstacles for foreign investors

1.2 Area and population

1.3 Government and law

1.4 Key economic indicators

1.5 Financial status

1.6

Currency

2. Regulation of foreign investment 8

3. Government incentives 93.1 Cash grants

3.2 Interest-reduced loans

3.3 Research & Development project incentives

4. Business organisations available to foreigners 114.1 Joint Stock Corporation (AG)

4.2 European Company (SE)

4.3 Limited Liability Company (GmbH)

4.4 Partnership (OHG or KG)4.5 Limited Liability Partnership (GmbH & Co.KG)

4.6 Sole proprietorship

4.7 Permanent establishment or branch

4.8 Joint venture

4.9 Silent partnership

4.10 Commercial register

5. Setting up and running business organisations 175.1 Business environments


5.3 Work and residency permits

5.4 Labour law5.5 Acquisition of German enterprises

6. Corporate taxes and social charges 216.1 General information

6.2 Domestic corporations and corporate income tax

6.3 Calculating taxable profit

6.4 Service charges and inter-company transactions

6.5 Losses

6.6 Foreign income

6.7 Inter-company dividends

6.8 Group taxation

6.9 Taxation of non-resident corporation6.10 Taxation for a branch of a foreign corporation

6.11 Trade tax


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6.12 Dates for tax declarations, tax payments and refunds

6.13 Social security contributions

7. Personal taxation 317.1 Income tax

7.2 Personal income tax rates

7.3 Assessment and filing7.4 Taxation of non-residents

7.5 Inheritance and gift tax

8. Double taxation agreements 36

9. Sales tax Value Added Tax 389.1 VAT rate

9.2 Input VAT deduction

9.3 International VAT considerations

10. Portfolio investment for foreigners 40

11. Trusts 41

12. Practical information 4212.1 Transport

12.2 Language

12.3 Time relative to Greenwich Mean Time (GMT)

12.4 Business hours

12.5 Public holidays

12.6 Useful links


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1. General information

1.1 Opportunities and possible obstacles for foreign investors

The Federal Republic of Germany welcomes investment from abroad. Many foreign companies are

active here, conducting business either as a subsidiary of a foreign parent corporation or as a branch

office. Germany is one of the most attractive locations for setting up business enterprises in Europe.

Some of the key attractions for foreign investors include:

Excellent sales opportunities

Access to a significant world market

Attractive terms of finance and a low inflation rate

A favourable competitive environment.

Investing in Germany means investing in the economic core of the European Union. The single

European market has the potential to reach 500 million consumers.

1.2 Area and population

The Federal Republic of Germany lies in the heart of Europe. It borders nine countries: Denmark to

the north, Netherlands, Belgium, Luxembourg and France to the west, Switzerland and Austria to the

south and the Czech Republic and Poland to the east. The reunification of Germany in 1990 made its

central geographic position even clearer. Germany is a member of the European Union (EU) and a

member of the North Atlantic Treaty Organization (NATO), providing a political bridge to the Middle

East and Eastern European nations.

The Federal Republic of Germany covers an area of 357,000 km stretching 876 km from north to

south and 640 km from east to west. The German borders measure a total of 3,767 km.

Germany has a total of 23 international airports, with major airports in Berlin, Bremen, Cologne,

Dsseldorf, Frankfurt, Hamburg, Hannover, Leipzig, Munich and Stuttgart. Germanys harbours give

access to both the North Sea and the Baltic Sea. The passenger and freight railway network, as well

as excellent motorways, complete a sophisticated transportation system.

With a population of nearly 82 million, Germany is the country with the second largest population in

Europe, behind Russia. Nevertheless, Germany is smaller in size than France (552,000 km) and Spain

(505,000 km).

The population density of Germany is 230 persons per km, compared to the European average of

116 persons per km. Of the 82 million inhabitants, approximately 7 million persons are of another

nationality. The most significant of these international communities located in Germany include

Turkish (1.7 million), Italians (500,000), Polish (400,000) and Greeks (280,000).

Over 95% of the country speaks Standard German, although most people in Germany speak one or

two foreign languages, in particular English, French, Italian, Spanish and Russian.

The climate of Germany is influenced by the moderately cool westerly Atlantic Ocean winds and the

continental climate of Eastern Europe. Temperatures are generally not subject to rapid or significant

variations. There is precipitation at all times throughout the year. The average winter temperature is

between 2 C and - 6 C. In the summer months, the average temperature is between 18 C and 20

C.


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1.3 Government and law

The Federal Republic of Germany is a constitutional democracy established on the basis of the

constitution of 1949 (basic law). Since reunification in 1990, Germany comprises 16 Federal States

(Lnder). Each level of administration (federal, state, municipal) is governed by an elected body.

These official bodies undertake decisions on all matters assigned to them by the constitution. Thepolitical centre and capital is Berlin.

The federal parliament comprises two chambers:

The lower chamber (Bundestag) is elected by the population for a four-year term. The

government is formed by a coalition of parties, which have a majority of seats. The

Government of Germany is headed by the Chancellor. Since November 2005, the Chancellor

has been Angela Merkel.

The upper chamber (Bundesrat) consists of members appointed by the state governments.

These members represent the respective governing parties of each state. The number of

delegates for each state more or less reflects its proportion of the overall Germanpopulation.

The German legal system follows the constitution. All legislative acts of the parliaments have to

conform to the constitution.

The German legal system is based on detailed codes and is principle based. Initial Acts of Parliament

are regularly proposed and debated in the parliament (Bundestag). Legislation is enacted by the

Bundestag and, if necessary, approved by the representatives of the German states (Bundesrat).

The German court system is a decentralised, multi-tier system. There are different jurisdictions for

certain areas of law, such as civil law, tax law or labour law. Consequently, there are separate courts

for each area of law.

The judgements of the supreme courts of each area of law are only binding for the involved litigants.

However, they are seen as a guiding line for other courts, especially the lower courts.

1.4 Key economic indicators

The Federal Republic of Germany is an export country, with a GDP of 2.5 trillion in 2010. Every third

job depends directly or indirectly on the export industry. Germany is the third largest exporting

nation in the world, exceeded only by China and the USA. In 2010, goods and services with a value of

nearly 960 billion were exported and 806 billion were imported. In the immediate future, exports

are anticipated to become even more critical to economic growth and stability. The eastern

expansion of the EU, the increasing acceptance of the Euro as an international commercial currency

and the development of new markets, such as China and India, will increase the importance of

exports for the German economy.

While the EU nations are traditionally the most important trading partners, exports to other

countries have increased above average, for example to China and South East Asia. Also, the U.S. has

constantly been Germanys second most important export partner.

In addition, Germany hosts some of the largest and most successful trade fairs in the world, and has

traditionally done so for centuries. This makes Germany the place where the world meets to present

their products.

Investors in Germany can rely on stable political, legal and social conditions as well as stable costs of

living.


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1.5 Financial status

Germany is one of the founders of the EU (formerly the European Community) and participates in

the European Monetary System. It is also a member of the General Agreement on Tariffs and Trade

(GATT) and the International Monetary Fund (IMF).

Germany has a highly sophisticated banking system, including publicly-owned as well as private

banks. These provide all of the customary business banking services, including financial and

commercial services. The most important international retail, wholesale and investment banks have

branch offices in Frankfurt, Dsseldorf, Hamburg, Munich or Berlin.

Most short-term financing of business is done through overdraft facilities and short-term loans.

Although short-term lending is subject to fluctuations in the interest rate, this kind of financing is

common practice, often over extended periods.

Medium and long-term loans are usually secured by mortgages or guarantees issued by parent or

group companies, or by third parties. Larger companies often cover their long-term financing needs

by issuing bonds.

All financing services are available to German and foreign investors under the same conditions.

1.6 Currency

The unit of currency is the Euro, represented by . A single Euro is divided into 100 cent. The

International Standards Organization (ISO) currency code is EUR.


