Corporate Tax in Germany
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While some countries have a flat percentage to calculate corporate tax, in Germany the corporate tax rate is dependent on the annual earnings of businesses. Higher earning companies and proprietors pay a higher tax rate, meaning business owners need to understand corporation tax calculation to determine how much they will pay annually for taxes.
This makes it important for you as a business owner or budding entrepreneur in Germany to understand paying corporation tax. If you plan to run a successful business, particularly if you wish to employ staff and expand globally as a company, how you handle your corporate tax can seriously affect the future of your business.
In this post we will go over the important aspects of paying corporation tax: who has to pay it, what are the corporate tax rates in Germany, and how to file your own corporate tax return.
Corporate tax in a nutshell
- Any person running a business in Germany is required to pay corporate tax
- Sole proprietors and owners of a limited liability company will pay tax at the personal level
- Freelancers are not obligated to contribute to the social security system in Germany, or to fill out a formal financial statement
- Unlike freelancers, artists and journalists must contribute to the social security system
- Germany has a high corporate tax rate, with the total amount currently sitting at 15.825%
- Certain conditions of your earnings may qualify you for exemptions and tax credits
Who pays corporate tax?
If you are running a business in Germany or are a tradesperson working in Germany, you will be required to pay some form of corporate tax. The rate of corporate tax in the country is made up of both a federal and municipal tax, meaning what you pay may vary somewhat depending on where in the country you’re working.
Also within the corporate tax bracket are differing rates depending on the kind of business you’re running or trade activities you perform.
Corporate tax for sole proprietors and limiteds
In Germany, a sole proprietor is a person who runs a business by themselves. A limited company is an official GmbH run by one or few persons and is one of the most popular forms of company ownership in Germany.
After registering your sole proprietorship or limited liability company with your local tax office, you will be issued a tax number which enables you to pay tax and receive a tax return.
Despite being a business owner, sole proprietors and limiteds will pay tax at the personal tax rate rather than corporate rate. This is due to the size of your business and number of involved partners.
Not all sole proprietors have to pay contributions to the German pension fund, so find out from your local tax office if you will need to do this. You will be able to lodge tax-deductible expenses for your work on things like stationary, travel arrangements, office space and equipment, among other things. Always save your receipts on all purchases of this kind.
Corporate tax for freelancers
Freelancers on the other hand are exempt from the requirement to prepare financial statements for tax, and do not need to pay trade tax. Instead, as a freelancer you can fill out a profit-and-loss assessment.
Once registered with your local tax office, professional association, and chosen accident insurance company (if necessary), the tax authorities will assess your income in quarterly payments. These payments will be based on your income after you’ve deducted for expenses.
As a freelancer you won’t likely be liable to the German social security system, but you will need to organise the following things for yourself:
- The right health insurance
- Disability insurance if you are suddenly no longer able to work
- Life insurance for retirement
Corporate tax for artists and journalists
Unlike freelancers, artists and journalists in Germany are legally obligated to make contributions to the social security system. So you will not have to make arrangements for the above, because you will be taxed automatically for them and covered.
Your contributions to these requirements will depend on how much you earn, as long as you don’t exceed the maximum earning amount for contributors. This amount changes annually.
What are the corporate tax rates in Germany?
Germany has one of the highest corporate tax rates in all of Europe. Combined with the solidarity surcharge of 5.5%, the total amount is 15.825%.
There is an additional trade tax on municipalities with over 80,000 inhabitants which ranges from around 8% to 20%, so your tax will be higher if you choose to live and work in one of Germany’s big cities.
Determine your corporate tax owed by combining the federal rate (with municipality addition if applicable) to the taxable income of your company.
What are the corporate tax exemptions?
Understanding both corporate tax exemptions and corporate tax credits can assist with providing you a more favourable annual tax return. Depending on your income type, you can benefit from one or more exemptions and credits.
Corporate tax exemptions
Some of the most important income types entitled to exemptions are:
- Capital contributions made by your company upon its founding or capital increase
- Capital repayments at the shareholder level, as long as they don’t contain dividend deductions
- 95% of domestic and foreign dividends
- 95% of capital gains from company shares sold
- Investment grants for any investments made in the new federal states
Corporate tax credits
As a corporate taxpayer you may be entitled to claim a credit. Credits amount to 3.8 times the amount you pay for your municipality’s business tax. The maximum amount of credits you can claim will depend on your business income.
Your tax credit will not result in an income tax refund and you cannot set it against the income tax of a subsequent year. Your tax credit however may result in overcompensation. This happens if it is greater than your owed municipal business tax. If this is the case, you’ll be able to use your credit fully against your income tax liability.
Research and development tax credit
How do you file your corporate tax return in Germany?
As with filing a regular tax return, filing your corporate tax return can be done via the German tax portal ELSTER. Register with ELSTER online and receive by mail an activation code which will allow you to complete your registration.
ELSTER is only in German, so non-German speakers can use tax tools like Taxfix or Steuergo. These tax tools will often simplify your tax return and so may not be ideal if you have quite a complicated return to fill out. For English speakers in this situation, try consulting with an English-speaking tax advisor
in your area.
Once the tax office decides how much you pay, you’ll receive an assessment and demand for payment, or information on how to receive your tax refund.
Taxes are complicated, especially for business owners and freelancers. However, it’s always good to approach them as an opportunity to assist your business, rather than a chore you begrudgingly perform as quickly as possible.
Corporate tax has many opportunities for you to benefit from your tax return and help your business flourish. Hopefully this article has laid out the basics of corporate tax in Germany in a helpful way, allowing you to approach your tax return with confidence.