Germany

Germany is a federal parliamentary republic with a head of government (the chancellor) and a head of state (the president) with mainly representative functions. The country comprises 16 states, each with its own constitution and with ample autonomy as regards internal organization. Three of these states are cities: Bremen, Berlin and Hamburg.

VAT
19%

CIT
15.82%

SSC
39.02%

CIT = Corporate Income Tax - corresponding to IRPEG

SSC = Social Security Contribution - corresponding to the Social Contribution (Employee + Employer)

Business Economics

The most important sectors of the German economy in 2018 were industry (25.8%), public administration, defense, education, health and social care (18.2%), trade. wholesale and retail, transport, hotel and restaurant services (16.3%).

59% of Germany exported to the EU: France 8% and the Netherlands 7%; in non-EU countries it exported 9% to the United States and 7% to China.

Germany imported 66% from EU Member States: the Netherlands 14%, France 6% and Belgium 6%; from non-EU countries it imported 7% from China and 4% from the United States.

Image by Bruno Kelzer

Taxation

The tax system is divided into three different levels corresponding to those of government according to the Constitution.

The German tax system is governed by the Tax Code published in 2002 which collects in a single standard the elements common to all taxes, the specific characteristics of the main taxes and the mechanisms of assessment, collection, litigation, etc.
As foreseen by the Constitution, the taxation system is divided into three different levels: the federal government (Bund), the regional governments (Lander) and those of the municipalities (Gemeinde). The law indicates the level at which each tax is managed which can be: the federal government or landers either as agent on behalf of the federal government or on their own. The shares pertaining to each territorial body are established in the constitution for all taxes except for VAT. For this reason, in fact, the Constitution refers to a specific federal law which is frequently modified, to take into account any short-term needs.

Below are the percentages of distribution of taxes on the various levels

      _cc781905-5cde-3194-bb589094-136bad5cde-3194-bb589094-136bad5ccc3 -bb3b-136bad5cf58d_      1_cc7819094-badd5-136bcc5_b58f5-3194-badd5-136bcc5_ -5cde-3194-bb3b-136bad5cf58d_     _cc781905-5cde-3194-bb3b-136badc5cf58d5-3194-bb3b-136bad5cf58d5 -1394c5-3194c5905-3194c5-3194c5-3194c5-3194d81-3194b905 bb3b-136bad5cf58d_       _cc7819094-badd5-136bcc5__cc7819094-5cde-136badc5-3194-badd-136bcc5_ 5cde-3194-bb3b-136bad5cf58d_     _cc781905-5cde-3194-bb3b- 136bad5cf58d_     Federal Government  _cc781905 -... -3194-bb3b-136bad5cf58d_ Municipalities

Personal Income Tax      _cc781905-5cde-3194905-bbcc3_1394bcc5-3194bcc5-3194bcc5_b -5cde-3194-bb3b-136bad5cf58d_42,5%     _cc781905-5cde-3194-bb3b-136905c5c5-1394-bb5890_bad5cf81 -3194-bb3b-136bad5cf58d_   42.5%   _cc781905-5cde-3194-bb3b-136bad5cf58d5-136c1-5905-bb3c81-bb3b-58c3-84d81-bb3d81_bsc7cf58d_ 3194-bb3b-136bad5cf58d_ 15%

Corporate Income Tax    _cc781905-5cde-3194-bb3b-136bad5cf58d-136bad5cf58d_     _cc781905-5cde-3194905badc5-136ccc5_b 5cde-3194-bb3b-136bad5cf58d_     _cc781905-5cde-3194-bb3b-136bad5cf5890d_5cde-3194-5c8190d_b3b8-3194b8-3194b8-3194b8-3194b8-3194b8-3194b8-01 -136bad5cf58d_    50%   _cc7819094-badd5-136bad5cf58d_ _cc7819094-badd5-136bad5cf58d_ 5cde-3194-bb3b-136bad5cf58d_     _cc781905-5cde-3194-bb3b-136bad5cf5890d_3134b8-3194b81-5b3b8-3194b805-3194c7-3194b805-3194b8905 -bb3b-136bad5cf58d_     _cc781905-5cde-3194-bb3b-136bad5 cf58d_     -

Value added tax (2015)       _cc781905-5cde-3194bbad-136bcc3_b -136bad5cf58d_   53.2%     _cc7819094-badc5 -5cde-3194-bb3b-136badcf58d_ 136bad5cf58d_    44,6%   _cc781905_badd-136badd-136b58d-3194-bb3bd-136bcc5_ -5cde-3194-bb3b-136bad5cf58d_  2.3%

 

Taxation of individuals
Resident natural persons are taxed on all their income while non-resident individuals only on those of German source. You are considered resident in Germany if you stay there for more than six months. All income from employment in any form paid, capital income and other income are considered taxable income. Resident taxpayers are divided into categories according to their family status and the presence of multiple incomes in the same family unit.
Each taxpayer has the right to an exemption from the tax for the first 8,821 euros (doubled in the case of a joint declaration). The following expenses are deductible from income:

  • insurance premiums up to € 2,800 for self-employed workers and € 1,900 for employees:

  • costs for professional training up to 4,000 euros;

  • donations to charitable, cultural and sports associations;

  • alimony paid to divorced spouses up to € 13,805. They constitute taxable income for the recipient.