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2. Regulation of foreign investment

There are no currency control restrictions governing the transfer of funds into and out of Germany.

In addition, there is no limitation on foreign ownership of German businesses.

General regulations for several industries and professions exist, but they do not apply especially to

foreign investors. For example, banks, insurance companies and stock brokers are subject to close

supervision by the Federal Financial Supervisory Authority (Bundesanstalt fr

Finanzdienstleistungsaufsicht - BaFin).


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3. Government incentives

European Law (European Commission) imposes general restrictions on state subsidies. Government

incentives may take the form of cash grants, low-interest loans or export guarantees. These

incentives are, however, often limited to certain industry sectors and services or to a particular

group of investors.

The available tax incentives are mainly special depreciation allowances for small or medium-sized

companies, and a rollover relief for certain capital gains.

3.1 Cash grants

Production or service location development is supported by investment incentives programmes,

providing support in the form of cash grants. The distribution of these grants is steered by two key

programmes:

Gemeinschaftsaufgabe Verbesserung der regionalen Wirtschaftsstruktur (GRW)

Investitionszulage (IZ).

GRW cash grants

The GRW is a national incentive programme which steers the distribution of direct subsidies for

investment projects throughout Germany in specified areas. The maximum level of support that is

permitted varies within Germany. In general, it depends on a regions level of economic

development. In the so-called maximum support areas, predominantly located in Eastern Germany,

eligible investment costs may be reimbursed, up to:

30% for large companies

40% for medium-sized companies

50% for small companies.

In certain regions of Western Germany and Berlin, support is also available through the GRW, albeit

at a lower level. Here, large companies can obtain up to 15% of their investment costs (eligible for

support) reimbursed, medium-sized companies up to 25%, and small companies up to 35%.

Eastern Germanys IZ

The IZ is a special incentives programme created to promote investment activities in Eastern

Germany. The IZ scheme supports investment projects in the federal states of Berlin, Brandenburg,

Mecklenburg-Vorpommern, Saxony, Saxony-Anhalt and Thuringia only. The IZ is granted tax-free.

This programme is based on the Investment Allowance Act 2010. Investors automatically receive IZ

funding (subject to all eligibility criteria being satisfied) when investing in Eastern Germany.

To qualify for the IZ incentives, an application has to be submitted to the relevant tax authority (not

later than four years after the end of the calendar year for which the IZ incentive is applied for).

Investment projects in Eastern Germany can combine the IZ with support from the GRW. However,

the level of support from both programmes may not exceed the maximum level of support

permitted in the respective region.


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Labour related incentives

Under the Social Security Code, entrepreneurs creating new jobs for long-term unemployed qualify

for a non-repayable taxable grant of typically 50% of the wages and salaries and social security

contributions. This subsidy is granted up to 12 months. Apart from this wage subsidy, other labour-

related incentives may be available under certain conditions. These subsidies concern costs

regarding recruitment support, pre-hiring training and on-the-job-training.

3.2 Interest-reduced loans

The KfW Bankengruppe (KfW) is the development bank of the Federal Republic of Germany. The KfW

offers a wide range of financing instruments including loans, mezzanine financing (a hybrid of debt

and equity financing) products and equity capital. These financial instruments are all available for

investors through different programmes.

The most important KfW products for the financing of investment projects are the KfW Entrepreneur

Loan (Unternehmerkredit) and the KfW Entrepreneur Capital (ERP-Unternehmerkapital). These are

available in three versions, tailored to the requirements of start-ups, new companies andestablished companies. KfW programmes are applied for via a companys bank.

State development bank loan programmes

In addition to the KfW, each of the 16 federal states also has their own development bank that

finances investment projects in their respective state. These development banks also offer loan

programmes with attractive grace periods. Interest-reduced loans constitute a subsidy and can

usually be combined with other public funding, for instance, GRW subsidy support. However, when

calculating the maximum level of financial support for investment projects, the equivalent value of

the subsidy of the loans from development banks must also be taken into consideration.

3.3 Research & Development (R&D) project incentives

R&D projects in Germany can access numerous forms of financial support. There are many

programmes allocating R&D grants, interest-reduced loans and special partnership programmes.

Many of the programmes are offered by the federal government. However, the federal states also

offer special R&D programmes. These R&D incentive programmes generally provide money to cover

personnel expenditure for R&D projects. Other costs for instruments and equipment may also be

eligible, if they can be clearly assigned to the relevant R&D project.


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4. Business organisations available to

foreigners

There are several different approaches available to a foreign investor seeking to initiate commercial

activities in Germany.

Business can be conducted in a variety of incorporated or unincorporated organisational forms:

Through an independent agent or distributor

Via a branch which is not a legal entity under German law

By establishing a subsidiary

By acquiring a controlling interest in an existing German company.

Business organisations

The main legal forms of business organisations in Germany are:

4.1 Joint stock corporation (AG)

An AG is an incorporated legal entity in which shareholder liability for debts of the corporation is

limited to the amount of the subscribed share capital. The AG is governed by the Joint Stock

Corporations Act (Aktiengesetz - AktG).

To establish an AG, at least five subscribers are required to sign the notarised Articles of Association.

The Articles must specify:

The corporate name

Corporate purpose

Number of shares authorised

Address of the corporation's initial registered office and

The name of each incorporator.

Since 1994, the forming of small joint stock corporations has been simplified. Up to a specific scale,

an AG can be formed by a single shareholder, and the statutory requirements are in many regards

less burdensome.

The minimum issued share capital is 50,000. The minimum par value per share is 1. Shares may

also be issued without par value, but allocable value of the total capital must be at least 1. A

minimum of 25 % must be paid up on each share, with the remaining balance to be settled on

demand. Par value shares must be sold at least at par; if they are sold for a higher amount, this share

premium must also be paid in. Unless restricted by its articles, an AG enjoys the benefit of

unrestricted transfer of its shares and, therefore, may raise capital freely. The AG is typically used

when capital is to be raised from the general public. The shares can be traded on a stock exchange, if

certain regulatory requirements are fulfilled.

In general, it takes about six weeks after the signing of the Articles of Association to register an AG.

Formation expenses comprise, in particular, legal, registration and notary fees. The initial subscribers

are responsible for appointing the first Supervisory Board.


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An AG has a Supervisory Board (Aufsichtsrat), Management Board (Vorstand) and General Meeting

of Shareholders (Hauptversammlung).

The Management Board is responsible for the day-to-day running of the company and is authorised

to decide all matters relating to operational conduct of the business. The Management Board is

appointed and controlled by the Supervisory Board.

Some of the most important functions exercised by the General Meeting of Shareholders are to:

Decide on the distribution of profits

Elect new members of the Supervisory Board

Amend articles or bylaws.

Shareholders can act only in meetings duly called by the Management Board, and in which a quorum

(minimum number of members) is present. An annual meeting is required by statute, and special

meetings are authorised when called by the holders with a designated percentage of voting rights.

For tax purposes, a corporation is treated as an entity and is therefore taxed on its own income. If

the corporation pays a dividend to its shareholders, the shareholders are subject to taxation.

However, if the shareholder is a corporation, the dividend is tax-free except for 5%.

4.2 European Company (SE)

The SE is also an incorporated legal entity in which shareholder liability for debts of the corporation

is limited to the amount of the subscribed share capital. The EU Council order on the Societas

Europaea (SE) was implemented into German national law through two statutes, the SE

Implementation Act and the SE Participation Act. The SE is governed by the Joint Stock Corporations

Act (Aktiengesetz - AktG).

There are four ways to form an SE:

1 Merger

2

Formation of a holding company

3 Formation of a joint subsidiary

4 Conversion of a public limited company previously formed under national law.

The SE must have a minimum share capital of 120,000. Statutes require the registered office of the

SE be its place of central administration. Unlike the AG and GmbH, the SE can easily transfer its

registered office within the European Community to another Member State without dissolving the

company.

