Hofmann International Tax Solutions

Beratung ohne Grenzen


















The German legislation

I. Income tax burden in Germany

  1. Burdened with income tax are individuals and partners of a partnership. Base of taxation is the income of this person. Taxable are the different kinds of income (for example earnings as business income, agriculture, earnings of self-employment, income of employment, income from rent and leasing and other income especially dividends, pensions and other benefits), reduced by special expenses for example expenses for a tax accountant, payment of retirement pensions, insurance rates and extraordinary burden. This income is burdened with a progressive income tax.
  2. Individuals and partnerships that have their place of residence or permanent dwelling or their seat in Germany are unlimited taxable in Germany. They are taxable in Germany with their whole worldwide income. That means that all kinds of income are in Germany taxable. There are exceptions regulated by international treaties and double tax agreements.

With registering in a German municipality a person is unlimited taxable in Germany. Alternatively a customary place of abode in Germany is sufficient. A person without a place of residence or a habitual abode in Germany is only limited taxable.

Individuals with no place of residence in Germany who earn more than 90% of their income in Germany have the possibility to opt to the unlimited tax liability.

  1. Furthermore we want to cater to the limited taxation. According to article 1, 49 and 50a of the German income tax act only earnings in Germany are taxable in Germany. These are especially business income, earnings of self-employment, income from rent and leasing, income of employment and agriculture. According to the double tax agreement between the Netherlands and Germany this income is only in Germany taxable if the earning stem from a in Germany established company.
  2. Basis of the income determination is the profit which you can find in the annual financial statement consisting of the balance sheet and the profit and loss statement. For small companies a cash basis accounting is acceptable.

Parts of the profit and loss statement are the write-offs. Regular write-offs are write-offs in form of a percentage rate of the purchase costs or the book accounting value. For small and medium-sized companies additional write-offs are possible. According to article 7g of the German income tax act this kind of companies are allowed to depreciate movable equipment with a percentage rate of 40% of the purchase costs.

This is an instrument to reduce the profit. Furthermore write-offs are possible if accounts receivable are unsure.

It is possible to set aside reserves especially company pension reserves. This also applies for the management of limited liability companies.

The most important points about the tax scale are:

  • Basic tax-free amount: 8,004 € / 16,008 € (unmarried/married) in the year 2012. No application for limited taxable persons. This amount will rise in the following years.
  • Progressive tax scale with a marginal tax scale of 14% and a maximum tax scale of 45% for income over 250,000 € / 500,000 € (unmarried/married).
  • Solidarity surcharge of 5.5% of the income tax or corporate income tax.

II. Corporate income tax burden in Germany

Unlimited taxable are corporate enterprises (limited liability companies or public limited companies) with its registered seat or its place of management in Germany. Otherwise these corporate enterprises are only limited taxable in Germany.

The assessment base for the corporation tax charged is the revenue which the corporate enterprise has earned during the calendar year. Taxable profits are determined using the result posted in the annual accounts (balance sheet and Income statement) drawn up under the Commercial Code. What is deemed income under tax law sometimes diverges from the way earnings are determined under commercial law, in which case tax law provisions prevail.

The corporation tax charged at corporate level is 15% (flat rate tax). Additional a corporate has to pay solidarity surcharge (5.5% of the corporate income tax).

When dividends are paid to an individual person, capital yield tax at a rate of 25% is charged. Since 1 January 2009, this tax is final for individuals who are residents of Germany. Solidarity surcharge is also imposed on capital yields tax.

When dividends are paid to an enterprise with full corporation tax liability, the recipient business is largely exempted from paying tax on these revenues. In its tax assessment, merely 5% of the dividends are added to profits as non-deductible operating expenses. The same applies if a taxable corporate enterprise sells shares in another company.

Deducting tax from dividends paid by a subsidiary with full tax liability to a foreign parent domiciled in the EU is waived on certain conditions, e.g., the parent company has to have a direct holding in the subsidiary of at least 15%.