There is a standard deduction of 801 euros which rises to 1000 euros for employees. The deductions for dependent children are 3,624 euros for each child (for children between 18 and 25 only if they attend schools or training courses).
 
The tax rates for individuals for 2021 are:

 

  • The income is tax free if it is less than 9,744 euros

  • Progressively increasing rate from 14% to 42% from 9,745 euros to 57,918 euros

  • Rate  of 42% for incomes between € 57,919 and € 274,612

  • Rate of 45% for incomes exceeding € 274,613.

In the case of couples who submit joint tax returns, the extremes of the income brackets are doubled. To this is added a solidarity contribution for the eastern lands equal to 5.5% of the value of the income tax due and a church tax for affiliates of recognized churches.
Capital gains (interest, dividends and capital gains) are not part of the taxable income but are subject to a single rate of 25% to which the solidarity contribution is added. In the case of dividends and interest, this is applied with withholding tax.

 

Social contribution

The following social security contributions (starting January 2021) are levied on employee income. Employer contributions are generally tax free.

  • Pension insurance: 18.6%, up to an annual income ceiling of € 85,200 (€ 80,400 in the new Länder) divided equally (9.3%) between employer and employee.

  • Unemployment insurance: 2.4%, up to an annual income ceiling of 85,200 euros (80,400 euros in the new Länder) divided equally (1.2%)   between employer and worker.

  • Health insurance: 14.6%, up to an annual income ceiling of € 58,150 divided equally (7.3 %)   between employer and employee.

  • Long-term care insurance: 3.05% (3.3% for people without children, aged 23 and above), up to an income ceiling of EUR 58,150 per year. The contribution is payable by 1.525% of the employer and 1.525% (1.775% for people without children, starting from 23 years) of the worker.


The regime of accidents at work depends on the industrial sector and on the risk of injury; these contributions are paid by the employer.

The insolvency contribution paid by the employer alone amounts to 0.12%, up to the annual income ceiling of € 85,200 (€ 80,400 in the new Länder).
An individual can apply for private health insurance and long-term care if certain conditions are met.

Self-employed workers generally do not have to pay compulsory social security contributions.


  Taxation of legal entities 
Companies are taxed on all income produced wherever they are resident while only on those of German origin for non-residents. However, many treaties against double taxation provide for the taxation of income produced abroad only in the country of origin and its complete exemption in Germany. A company is considered resident if it is incorporated under German law or if its main management activity is carried out in Germany. All income received by a company of whatever nature they are are generally considered business income and therefore subject to the provisions of the tax . 
In general, the starting point for the determination of the taxable income is the balance sheet result to which some corrections determined by the tax laws must be made. All expenses relating to the economic activity carried out are deductible with the exception of those relating to exempt income and those for which a limited deductibility is permitted. A system of deductibility of net interest expense has been in place since 2008. They are immediately deductible within the limit of 30% of EBITDA regardless of the relationship between debtor and creditor. The excess of interest over the allowed limit can be carried forward indefinitely while the excess EBITDA can only be used for the next 5 years. The 30% limit does not apply in the following cases:

  • net interest of less than 3 million euros;

  • not belonging to groups;

  • in the case of a company belonging to a group, if its equity ratio is not less than 2% compared to that of the group as a whole.

In the event of a change of ownership, the excess interest carried forward is subject to specific rules for their partial or total forfeitization.
The basic method for depreciation is that of the straight-line method, until 2007 the decreasing method was also accepted, abolished in 2008 but restored for the years 2009 and 2010 as an anti-crisis measure. Accelerated depreciation is allowed only for extraordinary cases. As of 2010, assets with a value of less than 410 euros can be depreciated immediately. The Ministry of Finance publishes amortization tables for tax purposes divided by type of assets.
For tax purposes, the valuation of inventories can be made using the LIFO method and the average cost method, while the FIFO method is not generally accepted.
Losses can be carried forward to cover any future profits without time limits. There are no restrictions on the use of reported losses of less than one million euros, while for those above this threshold there is a limit of 60% of income. There is also a carry-back mechanism valid for the previous year and for an amount not exceeding 1 million euro.
The tax is calculated by applying a rate of 15% to the taxable income, a further 5.5% solidarity tax is then calculated on this tax (to finance the costs of German reunification) thus obtaining a total rate of 15, 82%.
Dividends are exempt from tax for a share equal to 95% of the amount. For dividends paid after February 28, 2013, the exemption applies only if you hold at least 10% of the company's capital while it does not apply to banks, financial companies and holding companies with reference to investments intended for exchange in the short term. Furthermore, starting from December of the same year, the exemption does not apply if the dividend was treated as a deductible expense by the distributing company.
Dividends paid to non-resident companies are, on the other hand, subject to a withholding tax of 25% (plus solidarity tax for a total rate of 26.4%). Pursuant to the European "mother-daughter" Directive, withholding taxes are not made if the payment is made to shareholders residing in the European Union and who have held at least 10% of the capital for at least one year. The payer must apply for certification from the German tax administration in order to benefit from this exemption. As regards the payment of interest, there is no withholding tax with the exception of some types of financial instruments for which the rate of 25% plus solidarity tax is applied. Royalties and rentals paid to non-resident companies are subject to a withholding tax of 15%, while for individuals it is 30%. In both cases, the solidarity surcharge must be added. For both interest and royalties, the rates can be reduced on the basis of international agreements or the Community directive on interest and royalties.   
 