In terms of corporate governance, the shareholders of an SE can choose between a monistic and a

dualistic board system. The dualistic system basically works like the corporate governance system of

an AG with a Supervisory Board, a Management Board and the General Meeting of Shareholders.

In a monistic system, however, there is only a Board of Directors and the General Meeting of

Shareholders. So-called non-executive directors who form the Board of Directors appoint and

control the so-called managing directors. These managing directors are responsible for the day-to-

day running of the company and are authorised to decide all matters relating to the conduct of the

business. The managing directors may also belong to the Board of Directors. Therefore, unlike in the

dualistic system, there is no strict separation between managing and non-executive (controlling)directors. The functions exercised by the General Meeting of Shareholders are basically the same as

for the AG, since almost all of them are governed by the German AktG.


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For tax purposes, it is the same as the AG. An SE corporation is treated as an entity and is therefore

taxed on its own income. If the corporation pays a dividend to its shareholders, the shareholders are

subject to taxation. However, if the shareholder is a corporation, the dividend is tax-free except for

5%.

4.3 Limited liability company (Gesellschaft mit beschrnkter Haftung - GmbH)

A GmbH is an incorporated legal entity, in which shareholder liability for debts of the corporation is

limited to the amount of the subscribed share capital. The GmbH is governed by the Limited Liability

Companies Act (Gesetz betreffend die Gesellschaften mit beschrnkter Haftung - GmbHG).

To establish a GmbH, subscribers are required to appear before a notary in order to have the Articles

of Association notarised. The minimum capital required is 25,000. The nominal value of a share

must be at least 1.

In total, the shareholders must put up at least 50% of the capital. If the company is established solely

by one individual, the registration is made only after the shareholder has paid in the above minimum

portion of the capital and provided security for the balance. Generally, profits are allocated in

proportion to each shareholder's interest. The shares of a GmbH cannot be traded on a stock

exchange.

The formalities for establishing and operating a GmbH are much simpler and considerably less

expensive in comparison to an AG. Most foreign-owned businesses in Germany operate as GmbHs. It

is the preferred form of incorporated business organisation.

A GmbH is managed and represented by one or more registered managers appointed by the

shareholders. Shareholders themselves may be active in operational management, which is often

the case. These managers are legally authorised to conduct all business affairs, although they may be

subject to certain internal limitations stipulated by the shareholders. Fundamental decisionsaffecting the future of the GmbH, which are typically outlined in the bylaws, require shareholder

approval.

For tax purposes, a GmbH is no different to an AG or SE corporation. A GmbH is treated as an entity

and is therefore taxed on its own income. If the corporation pays a dividend to its shareholders, the

shareholders are subject to taxation. However, if the shareholder is a corporation, the dividend is

tax-free except for 5%.

4.4 Partnership (OHG or KG)

In contrast to a corporation, a partnership is not a legal entity. Instead, its a grouping of two or

more individuals (or partnerships/corporations) who are engaged in business as co-owners. If strictly

interpreted, saying a partnership is not an entity could be considered impracticable. As a result,

certain sections of the German Commercial Code treat a partnership as if it were a legal entity. For

example, property titles may be held in the name of the partnership, but the property is owned by

individual partners as joint tenants.

In contrast to shares of a corporation, which are freely transferable unless limited by contract, a

partner cannot transfer his or her partnership interest freely to a recipient and make them a

member of the partnership. In order for such a transfer to take place, the partner needs the consent

of all remaining partners.

In the absence of a contrary agreement, every general partner has the right to participate equally inpartnership management.


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For tax purposes, partnerships are treated as a conduit, and consequently are not subject to direct

taxation. This means whatever the partnership earns, whether in the form of ordinary income or

loss, capital gain or loss, is passed to each partner in that form of income. Each partner is individually

responsible for reporting and paying tax on his or her share of profits, via their personal income tax

return. The partnership may, however, be subject to trade tax.

General Partnership (Offene Handelsgesellschaft - OHG)

An OHG is a commercial general partnership comprising at least two persons (individuals or legal

entities) and conducts a business under a firms name. It is established by an agreement between

two or more individuals (or corporations/partnerships) to place their money, effects, labour and

skill, whether its one aspect or a combination of them all, in lawful commerce or business, with the

understanding that there shall be a proportional sharing of the profits and losses between the

partners. The OHG must file for registration with the Commercial Register.

An OHG, in itself, does not have its own legal character, but it can sue or be sued, acquire rights and

incur liabilities under the firms name. An OHG is governed by the German Commercial Code

(Handelsgesetzbuch - HGB).

In contrast to a corporation, where the risk for shareholders is limited to their investment, every

partner of a general partnership is subject to unlimited personal liability for all debts of the

partnership. The consequence of this unlimited personal liability means an OHG is not a very

common choice for organisations.

Certain professions, such as lawyers and medical professionals/physicians, may be organised in a

special type of partnership, similar to the OHG.

Limited Partnership (Kommanditgesellschaft - KG)

A KG is a limited partnership comprising at least two persons for the purpose of conducting acommercial enterprise under a common firm name. This is a partnership consisting of two classes of

partners:

General partners, who essentially have the rights and obligations of partners in an ordinary

partnership

Limited partners, who do not participate in the management of the partnership's business

and are subject to only limited liability.

A KG does not have its own legal character, but it can sue or be sued, acquire rights, and incur

liabilities under the firms name. A KG is also governed by the German Commercial Code.

The partnership agreement must specify which partners are general and which partners are limited.

Subject to the provisions of the partnership agreement, only general partners have management

authority and the power to represent the partnership. Limited partners are excluded from such

functions.

The limited partnership must file for registration with the Commercial Register. Limited partners are

liable for their partnerships debts until their limited liability is recorded in the Commercial Register.

In order to protect the limited partners from additional liability, the final formation of the

partnership should be conditioned on the completion of the registration. Like an OHG, the possibility

of general partners being exposed to unlimited liability, means a KG is not a very common business

organisation in Germany.

4.5 Limited Liability Partnership (GmbH & Co. KG)


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A GmbH & Co. KG is a limited partnership, where the general partner is a corporation (GmbH). In this

case, only the GmbH is fully liable for the debts of the partnership, while the limited partners are

liable only to the extent of their contribution to the partnership capital. The general partners

(GmbH) liability for obligations of the GmbH & Co KG is limited to its subscribed capital. Meaning, if a

corporation is the sole general partner, no individual will have unlimited liability.

The GmbH & Co. KG is the most popular partnership in Germany due to tax reasons and the limited

liability. Primarily, a GmbH & Co. KG is used by small and medium-sized businesses.

In order to establish a GmbH & Co. KG, the formation of a GmbH is needed. Generally, the

shareholders of the GmbH will be limited partners in the GmbH & Co. KG. The partnership

agreement will be signed by the registered managing director of the GmbH and the limited partners.

For tax purposes, the GmbH & Co. KG is basically treated like a partnership. This means whatever the

GmbH & Co. KG earns, whether in the form of ordinary income or loss, capital gain or loss, is passed

to each partner in that form of income. Each partner is individually responsible for reporting and

paying tax on his or her share of profits, via their personal income tax return. The partnership may,

however, be subject to trade tax.

4.6 Sole proprietorship

A sole proprietorship is the basic form of business activity in Germany. It is a business, with an

individual operating under a specified firm name. This individual faces unlimited liability in relation

to the firm's creditors. As a general rule, an individual sole proprietor must register his business with

the Commercial Register. The income of the proprietorship qualifies as the individuals personal

income, meaning its not subject to a separate tax. The individual is responsible for reporting and

paying tax on their personal income tax return.


Business may be conducted by opening a branch rather than setting up a separate German

company. In general, there are no specific legal requirements for a foreign enterprise to establish

and operate a branch in Germany.

