STEP

Title Research

Germany

4. TAXATION

a. Introduction

Tax legislation and collection in Germany operate only at the federal level.

b. Tax system: general concepts of tax regime

i. Inheritance and gift tax

German inheritance and gift tax is imposed on any transfer of property at death or by gift. The recipient of the bequest is liable for inheritance tax, whereas both the donor and the donee are liable for gift tax.

Tax rates differ depending on the relationship between decedent/donor and beneficiaries. For close relatives (e.g. children, spouses), they vary between 7 per cent and 30 per cent, for other relatives between 15 and 43 per cent and for unrelated persons, rates of 30 and 50 per cent apply. EUR500,000 received by a spouse and EUR400,000 received by a child are tax-free. Under certain circumstances, exemptions from inheritance tax also apply for a further EUR256,000 for a spouse and up to EUR52,000 for a child. Under certain circumstances, family homes used by spouses or children are tax exempt if personally used for ten years after the transfer.

The inheritance and gift tax law provides further exemptions for the transfer of business assets if at least half of the taxable value relates to assets that are treated as productive assets under the act. A tax credit of 85 per cent on the taxable base is granted if the transferee keeps the assets for five years, during which period the amount paid out to employees must reach 400 per cent of the yearly average of the five years before the transfer. The same treatment applies for the transfer of shares if the transferor, personally or together with associates, owns more than 25 per cent of all shares of a German or EU/EEC corporation. The transferee of business assets or shares may opt for a full tax exemption leading to further requirements.

ii. Income tax

Residents are taxable on the basis of worldwide income, whereas non-residents are liable to tax on source income. Individuals are resident if Germany is their home, place of dwelling or habitual place of abode (i.e. a presence in Germany for more than 183 days in a year). An entity is resident if either its legal seat or place of management is in Germany.

The German Corporate Tax Act lists various types of entities. Partnerships are treated as transparent and are not taxed as separate entities, with partners taxed individually. German thin capitalisation rules are being changed. An Interest Deduction Limitation system is being implemented to apply to all business units.

Individuals are subject to income tax, which applies to income of seven different categories, less allowable personal deductions. Exempt income includes payments from health, accident and disability insurances, statutory pension plans, social security distributions and scholarships for scientific research.

Corporations are subject to tax on worldwide business income with capital contributions exempt at the company level. At the shareholder level, capital repayments that do not include any dividend component are tax-exempt.

Partnerships and sole proprietorships are granted a preferential treatment of retained profits. The reduced tax rate of 28.25 per cent (plus solidarity surcharge) will apply upon request by the partner(s).

Individual income tax is imposed at progressive rates. Starting at EUR8,004, the marginal rate rises from 14 per cent to 42 per cent for income over EUR52,882. Income over EUR250,731 is subject to tax of a 45 per cent tax. For jointly assessed spouses, annual taxable income levels are doubled. Employers are required to withhold prepayment of the final income tax (‘wage tax’) from employees’ salaries.

Regarding capital gains (from privately held property), irrespective of whether long or short-term, there is a flat tax (Abgeltungsteuer) with a uniform rate of 25 per cent. The same flat tax applies to income from capital investments (i.e. dividends, interests, certificates/financial innovations (under certain conditions), proceeds from participating loans or silent partnerships). There is an option for individual tax rate treatment. Income-related expenses are not deductible. This tax is deducted at the source. Foreign withholding tax will be credited. The corporate income tax rate for both retained and distributed profits is 15 per cent (plus trade tax, 14 per cent and solidarity surcharge). Dividends and other profit distributions paid by German resident companies are subject to creditable 25 per cent withholding tax. Withholding tax on interest and income from silent partnerships is 25 per cent as well as interest paid by a bank. A ‘solidarity’ surcharge of 5.5 per cent is levied on computed taxes.

Individuals and corporations are required to file tax returns. Usually, the tax year is the calendar year.

iii. International tax matters

In general, all property is subject to inheritance or gift tax if the decedent, donor or beneficiary (i.e. heir, legatee, or donee) has a residence in Germany. German citizens living abroad are treated as residents for five years after abandoning their residence in Germany. If the decedent or donor was subject to unlimited income taxation as a German citizen for a period of five years within the last ten years before becoming not subject to unlimited income taxation, and this person is afterwards domiciled in a low-tax country, then the person is taxable in Germany on property received from foreign family foundations or foreign subsidiaries of German companies, but not from foreign companies. If none of the above-mentioned persons is a German resident, tax is limited to received property situated in Germany.

As most German tax treaties do not cover gift and/or inheritance tax, German inheritance tax law grants a foreign tax credit only for foreign inheritance tax (not for gift tax) paid on foreign property, as defined by German law. Even so, the property is included in the German inheritance tax base.

Dividends and capital gains derived by residents are fully exempt from corporate income tax, except that a 5 per cent lump sum of gross dividends and capital gains is added back to corporate taxable income.

Non-residents are subject to German income tax on:

  • business profits
  • remuneration for services
  • dividends or income from silent partnerships
  • interest from resident payers
  • rent from immovable property, and
  • royalties.

Withholding tax on non-residents is final, although tax treaties may provide reduced tax rates.

Non-resident companies are subject to German corporate income tax at the same rates as resident companies if they derive German source income that is not subject to a withholding tax but is calculated as the difference between profits and related expenses.


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