III. Trade tax burden in Germany

For business income has to be paid trade tax additional to the income tax or the corporate income tax. Individuals and partnerships that have to pay trade tax are favored by a tax free amount of 24,500 €.

The trade tax is charged by the local authorities or municipalities, who are entitled to the entire amount. The corresponding rate of trade tax depends on two components:

  • The tax base rate (3.5% throughout Germany)
  • The multiplier (Hebesatz) stipulated individually by every municipality

The taxable income of the company is multiplied with the tax base rate of 3.5% which results in the so-called tax base amount. The tax base amount is then multiplied with the corresponding municipal multiplier; which results in the sum total of trade tax which is due.

The multiplier is set by each municipality. On average, it is between 350 and 400 percent but may not total less than 200 percent. There is no upper limit for the municipal multiplier. It is generally higher in urban areas than it is in rural areas, although it does currently not total more than 490 percent in any of the large cities.

IV. Value added tax in Germany

The value added tax in Europe is formed nearly synchronized in whole Europe. There are no big meanderings in Germany.

V. Inheritance tax and gift tax in Germany

Inheritance tax and gift tax are regulated in the same law. Taxable is either a transfer by reason of death or a gift amongst livings. Inheritance tax rates in Germany vary depending on the degree of kinship and the amount or value received. German inheritance law divides heirs and beneficiaries into three classes. The general rule is that more remote relatives have lower exemptions and pay higher taxes. The tax rate is from 7% up to 50%. The German inheritance tax and gift tax differs three categories.

Category I:

Spouses, children, grandchildren, great grandchildren, parents, and grandparents are in category one. Tax rates in class one vary from 7% (up to 75,000 Euros), 11% (up to 300,000 Euros), 15% (up to 600,000 Euros), 19% (up to 6,000,000 Euros), 23% (up to 13,000,000 Euros), 27% (up to 26,000,000 Euros), to 30% (more than 26,000,000 Euros).

Category II:

Brothers and sister, nieces and nephews, parents-in-law are in category two. Tax rates in class two vary from 15% (up to 75.000 Euros), 20% (up to 300.000 Euros), 25% (up to 600.000 Euros), 30% (up to 6,000,000 Euros), 35% (up to 13,000,000 Euros), 40% (up to 26,000,000 Euros), to 43% (more than 26,000,000 Euros).

Category III:

All other heirs and beneficiaries are in category three. Tax rates in class three vary from 30% (up to 13,000,000 Euros) to 50% (more than 13,000,000 Euros).

More than nominal exemptions are only available for spouses (500.000 Euros), children (400.000 Euros), grandchildren and great grandchildren (200.000 Euros), and other persons of category one (100.000 Euros). The exemption available to other beneficiaries of the categories two and three is only 20.000 Euros.

The same classifications, tax brackets and tax rates apply to German gift tax. Nonetheless, lifetime gifts may reduce inheritance tax liability in Germany. Gifts made more than ten years before the date of death are not taxable, and after ten years the gift tax exemption can be used for another gift, which will not be subject to gift tax (but may be subject to inheritance tax if death occurs within 10 years).

A highly disputed issue in the course of the legislative process was the treatment of business assets for inheritance tax purposes. The goal was to ensure that business owners contribute their share to the budget without creating a lack of liquidity, or bankruptcy, either on the level of the companies or on the level of their new owners. Under the new exemption rule, an heir of a company must bindingly choose one of two options:

Option 1:

If the heir of the company continues the core operation of the company for five years, 85 percent of the transferred business assets are tax exempt. This requires that the sum of salaries after five years is lower than 400% of the sum of salaries at the time of succession. Moreover, the share of administrative assets compared to the total business assets must not be higher than 50%.