4.8 Joint venture

Joint venture partnerships are set up to manage certain projects. These terminate with the

completion of the project. In general, joint ventures are organised as a partnership (Gesellschaft

brgerlichen Rechts - BGB-Gesellschaft). Such a partnership can be founded by concluding a

partnership agreement for which no special requirements have to be observed. Notary certification,however, is required if real estate transactions are involved.

4.9 Silent partnership (Stille Gesellschaft)

A silent partnership is a special partnership, established purely on a contractual basis with the owner

of an enterprise. It may be used to conceal participation and/or to structure participation for tax

reporting purposes taking into account tax aspects.

4.10 Commercial register

Germanys commercial register (Handelsregister) provides information about all legally relevant

relationships between merchants and commercial companies. The information is public and can beviewed by other companies. The commercial register contains information about:


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A firms name and legal form of the business

The name of the partner and/or the personally liable partner

The managing director or the executive of corporations

The companys capital stock

Liability limitations of partners

Issuing and revoking the power of attorney Opening of insolvency proceedings

The dissolution and termination of a company.

The commercial register is managed by the district court, where it is open to public viewing at no

cost. In addition, the companies register can also be consulted online, via the common register

portal of the German federal states (Gemeinsames Registerportal der Lnder,

www.handelsregister.de). Some of the company data stored in the commercial register is also

available electronically through the commercial register of the Federal Gazette (Bundesanzeiger,

www.unternehmensregister.de).

Companies are required to register if they carry out a commercial business operation. This is

determined by various criteria, including:

Use of financial accounting

Annual turnover

Capital resources

Total number of employees.

As a general benchmark, a business with an annual turnover of over 500,000 and a profit of

50,000 can be assumed a commercial business operation. In each case, the registration

requirements should be determined by qualified counsel.

The application for registration in the commercial register is electronically filed in publicly certified

form, by a notary, to the appropriate commercial register. As a rule, company types that are

required to file an entry on the commercial register in order to establish the organisation, the

possible liability limitations for the partner(s) takes effect after the entry on the commercial register

has been made. If business was conducted prior to this registration, the partners would be liable for

any company losses, using their personal private assets.

The total costs for entry onto the commercial register vary depending on the type of company being

registered. Costs incurred cover the notary certification and the fees charged by the district court for

entry and publication in the Federal Gazette (Bundesanzeiger). The costs and fees are not levied on

an arbitrary basis, but are regulated by law. They largely depend on the number of partners and theshare capital. If additional legal advice is sought, further costs may be incurred.
http://www.handelsregister.de/http://www.handelsregister.de/http://www.unternehmensregister.de/http://www.unternehmensregister.de/http://www.unternehmensregister.de/http://www.handelsregister.de/


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5. Setting up and running business

organisations

5.1 Business environments

A foreign investor may conduct business in Germany in a variety of incorporated or unincorporated

organisational forms. For details on the different legal forms (incorporated or unincorporated)

available to foreign investors in Germany, please see section 4.


Foreign companies may establish branches without prior governmental approval for the

establishment of a business. However, the operation of the business may require the approval of the

appropriate government authority. Also, it is essential for investors in any business activity to notifythe appropriate trade office (Gewerbe- oder Ordnungsamt).

A branch is not able to independently participate in general head office business transactions. The

foreign parent is responsible for financing its branch, in addition to covering its debts. As a result, no

minimum capital is required for the branch. Invoices must be issued on behalf of the head office. An

individual company name for the branch may not be used. For these reasons, a branch

establishment does not have to register and be listed on the commercial register.

5.3 Work and residency permits

EU citizens and citizens of Norway, Iceland, Liechtenstein and Switzerland do not require any form of

visa, residence or settlement permit to legally live or work in Germany. They may enter the countrywith a valid passport or photo identity card. They only have to apply for a certificate stating the right

of residence. This can be done at the same time as completing the police registration procedure. The

right of residency certificate has an unlimited validity and does not need to be renewed unless the

holder's passport or ID number changes in the future.

If the proposed stay of non-EU citizens exceeds 90 days, they are required to obtain a work and a

residence permit, prior to moving to Germany. The applications are filed with the German Consulate

General at the foreigner's place of residence.

Work permits are not required for General Managers (Geschftsfhrer) registered in the Commercial

Register or scientific research staff. Exceptions also apply to citizens from Australia, Israel, Canada,

Japan, New Zealand, USA and South Korea. It is still necessary to obtain an authorisation and priority

check from the Federal Employment Agency. However, citizens of these countries do not have to

belong to a specific professional group in order to obtain a corresponding residency permit.

Foreigners considered as highly qualified foreign employees can be granted a settlement permit

from the outset.

Upon moving to Germany, all foreigners have to register with the local registration office

(Einwohnermeldeamt) at their place of residence.

5.4 Labour law


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Germany has different models of employment. There are fixed-term contracts, temporary

employment and mini or midi jobs. Mini jobs (with a monthly wage not exceeding 400) and midi

jobs (with a monthly wage not exceeding 800) benefit from reduced social security contributions.

The legally permitted working time totals eight-hours per day and 48-hours per week. Saturday is

considered to be a normal working day. An extension of the working time, to a maximum of 60 hours

per week (or ten hours per day), is possible in certain conditions. Employees have the legal right to

claim at least four weeks of paid vacation in a calendar year. The number of public holidays in

Germany varies from one federal state to another.

German labour law does not discriminate against foreign employees working in Germany.

An employment contract has to be terminated in writing (paper form). Electronic termination, for

example via email, is not legally accepted. A termination can only take legal effect, if a specific

reason for the termination exists. This may be for personal, conduct-related or business reasons. The

termination may, upon the employee's request, be reviewed by a Labour Court. The Court examines

whether the termination was based on a cause defined in the labour laws. A collective dismissal is

subject to notification to and approval by the workers council and may require a social plan, whichprescribes severance pay schemes.

Under German Co-Determination Acts, if the number of company employees exceeds certain

thresholds the Supervisory Board must include worker and shareholder representatives. If a

corporation (AG, GmbH or SE) has more than 500 employees, one third of the members of the

Supervisory Board must be employee representatives. For companies with more than 2,000

employees, half of the Supervisory Board members are elected by the companys employees.

Law of Contract

German law of contract offers investors a reliable framework for action. The principle of contractual

freedom enables the conclusion of contracts with freely selectable contractual partners and the freedetermination of the subject matter of the contract, as long as the current law is not infringed. The

basic structures of the key types of contract are governed by the German Civil Code (BGB).

Contractual conditions are standardised to a high degree.

Contracts completed according to German law are normally short and simple in structure. Existing

legal regulations apply unless agreed otherwise in the contract.

Purchase law

The purchase contract is the type of contract completed most frequently. The concise legal

regulation of purchase law considerably simplifies the completion of contracts on a day-to-day basis.

The United Nations Convention on Contracts for the International Sale of Goods applies tointernational delivery of goods contracts in Germany.

Commercial law

German commercial law corresponds with international standards. Global trading practices and

standard trading contractual clauses such as Incoterms (International Commercial Terms) are

recognised. Global financing mechanisms for international trade such as letters of credit and

payment guarantees also apply in Germany.

Basic information on litigation

There is no case law in Germany. This means that decisions made by courts are only binding for thelitigants and not other courts of law. Even so, the decisions made by the superior courts are used as

guidelines.


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In Germany, there are no so-called pre-trials, such as those recognised by American law. If the

court orders a hearing of evidence, it is, as a rule, up to each party to prove the facts of their specific

case.

Litigations costs in Germany are low as they are calculated based on the court costs and lawyers

fees. In general, the costs are paid by the party who loses the legal case. The costs are shared in the

event of partial success for each party.

5.5 Acquisition of German enterprises

Asset deals versus share deals

There are different tax implications for asset deals and share deals.

An asset deal gives the buyer the opportunity to depreciate the assets acquired, but the seller has to

pay capital gains tax on the purchase price (see section 7). Each single asset has to be sold

individually and each contract with third parties must be assigned, which may require the consent of

the third party.