Business Tax
The municipal tax is applied to all companies that carry out commercial activities and is applied with the same rules as that on corporate income with some differences (such as the absence of the carry-back mechanism). Furthermore, for partnerships, all payments (wages, interest, etc.) to shareholders are considered taxable income. The level of taxation is decided at the municipal level starting from a national rate of 3.5% to which a multiplier is applied which cannot be less than 2. Generally the resulting rate is around 14%. In the case of partnerships, the first 24,500 euros are exempt from this tax, furthermore, again for partnerships, it can be deducted from income tax up to a maximum value equal to 3.8 times what would be applied the national tax rate of 3.5% ._ cc781905-5cde-3194-bb3b-136bad5cf58d_

The value added tax
As a member state of the European Union, Germany has a value-added taxation system in line with the provisions of the relevant Community directives. It therefore applies to transactions of goods and services within the country as well as to intra-community imports and purchases. The system for calculating the VAT due is that of the difference between the tax received during the sale and that paid on purchase. Obviously, the deduction of the VAT paid is not foreseen in the event that exempt goods or services are supplied. Financial and insurance services, transactions subject to tax on real estate transfers, health services and welfare, cultural and educational activities are exempt. The ordinary rate is 19% but for certain goods it is reduced to 7%. Exports, intra-community sales and international services are instead zero rate.
Small businesses are exempt from VAT if their total revenues are less than € 17,500 in the previous year and if they do not expect to exceed € 50,000 in the present one. However, they can opt for the ordinary taxation regime.


Other taxes and duties

Taxes on real estate
Transactions relating to land and real estate located in Germany are subject to taxation. The tax is also required in the case of the purchase of companies (at least for a 95% share) that own properties. The tax is levied at the level of each federal state and has a rate that varies between 3.5% and 6.5%. Municipalities apply a tax on the possession of land and buildings based on their cadastral value and the rate of which is calculated by applying a multiplier chosen by the local authority to the federal rate of 0.35%. The effective tax rate in the main cities is therefore between 1.5% and 2.3%.

Taxes for the Churches
In Germany, anyone who is registered with the Catholic Church or  protestante is required to pay a special tax (Kirchensteuer). Members of the Jewish community pay an equivalent tax in favor of their own church (Kultussteuer). For members of other religious communities and for non-believers there is no obligation to pay this type of tax. The tax which varies from Lander to Lander is generally equal to 8-9% of the personal income tax and is considered a deductible expense for this tax.
The management, collection and assessment of the tax can be managed directly by the churches themselves or, more frequently by the Lander who maintain the registers of members, communicate the lists to the employers in order to allow the relative withholdings and draw a service commission.
 
The inheritance tax
Among other things, the following are subject to inheritance tax: the purchase of the inheritance by legal succession, testamentary or succession agreement; the purchase of the inheritance by legacy; the purchase of the inheritance by donation with post mortem effect and any patrimonial advantage based on a contract stipulated by the deceased (eg life insurance); the purchase of the inheritance by right to the legitimate share; the purchase of the inheritance on the basis of the reserve in favor of natural children. In the event of an inheritance not deriving from a will opened at a German court or notary, the heir must notify the Tax Office within three months. The beneficiaries are divided into three categories which correspond to different levels of exemption and tax rates. 

  • spouse (or registered partner), direct ascendants or descendants (including descendants of the spouse from previous marriages). There is an exemption of 500,000 euros for spouses, 400,000 euros for children, 200,000 euros for grandchildren and 100,000 euros for others. The rate is progressive and varies between 7% and 30%;

  • other degrees of kinship or divorced spouses. The exemption is 20 thousand euros. The rate varies between 15% and 43%;

  • other beneficiaries. The exemption is 20 thousand euros. The rate varies between 30% and 50%;

 

Declarations, instrumental obligations and payments
Tax returns are submitted by May 31 of the following year and can also be submitted to declare additional expenses and receive a refund. The final tax is calculated after submitting the tax return. The payment of VAT is monthly and becomes payable according to an accrual principle when the goods are delivered or the services are provided but   the smaller companies and self-employed workers, i.e. those with revenues annual payments of less than 250 thousand euros (for the tax years from 2009 to 2011 the limit was 500 thousand euros) can ask to adopt a cash principle, that is to make the obligation run from the moment in which the payment is actually received. Employers and other payers are obliged to make withholdings relating to income tax, solidarity surcharge and any church tax.

OUR PRESENCE IN GERMANY

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