The German corporate tax system is relatively complicated and makes a distinction between both the types of legal structure being employed and, distributed and undistributed profits. Therefore, advice is always recommended before establishing an entity in Germany. In addition, it should be noted that whilst the ostensible German corporate tax burden is reasonable, the real level will often be considerably higher and will include, net asset tax (vermogensteuer) and municipal trade tax (gewerbesteuer) plus the new continuing solidarity tax of 7.5% to assist in the re-integration of the former East Germany.
Corporate TAX (Korperschaftsteuer)
The aggregate German corporate tax rate is around 29.58%. This is calculated on the basis of the official corporate income tax rate being 15%, the solidarity surcharge being 0.825% (5.5% of the corporate income tax), and the local trade tax, which varies between 7% and 17.15%, assuming a municipality multiplier (Hebesatz) ranging normally from 200% to 490% (the average multiplier for 2012 was 393%). The local trade tax is unfortunately not deductible as a business expense.
EU & Non-EU Investors (No participation exemption)
In such circumstances, a branch would normally be favoured since the standard German treaty withholding tax rate for portfolio/small investors is 15%. Therefore, on distribution, the tax liability would be, for a GmbH/AG, 30% plus 15% = 45%. For a branch it would be 42%.
Non-EU Investors (with a participation exemption)
Where a company meets the participation exemption criteria (normally requiring an equity holding of 10% to 25% in the German company) the withholding tax is normally reduced to 5% giving an effective 35% tax burden. Therefore, the creation of a local German company will be preferable.
EU Investors (with a participation exemption)
EU investors with a major participation will normally either satisfy EU Directive 90/435, which requires a 25% stake or, if the treaty definition of a major participation is lower, the treaty rate. In the first case, there would be no withholding taxes whilst in the second, generally a 5% withholding tax. Where there is a conflict, Directive 90/435 will take precedence
Capital Gains Tax
In Germany there is no distinction between capital gains and ordinary income. Therefore, the rates already mentioned for corporation tax will be equally applicable as, if appropriate, will be the other potential taxes. Nevertheless, it should be noted that in certain circumstances it is possible to benefit from rollover relief
Value Added Tax
As with all other EU members, Germany employs a value added tax system.
The standard VAT rate since January 2007 is 19% (Jan 2007) with the reduced VAT rate being 7% primarily for foodstuffs, books, medical, passenger transport, newspapers, admission to cultural and entertainment events, hotels together with some other items which are exempt or zero rated items.
The other main taxes currently applicable in Germany are as follows:
General insurance contracts are subject to a 15% surcharge on the before tax premium. However, certain exemptions are made for life and other specified insurances Property Acquisition Tax: On the purchase of land or property an individual or company is liable to pay a 2% duty on the actual acquisition price. It will be noted that German property acquisition taxes are lower than in many other European countries
This is a sort of municipal ground rent charge against all land and properties. In most cases, the rates are negligible.
German Beneficial Structures
German Government Incentives
In general the German government does not offer specific incentives, tax or otherwise, to those wishing to invest what was Western Germany. In addition, previous incentives available for investment in territories constituting the former German Democratic Republic (East Germany) are no longer available. Previously there were a number of concessions and/or incentives including exemption from the municipal trade tax on capital and accelerated depreciation concessions against fixed assets up to 50%.
Example Beneficial Structures
In Germany the anti-avoidance provisions are well developed and certainly cause difficulties for individuals (see below). Nevertheless, in general foreign and fiscally beneficial companies can be used provided they come from a 'respectable' jurisdiction and genuine management and control are established. For inward investment many tax treaties make it possible to avoid capital gains tax and the ubiquitous legitima portia principle. However, the main use for such companies is to transfer activities to more fiscally beneficial pastures.
Using a Foreign Company to Circumvent Corporation Tax Levied on a Capital Gain
The most important point to note is that Germany does not have specific legislation, as do both France and Spain, against the use of a foreign company to acquire local property. Nevertheless, such a company must be protected by a suitable double taxation treaty whereby capital gains* can be exempted on the disposition of 'movable' property (i.e. the shares) in the foreign holding company. Of course, such a company must be careful not to be deemed to have a 'permanent establishment' in Germany or local taxation will apply in the normal manner. In respect to the choice of jurisdiction, either the United Kingdom or the Republic of Ireland (both having the necessary treaty provisions) would seem ideal candidates although other possibilities could include Luxembourg and the Netherlands The benefits of using an offshore company, at least for a non-German national/resident, could include:
- Circumvention of indigenous inheritance taxes;
- Circumvention of Property Acquisition Tax on a future resale;
- Avoidance of German taxes and, possibly, those of the 'holding' company jurisdiction;
- Avoidance of Net Asset Tax
For more information on the German Tax System please contact one of our tax planning consultants.