A share deal simply involves the sale of shares representing assets. Under current German tax law,

there may be a tax advantage for the seller, if he or she is able to sell their equity interest, whereas

the foreign investor would most likely want to buy depreciable assets, rather than shares.

However, a distinction should be made between interests in partnerships and interests in

companies.

Interest in a partnership - In acquiring an interestin a partnership, there is no difference

between a share deal and an asset deal from the tax point of view. In either case, the seller

may enjoy a preferential tax rate, and the purchaser may depreciate the hidden reserves

(amount in excess of book value) and deduct his or her financing costs. Most notably, the

purchaser may depreciate the acquired (pro-rata) good will.

Interest in a company - When acquiring an interest in a company, there are different tax

consequences for the buyer and seller, depending on whether the acquisition is an asset or

share deal. Under German tax law, for a corporate shareholder, the capital gain is tax

exempt; an individual shareholder receives a preferential tax rate when selling shares. As a

result, both corporate and individual shareholders generally prefer share deals. However, as

a general rule, purchasers can only depreciate acquired assets. In particular, the purchaser is

not allowed to depreciate the acquired (pro-rata) good will in case of a share deal.

Consequently, buyers of German companies prefer asset deals.

If the essential assets of a business are transferred, the liabilities follow the assets. This includes the

tax liabilities of the past two years, liabilities to the employees (pension schemes, collective

bargaining agreements etc.) and creditor liabilities.

Due diligence

The legal and tax history of the company being acquired must be thoroughly investigated prior to

the actual acquisition. The recent annual financial statements and reports of the tax and social

security submitted to the authorities should be examined closely. This includes reviewing their latest

audits relating to income tax, salary and wage tax, value added tax and social security contributions.

Also, the bylaws of the company being acquired should be reviewed. Recently, environmentalregulations have become increasingly important in acquisition decisions.


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Prior to any acquisition, investors should analyse:

The bylaws of the company

German and EU anti-trust regulations

Trademarks and other intellectual property rights

Regulations on the use of real estate

Contingent contractual liabilities

Individual and collective labour law situation etc.

Notarisation of legal transactions

For certain transactions to be legally valid, they must be notarised. This includes the formation of a

GmbH or AG, amendment of its bylaws and real estate transactions.

The transfer of shares of a GmbH or a GmbH & Co. KG must be notarised as well. The transfer of

shares in an AG, an SE or in a partnership does not require notarisation.

The signature of the managing director must be notarised on applications for registration in the

Commercial Register. Notaries are not obliged to give tax advice.

If a foreign party has to sign a notary deed (or certification), the person representing the foreign

company/investor has to prove his or her power of attorney, according to the foreign company law.

Change of legal form

All changes of the legal form are regulated by the Re-Organisation Act (Umwandlungsgesetz -

UmwG). In many cases, these conversions can be done free of tax. The main condition for a tax-free

conversion is that the German right of taxation is not restricted or reduced. In any case, conversions

need detailed and careful planning.


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6. Corporate taxes and social charges

6.1 General information

Federal, state and local governments levy taxes. The most important taxes are the corporate income

tax (Krperschaftsteuer) and the trade tax (Gewerbesteuer).

Companies in Germany are usually taxed on two levels. On the first level, corporations such as the

stock corporation (AG or SE) and limited liability company (GmbH) are subject to corporate income

tax. On the second level, corporations are subject to the trade tax, which is imposed by local

municipalities (for example, the German town or city where the company does business).

Partnerships, however, are not taxed themselves (as is the case with corporations), but their

partners are taxed. The taxable profit is determined by the company and allocated to the partners

according to their shares. As a result, the income of an individual partner is subject to personal

income tax (Einkommensteuer), and the income of a corporate partner is subject to corporateincome tax (Krperschaftsteuer). The partnership itself is, however, subject to trade tax, if it

generates trade income.

Regardless of how a commercial transaction is structured, German tax authorities examine

businesses carefully for assessment purposes. Inter-company transactions must be on arms' length

terms (as if between independent parties). Sham transactions, backdating and trustee relationships

are disregarded for tax purposes, and the actual ownership of property prevails (substance rather

than form).

Business tax audits are conducted every three to five years. Larger companies are usually audited on

a regular basis.

6.2 Domestic corporations and corporate income tax

As a rule, resident corporations are subject to tax on their world-wide income. Foreign corporations

are taxable only on German source income. Resident corporations are corporations having their

place of management or their statutory seat within Germany. This also includes foreign corporations

having their statutory seat or place of management in Germany.

Corporation tax is regulated by the Corporate Tax Act (KStG) and the Corporate Tax Ordinance

(KStDV). It governs the general income tax for corporations (especially AG, SE and GmbH).

Since 2008, the tax rate has been 15% on the taxable profit of the company. Corporate income tax ispayable on retained and distributed profits. The so-called solidarity surcharge (Solidarittszuschlag)

of 5.5% is added to the corporate income tax. The corporate income tax and solidarity surcharge

combined amount to a total 15.825% of tax.

Distributed income is subject to a withholding tax on dividends of 25% (plus a solidarity surcharge of

5.5 % of the tax due) for the account of the shareholder. This is unless a reduced rate applies under a

double taxation agreement. Almost all German tax treaties reduce this rate to between 5% and 15%

on dividends paid to foreign corporate shareholders with at least a 25% holding of ownership in the

German company. Within the EU, dividend payments between a corporate domestic subsidiary

company and a corporate foreign parent company are tax-free over and above a 10% stake.

Irrespective of the existence of a tax treaty, corporate recipients of dividends may apply for a refund

of the withholding tax if it exceeds the corporate tax rate of 15%.


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Corporate tax is assessed annually. The tax assessment period is the calendar year, unless otherwise

agreed.

6.3 Calculating taxable profit

The tax base is the general taxable income. It is calculated using the annual net income/net loss

according to the corporations commercial balance sheet, with adjustments according to the tax

accounting rules. Furthermore, certain adjustments, outside of the balance sheet, have to be made.

For example:

corporate income tax

trade tax

half the remuneration received by members of the Supervisory Board during the year.

6.4 Service charges and inter-company transactions

Like all other operating expenses, remuneration for services etc. rendered by shareholders isdeductible, providing:

the remuneration is in line with the arms length principle, and

the services, performance and remuneration are evidenced and documented in writing, in

advance.

These principles are of particular importance for a German subsidiary of a foreign parent company. If

the above requirements are not met, the payment or remuneration is treated as a deemed profit

distribution. Once a deemed profit distribution is recognised, it cannot be reversed and may lead to

retroactive taxation for past years.

The Federal Minister of Finance has published circulars with administrative principles for the

examination of:

income allocation in the case of multinational associated enterprises (Transfer Pricing

Circular), and

income allocation through cost contribution arrangements between multi-national

associated enterprises (Cost Contribution Agreement Circular).

German tax law requires documentation of international transfer pricing and cost contribution

arrangements. The company has to prove that inter-company transactions have been carried out at

arms length terms. Violations of these documentation regulations are subject to financial

penalties.

6.5 Losses

Income tax losses of up to 511,500 can be carried back and offset against taxable profits of the

previous tax period. Additional losses may be carried forward and offset against taxable profits in

future years without any limit of time. However, losses carried forward can be offset against profits

only up to 1 million unrestrictedly. The exceeding amount (loss of more than 1 million) is only

deductible at a rate of 60% of the remaining taxable profits. Therefore, a company with a loss carry

forward of more than 1 million pays taxes, if the subsequent profit is not high enough, even though

the amount of losses could absorb the profit. This is called minimum taxation.


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The carry-back rule of losses is not allowed for trade tax purposes. The loss carry forward rule,

however, is applicable to both trade and corporation tax.