Option 2:

If the heir of the company continues the core operation of the company for seven years, 100 percent of the transferred business assets are tax exempt, if the sum of salaries after seven years does not exceed 700% of the sum of salaries at the time of succession and the share of administrative assets compared to the total business assets is not higher than 10%.


Private law and commercial law in Germany

Base of the German civil law is the Civil Law Code (“Bürgerliches Gesetzbuch” - abbreviation: „BGB“). The German civil law determines the relationships among persons and/or legal entities. The most important principle of the German civil law is the “Privatautonomie”, which means that the contracting parties have the right to rule their own affairs without interference from the state, especially in the disposal of their property according to their will and the creation of contracts with partners and with the contents they like. Because of this, most of the rules in the civil law act are only supplied in case that the partners of a contract did not make an agreement on that special point themselves. But there are some binding legal rules in the German civil law act that the contracting parties have to adhere. In the last years there has been a tendency towards more regulation, especially between a professional and a consumer, declaring contracts invalid which place an undue burden on one party. Other groups of people that enjoy protection are minors and people in a weak economic position.

For buying and selling real estate in Germany an executing of a notarial deed is necessary. Not only the transfer of the property must be notarized also the real estate purchase agreement.

The German Limited Liability Company (= Gesellschaft mit beschränkter Haftung - abbreviation: „GmbH“) is a type of legal entity with limited liability that is very common in Germany Under German law, the GmbH must have a minimum founding capital of €25,000, from which €12,500 have to be raised before registering in the commercial register.

Since the year 2010, a derivate form called “Unternehmergesellschaft (haftungsbeschränkt)” or short „UG (haftungsbeschränkt)“ was introduced. It does not require a minimum founding capital, and was introduced to assist company founders in setting up a new company. Also, the UG must accumulate 25% of its yearly earnings as legal reserve until it reaches €25,000. The owners may then decide to increase capital and rebrand to GmbH, or may omit the suffix “haftungsbeschränkt”.

German labor and employment law

German labor and employment law is divided into two areas: individual employment law and collective labor law. Individual employment law concerns the relations between the individual employee and the employer whereas collective labor law regulates the collective representation and organization of employees as well as the rights and obligations of employees’ representatives.

German labor and employment law is not consolidated into a single labor act. The main sources of German labor and employment law are Federal legislation, collective bargaining agreements, work council agreements and individual employment contracts. Many labor and employment law matters are heavily influenced by case law so that judicial precedent is an important part of the legal framework.

Employment contracts have to implement some minimum requirements. The employer has a statutory obligation to provide the main contractual terms in writing to the employee no later than one month after the commencement of the employment. The terms and conditions of the employment are regulated mainly by statutes, collective bargaining agreements and works council agreements. As a rule, the employment contract may not deviate from these provisions to the detriment of the employee. The written summary must contain at least the following:

  • Name and address of the employer and the employee
  • Information on the starting
  • Anticipated duration (only in case of fixed term contracts)
  • Place of work
  • Nature of the activity involved
  • Composition and amount of the remuneration
  • Working hours
  • Length of annual leave
  • Notice period. To avoid future disputes,

The employer and employee may agree upon a trial period, which is limited by law to a maximum duration of six months. The notice period within the trial period is two weeks. The German Act on protection against unfair dismissal does not apply within the first six months of employment. This law is also not applicable if an employer employs less than 10 employees.

The German Civil Code sets forth the statutory notice periods. Their length depends on the employee’s length of service with the employer with notice periods ranging from 4 weeks for employees with less than 2 years’ seniority to 7 months for employees with more than 20 years’ seniority. Unless otherwise stated in the employment contact, the extended statutory notice periods are only applicable to terminations by the employer. Collective agreements may specify longer or shorter notice periods, whereas individual contracts of employment may only specify longer notice periods.

By statute, German employment law grants employees who work on a six day work week, 24 working days of paid leave per calendar year. Based on a five day work week, 20 working days of paid leave have to be minimum guaranteed.

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