The right of a loss carry forward, and therefore the sum of losses from the previous years, is lost if

more than 50% of the shares of a company are sold to one person or a group of persons with

common interests within a five-year period. If a holding of more than 25% but not more than 50% is

acquired, the loss carry forward will be lost according to the percentage of the acquired shares.

Acquisitions of up to 25% do not lead to an expiration of the loss carry forward. Exemptions from

this loss penalty rule exist, for example for internal group restructurings. Also, the loss carry forward

is not forfeited if hidden reserves exist in the companys assets.

Losses incurred by subsidiaries as a result of inter-company pricing for products of the parent

company may be disregarded by the tax authorities, if the transfer prices do not conform with the

arms length principle.

Basically, losses of foreign permanent establishments from active businesses can be tax-effective for

a German (corporate) owner. In tax treaty cases, however, the exemption method for foreign

income applies (for example in relation to all EU states and to the USA). Therefore, foreign lossescannot be claimed in Germany. However, due to the case law of the Court of Justice of the European

Union (ECJ), it is possible to claim losses from a foreign permanent establishment located in the

EU/EEA under certain conditions.

6.6 Foreign income

Foreign income of a German resident company earned by a foreign branch is subject to German

corporate tax. In the case of a tax treaty, very often the exemption method applies, for example in

relation to all other EU states and the USA. Therefore, foreign branch profits and losses are not

included in the German taxable income. Otherwise, relief for foreign taxes paid on foreign branch

profits is available, and withholding taxes are credited against German corporation tax on the branch

profit.

Foreign income of a company based in Germany earned from its overseas subsidiaries is generally

not subject to German tax, since these subsidiaries are their own legal entity. There are exceptions

to this rule, e.g. CFC legislation.

6.7 Inter-company dividends

Domestic and foreign inter-company dividends received directly or via an interposed partnership are

generally tax-exempt, regardless of the amount of the investment or the length of time the shares

were held. Dividends of resident corporations are subject to a withholding tax of 25%, plus solidarity

surcharge of 5.5% on this amount. Shareholders are granted a tax credit for the same amount of thewithholding tax.

Even so, 5% of the received dividend is deemed to be a non-deductible expense and is therefore

taxed. Foreign withholding tax on foreign dividends cannot be credited against the corporate income

tax.

6.8 Group taxation

Each company has to file its own tax returns as an independent legal entity and has to calculate its

own taxable income. For tax purposes, it is possible to pool profits and losses by establishing a group

taxation scheme called Organschaft. Currently, the Organschaft is only open to domestic

companies. However, due to ECJ law, there are plans to extend the scope to at least EU companies.


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Separate legal entities may form an Organschaft group for tax purposes. Future profits or losses of

the subsidiary can be transferred to the parent company, providing:

the subsidiary is integrated financially into the parent company from the beginning of the

tax year, through direct or indirect majority voting

and

the two companies complete a profit and loss pooling agreement of at least five years

duration and file this agreement in the Commercial Register.

Group taxation is effective from the beginning of the year of registration of the pooling arrangement

in the Commercial Register.

Group taxation is available for corporate and trade tax purposes. Whats more, group taxation is

available for the purpose of value added tax (VAT), although other requirements have to be fulfilled.

Controlled foreign company legislation

There is detailed legislation regarding the allocation of foreign passive income to German tax

residents and for extended limited tax liability for residents leaving Germany (Auensteuergesetz -

AStG).

Holdings in foreign corporations

Based on domestic law, capital gains realised on the sale of both domestic and foreign shares by

German companies are tax-free, irrespective of the percentage of shareholding. Correspondingly,

capital losses or write-downs are not tax deductible.

However, 5% of the realised capital gain is considered as non-deductible expense and is therefore

taxed.

Parent subsidiary directive

The German implementation of this EU directive bans withholding taxes on dividends distributed by

a subsidiary in Germany to a parent company in another EU member state. In addition, it offers tax

relief with respect to received dividends from the parent company.

The reduced tax rate in Germany applies only if the foreign holding company:

Has a specific legal form (usually corporation)

Is resident for tax purposes in another EU country and

Is subject to corporate tax.

The directive applies to shareholdings with a minimum participation of 10% and grants EU member

states an option to demand that the shareholding must have been held continuously for a period of

two years. In Germany, this minimum period is one year.

The zero tax rate only applies if a certificate of exemption issued by the tax authorities is presented

beforehand. If withholding tax has already been paid, it can be refunded upon application.

Germany introduced a general anti-directive and anti-treaty shopping provision into its national tax

code to protect against the abuse of these benefits by non-EU residents (see section 7).

Interest and royalties directive


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The German implementation of this EU directive bans the withholding of taxes on interest and

royalties paid by a group company in Germany to another group company in another EU member

state.

The reduced tax rate in Germany applies only if the foreign holding company:

Has a specific legal form (usually corporation) Is resident for tax purposes in another EU country and

Is subject to corporate tax.

This directive applies to shareholdings with a minimum participation of 25 % and grants EU member

states an option to demand that the shareholding must have been held continuously for a period of

two years. In Germany, no minimum period applies.

The zero tax rate only applies if a certificate of exemption issued by the tax authorities is presented

beforehand. If withholding tax has already been paid, it can be refunded upon application.

Based on this directive, Germany also introduced a general anti-abuse provision to protect against

the abuse of the above benefits for non-privileged companies.

Mergers directive

The mergers directive enables a company or several companies within the EU to reorganise and

benefit from tax neutrality. However, the directive permits taxation of capital gains, if the taxation

right of the former residence/source country is restricted after the reorganisation. This directive was

amended in 2006 to extend the scope, for example, to an SE (European Company).

Germany has implemented pursuant (compatible) regulations, corresponding to the amended EU

directive, to ensure cross-border mergers, spin-offs, transfer of assets and exchanges of sharesinvolving companies from at least two member states of the EU are tax neutral. Effectively, as of the

end of 2006, it has been possible to conduct tax-neutral cross-border reorganisations in Germany,

providing the taxation right of Germany is not restricted.

6.9 Taxation of non-resident corporations

Tax rate

Non-resident corporations are corporations that have neither a statutory seat nor their place of

management in Germany. They are subject to limited corporate tax liability on specific categories of

German source income. The most important are:

Income from trade or business through a permanent establishment or through a permanent

representative

Income derived from domestic real estate

Other income from German sources detailed in section 49 of the German Income Tax Act.

The corporate tax rate for non-resident foreign corporations generating income from German

sources has been 15% since 2008. The same rate applies to domestic corporations.

Thin capitalisation rules

As of 2008, the former thin capitalisation rules were replaced by a general interest stripping rule.

This rule restricts the deductibility of all interest expenses of a company, irrespective of the seat of

the parent company. This regulation states that interest payments may not be deducted from


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income if the difference between interest expenses and interest income (negative interest) of a

company exceeds 30% of the EBITDA (earnings before interest, taxes, depreciation and

amortisation). Interest expenses also include interest costs arising from third party financing, for

example, financing from banks.

There is a threshold for the interest limitation. If the negative interest amounts to less than 3

million, full deductibility is given. Also, national groups are exempt from this rule regarding their

intra-group financing. For international groups, proving that the amount of interest expenses is not

abuse can only be done by using a complex equity ratio test.

Interest expenses that are not deductible from taxable income (if negative interest exceeds the

amount of 3 million and exceeds 30% of the EBITDA), may be carried forward to future years,

without time restrictions. However, the rules for forfeiture of loss carry forwards apply

correspondingly. Therefore, an interest carry forward is completely eradicated, if more than 50% of

the company shares are acquired. If more than 25% but not more than 50% of the shares are

acquired, the carry forward is forfeited proportionally.

6.10 Taxation for a branch of a foreign corporation

If a foreign corporation operates a permanent establishment (PE) in Germany, corporate income tax

is levied on all income attributed to operations and activities of the PE in Germany. The applicable

tax rate is 15% (plus solidarity surcharge). In addition, a PE has to pay trade tax, like any other

domestic corporation.

Transactions between the foreign parent and the PE have to be on arms length terms, most notably

if purchases of goods and services from a parent by a PE are to be tax-deductible. Losses may be

deducted, providing an effective connection between the loss and the domestic income can be

demonstrated.

As a PE is not a legal entity and therefore cannot distribute profits, no withholding tax is levied on

transferred income. If, however, the PE receives income which has been subject to withholding tax,

this withholding tax can be credited against tax due or (if preferred) deducted from income.

In December 1999, Germanys Federal Ministry of Finance issued a comprehensive circular regarding

administrative principles relating to the allocation of income in the case of PEs of multinational

enterprises.

6.11 Trade tax

All commercial business operations in Germany are subject to trade tax (Gewerbesteuer),

irrespective of their legal form. Trade tax is based on the Federal Trade Tax Act and is levied bymunicipalities (Gewerbesteuergesetz GewStG).

Trade tax is based on taxable corporate income, subject to a number of positive and negative

adjustments. In particular, one fourth of interest paid on loans is disallowed and must be added

back. Other financing costs, such as rent expenses for movable and non-movable assets, must also

be added back at certain percentages, for example 5% of rent expenses for movable fixed assets or

12.5% of rent expenses for non-movable fixed assets.

Trade tax rates depend on the municipality within Germany, as the tax rate is set by local

authorities. The rates for trade tax range from between 7 % and 17 %. Usually, the larger cities have

higher trade tax rates than smaller towns and communities.

The amount of payable trade tax is neither deductible from income for corporate income tax, nor for

trade tax purposes.


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Partnerships and sole traders have an annual tax-free allowance of 24,500 for trade tax purposes.

The solidarity surcharge is not levied on the trade tax.

6.12 Dates for tax declarations, tax payments and refunds

Every taxpayer has to submit an annual tax return to their appropriate tax office (Finanzamt). Also,an employer is obliged to withhold wage tax for their employees and, as a result, has to file wage tax

returns. Tax returns for the wage tax and the value added tax (VAT) can easily be submitted to the

tax office electronically. From 2014 for the tax period of 2013, corporate tax and trade tax returns

will also be submitted electronically. The tax office where each respective company has its (German)

head office will be their relevant tax authority.

The most important types of tax (corporate income, personal income, trade, and VAT) are collected

via advance payments (normally monthly or quarterly). These are then offset against the actual tax

liability in the annual tax declaration.

Quarterly advance payments for income tax (on 10 March, 10 June, 10 September and 10 December)have to be made in accordance with the estimated tax liability for the year.

Other dates for advance payments are:

Trade tax on the 15th of February, May, August and November;

VAT, wage taxes and withholding taxes are due by the 10th day of the month, following the

month which has been declared in the tax return.

Income and corporate tax returns should be filed by 31 May of the following year. However,

if the services of a tax consultant are employed, tax returns may be filed until 31 December.

Interest is 0.5 % per month on both tax claims by the tax office and tax refunds claimed by thetaxpayer. The interest period starts 15 months after the end of the tax year. Interest on tax claims of

the tax authorities is never deductible. However, interest on tax refunds claimed by the taxpayer is

always taxable for individual and corporate income tax purposes.

Appeals

Appeals against tax assessments must be made within one month after the receipt of the tax

assessment notice. This deadline is strict, and late appeals are not accepted.

An appeal against a tax assessment is possible at three levels. First of all, an appeal to the

appropriate tax office can be filed. The next step is to appeal to the competent tax court and finally

to the Federal Tax Court (Bundesfinanzhof).

It may also be possible to contend that European law is breached by German tax law. However, the

taxpayer may not directly appeal to the Court of Justice of the European Union (ECJ). The Taxpayer

can only request the (federal) tax court to refer the case to the ECJ in a preliminary ruling procedure.

The judgement of the ECJ is binding for all tax courts and can overrule national tax rules.

Corporate tax and individual income tax

As of 2009, the half-income system has been replaced in Germany by the part-income system for

dividends of shares allocated to the business assets and by the final withholding tax of 25%

(Abgeltungsteuer) for dividends of shares allocated to the private assets, respectively. Still, it

remains a shareholder relief system.


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Regarding taxes paid on the corporate level, there is no credit available for the shareholder. In order

to individual shareholders to mitigate double taxation of distributed corporate income, only 60% of

the income is taken into account for the individual income tax (business assets). Also, the dividend

recipient is allowed a full credit for any dividend withholding tax. However, only 60% of income-

related business expenses that are attributable to the dividend income are tax deductible.

For shares that form part of the private assets, a preferential rate of 25% (plus solidarity surcharge)

on 100% of the dividend applies, compared to the maximum personal income tax rate of 45% (see

section 7). The 25% tax is withheld upon payment and basically becomes final, i.e. no more tax is due

on the dividend. The system for private assets is illustrated on the table below.

Corporate taxable income 10,000

Deduct: Trade tax, e.g. at a rate of 14% (1,400)

Deduct: Corporate income tax at 15% (1,500)

Deduct: Solidarity surcharge on corporate income tax at 5.5% (82.50)

Remaining balance 7,017.50

Net amount for dividend recipient 7,017.50

Taxation of shareholder

Final withholding tax at 25% plus solidarity surcharge: 26.375% 1,851

Net Income 5,166.50

6.13 Social security contributions

In contrast to some other developed countries, the core social security in Germany is collectively

financed by means of a process of redistribution. The current costs for social security are paid

directly from contributions by employees and employers alike.

The German social security system comprises:

pension insurance,

unemployment insurance,

health insurance,

nursing care insurance,

accident insurance.

Employees may be exempt from the mandatory German social security system if they are sent to

Germany by a foreign employer and if their terms of employment in Germany are limited from the

beginning.

Generally speaking, social security contributions are shared equally by the employer and the

employee, with the exception of accident insurance costs, which are solely covered by the employer.

The employer is responsible for withholding and remitting the full amount of social securitycontributions (employees share and employers share) to the relevant authorities. Deductions made

from an employee's salary are calculated on a sliding scale, according to the income threshold.


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Health insurance

Employees earning a gross wage of less than 4,125.00 per month receive mandatory insurance

from one of the public health insurance providers. Employees whose earnings are above this income

threshold can select a public or private insurance company. Employees and employers also share the

premiums for private health insurance plans.

The basic flat health insurance contribution rate amounts to 15.5% of the employees gross

income. 0.9% of the health insurance rate is paid by the employee only. The remaining 14.6% of the

health insurance rate is equally shared between the employer and the employee.

Nursing care insurance

Nursing care insurance is organised in more or less the same way as health insurance, with a

contribution rate of 1.95% of the gross wage. The employer and employee both pay half of the

contribution rate, with childless employees paying an extra 0.25 % on top of their contribution.

Slightly different rates, in favour of the employer, apply in the federal state of Saxony. The premiums

are deducted through payroll accounts and are transferred to the nursing care insurance companyvia the health insurance company.

Pension insurance

Pension insurance is compulsory for employees. The premium is 19.9 % of the gross wage and is

divided equally between employee and employer. Contributions are collected by the employees

health insurance company.

Unemployment insurance

The premium for the mandatory unemployment insurance was recently reduced to 3.0 % of the

gross wage, and is shared equally by the employer and employee. Contributions for unemployment

insurance are collected by the employees health insurance company, which transfers the money to

the Federal Employment Agency (Bundesagentur fr Arbeit).

Accident insurance

Statutory accident insurance provides cover if an employee suffers an accident at the workplace or

on the way to work. In contrast to the other four mandatory insurances (health, nursing, pension,

and unemployment), the costs for accident insurance are exclusively paid for by the employer.

Every employer is responsible for informing the relevant professional association about the

establishment of his or her business and must register with this organisation. The accident insurance

rate is determined based on the companys total remuneration sum and the hazard category of theemployees work (the hazard category is determined by the relevant employers' liability insurance

association). According to DGUV (the German umbrella association of employers' liability

insurances), the apportioned quota levied in 2010 was 1.32%.

The monthly rates for these insurances in the Western and Eastern States in 2011 (for employees

and employers) were:

Income threshold

Employer Employee Western

States

Eastern

States

Percentage Percentage


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Pension insurance 9.95% 9.95% 5,500 4,800

Unemployment insurance 1.5% 1.5% 5,500 4,800

Health insurance 7.30% 8.20% 3,712.5 3,712.5

Nursing insurance 0.975% 0.975%

1.225% (childless)

3,712.5 3,712.5

Total 19.725% 20.625%

20.875% (childless)

Example:

The employer's deductions for a married man without children in 2011, based on an annual salary of30,000 in the Western States would have been:

Employee

Monthly gross salary 2,500

Deduction

Wage withholding tax (13.68 %, Steuerklasse IV)

342

(Solidarity Surcharge: 5.5 % of wage tax) 19

Employee's share of social security

(20.875 % of monthly gross salary)

Total deductions

522

883

Monthly net salary 1,617

Employer

Total cost for employer

- monthly gross salary 2,500

- employer's share of social security 493

(19.725 % of monthly gross salary)

Total costs: 3,021


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7. Personal taxation

7.1 Income tax

Individuals who are German residents, or are foreign nationals legally recognised as German

residents, are subject to unlimited taxation, unless a tax treaty assigns the right to impose tax on

income in favour of another country. Individuals who are not resident in Germany will be subject to

limited taxation only, on income from German sources that are listed in section 49 in the German

Income Tax Act.

An individual is a resident of Germany, if his or her residence or habitual abode is in Germany.

Meaning, an individual may be subject to unlimited taxation in Germany from the very first day of

his or her stay.

What is regarded as taxable income?

The German Income Tax Act ( 2 para. 2 EStG) sets out seven categories of taxable income. Income

that does not fall within one of these categories is not taxable:

Income from agriculture and forestry

Income from business

Income from independent personal services (doctors, notaries, lawyers, consultants,

architects etc.)

Income from employment (salaries and wages)

Income from capital investment (dividends, interest, capital gains)

Income from rents and royalties

Other income, including annuities, pensions and private, short-term capital gains (especiallyfrom the sale of real estate).

Withholding tax is levied on wages, dividends, interest, capital gains, income from a silent

partnership or from a participation loan, royalties and income from securities ( 43 para. 1 EStG).

This tax can be credited against the personal income tax liability, unless the withholding tax on

private capital income is final (see the next paragraph on Abgeltungsteuer).

Capital gains derived by an individual within the first three categories of income, are included in the

respective category of income. Private capital gains of securities are taxed as capital income, the rest

only in the event of a private, short-term transaction. Only in case of a substantial shareholding in a

corporation, the income is qualified as trade income.

A private short-term transaction occurs when the holding period for real estate was not more than

10 years, or for other property (e.g. cars, but not securities) was not more than one year. Such gains

are regarded as ordinary income and taxed at regular rates.

Gains arising from the sale of substantial shareholdings in corporations and of partnership interests,

qualify as business profits. A substantial shareholding in a corporation is given, if the participation

amounts to 1% of the share capital at any time throughout the five years preceding the transfer.

Capital gains arising from the disposal of a sole proprietorship or partnership may be subject to a

preferential tax rate under certain conditions. Such capital gains are not subject to trade tax.

The net income of each of the categories of income listed above is calculated separately and - after

deducting operating expenses and other income-related expenses added to obtain the total

income. The only exception is the category for capital income (see the next paragraph on


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Abgeltungsteuer). Losses from previous years, or the subsequent year, may be deducted. The rules

and limitations on the loss carry back and loss carry forward (see section 6) are also applicable to

individuals.

The total amount of income, reduced by special expenses and allowances for extraordinary hardship,

result in the taxable income.

Wage tax

Employees have to pay wage tax (Lohnsteuer) on their wage income. Wage tax is a special form of

the income tax paid by employees. The employer is obliged to withhold the wage tax due from their

employees salary, and pay it directly to the tax office on a monthly basis.

The withheld wage tax is an advance payment for the personal income tax of the employee. As a

result, employees who do not generate earnings from non-wage incomes are not obliged to submit

an annual tax declaration. Even so, it can be more favourable for employees to file a tax return.

Special taxation of capital income final withholding tax (Abgeltungsteuer)

Capital income, i.e. dividends, interest and capital gains from the sale of securities purchased after

31st December 2008, is no longer part of the overall taxable income. Capital income is taxable at a

flat rate of 25% (plus solidarity surcharge: 26.675%). The final withholding tax is retained by the

domestic debtor of the dividend or interest, or by the domestic institution managing the deposit (for

instance a domestic bank), and then paid to the appropriate tax office. No more taxes are due on

dividends paid out to private shareholders. However, costs attributed to capital income may no

longer be deducted.

If the capital income is paid out by a foreign institution, e.g. a foreign bank, the individual taxpayer

must report this income in his or her income tax return. The flat-rate of 25% is then levied by way of

assessment.

Please note that the capital income is not subject to the flat tax if the corresponding security forms

part of the business assets. Under certain circumstances, a taxpayer may also opt for the part-

income taxation (as opposed to the flat rate), even though the shares are part of the private assets.

This option can be advantageous, if the taxpayer incurs costs associated with the shares (e.g.

interest on a loan). This is because these costs are deductible to the amount of 60% (part-income

system), whereas no costs at all may be deducted under the flat tax regime.

Personal income tax for partnerships

Partnerships are not managed as independent legal entities in the same way as corporations. The

individual partners carry all of the rights and tax obligations. So, it is not the partnership itself whichis taxed (as is the case with corporations), but the individual partners - with the personal income tax

rate for the corresponding partner being the deciding factor.

The taxable profit is determined at company level and allocated to individual partners according to

their ownership shares. As a rule, both the retained and distributed profits of a partnership are liable

for personal income tax.

Offsetting trade tax against personal income tax

Sole traders or individual partners of partnerships can offset some of the trade tax sole traders or

the partnerships pay, against personal income tax to the total of 3.8 times the trade tax base

amount. This means that there is in effect no trade tax burden for sole traders/partnerships inmunicipalities with a multiplier of a maximum 400.9% (taking into account the additional effect of


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offsetting against the solidarity surcharge of 5.5%). Trade tax still has to be paid to the municipality.

However, it can be offset against the personal income tax of the respective sole trader/partner.

7.2 Personal income tax rates

Income tax is levied at progressive rates, except for private capital income which is subject to the flat

tax. In the case of married individuals, both of whom are resident in Germany and filing a joint

return, the advantage of tax splitting is applied. This means income is divided equally between

husband and wife. In general, splitting leads to a lowering of the progressive rates applied.

The individual tax rates for a single person are as follows (for married persons filing their return

jointly, the amounts are doubled):

Year 2009 2010 2011

Basic allowance () 7,834 8,004 8,004

Minimum tax rate 14.0% 14.0% 14.0%

Maximum tax rate 42.0% 42.0% 42.0%

in excess of 52,552 52,882 52,882

The special maximum tax rate of 45% is imposed on income in excess of:

Income

2009 2010 2011

Single ( ) 250,401 250,731 250,731

Considering the additional solidarity surcharge of 5.5% on the individual income tax, the effective

marginal rates amount to 44.3% (47.5% for the special maximum rate).

7.3 Assessment and filing

The tax assessment period for individuals is the calendar year. Individual income tax returns must be

submitted by 31 May, following the end of the calendar year. An extension can be obtained upon

application. If the services of a tax consultant are employed, tax returns may be filed until 31

December.

The tax authorities assess quarterly advance payments for the estimated income tax. The

assessment is based on the preceding tax years income tax liability. Wage tax o

tax guide - germany

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