Starting a business in Germany (2): Trade tax and Corporate Income Tax

In our last article Starting a business in Germany (1): Vat and Input tax, we covered the key points of German VAT and Input tax with practical examples. Go check it out if you have not yet!

Continuing with the second part on the topic of taxation in Germany, we will guide you through the key characteristics of German trade tax and corporate income tax. In addition, we will also give you practical examples such as tax calculation and the latest tax rates.

Trade tax (Gewerbesteuer)

Trade tax or business tax (Gewerbesteuer) is a local tax and is charged on a yearly basis. It is the most important financial source of income of local authorities in Germany.

 

Who is liable to be taxed?

All entrepreneurs with commercial activities operating in Germany are subject to trade tax. Corporations located in Germany are always deemed to carry on commercial trade or business, regardless of actual activities. However, agricultural and forestry businesses or self-employed professionals (e.g. architects, doctors or journalists) as well as non-profit organizations are not subject to trade tax. Individuals and partners are not subject to trade tax, unless the activities are deemed to be commercial under the income tax law. They can claim a credit against their payable income tax that takes into account the trade tax they have paid.

Trade tax rate

The trade tax rate is set by each municipality individually. The trade tax rate is applied similarly for all businesses within the same municipality. The German trade tax rate is currently set between 14% and 17%.

The respective rate of trade tax relies on two main factors:

  • The tax base rate (3,5% within Germany)
  • The multiplier ((Hebesatz) varied by municipalities

Trade tax calculation

Firstly, the tax base amount is calculated by multiplying your company’s taxable income with the tax rate 3,5%. The taxable income is generally defined as a company’s gross income minus any allowable tax deductions. The next step would be to multiply the so-called tax base amount with the respective municipal multiplier.

Example:

  • A German limited liability company X with yearly taxable earnings of EUR 1.500.000 based in city Y.
  • City Y has a municipal multiplier of 400%.
  • The tax base amount of company X is EUR 52.500 – calculated by multiplying the tax rate 3.5% with its annual taxable earnings (3.5% x EUR 1.500.000).
  • Finally, the amount EUR 52.500 is to be multiplied with the corresponding municipal multiplier 400%, resulting the total trade tax of EUR 210.000.

In general, the municipal trade tax multiplier rate in Germany ranges from 200% to 490%, for instance, Berlin has 410%, Hamburg has 470%, Munich 338.4%, Frankfurt a. M. 379.5%, Cologne 448.2%, Stuttgart (350.7%).

For more details, please check out the table Overview of municipal trade tax multiplier rates in different states of Germany below.

Federal State # of
cities
Municipal trade tax multiplier rate (%) Min (%) Max (%)
Baden-Württemberg 1,101 350.7 265 450
Bavaria 2,056 338.4 230 490
Berlin 1 410.0 410 410
Brandenburg 419 324.0 200 455
Bremen 2 460.0 460 460
Hamburg 1 470.0 470 470
Hesse 426 379.5 285 530
Lower Saxony 1,002 371.9 300 500
Mecklenburg-Vorpommern 780 339.0 200 465
North Rhine–Westphalia 396 448.2 260 550
Rhineland-Palatinate 2,306 372.7 320 900
Saarland 52 419.3 360 490
Saxony 438 394.2 300 490
Saxony-Anhalt 221 348.9 237 507
Schleswig-Holstein 1,110 343.3 250 450
Thuringia 849 378.4 240 470

(Sources: German Federal Statistical Office)

Corporate income tax (Körperschaftssteuer)

A corporation is considered a resident to corporate income tax, if its central place of management or registered office is located within Germany. In particular, with regards to associations, joint stock companies (AG) and limited liability companies (GmbH), their worldwide income will be taxed unlimitedly. However, general partnerships (oHG) are exempt from corporate income tax. For those companies that are not based in Germany, only their income generated inside Germany are liable to German corporate income tax.

German corporation income tax is levied at a uniform rate of 15%. In addition, solidarity surcharge (Solidaritätszuschlag) – 5.5% is added on top of the corporate income tax rate of 15%. The surcharge is 5.5% of the 15% corporate income tax; resulting a total of 0.825 percent of taxable income. Thus, corporate income tax and solidarity surcharge add up to a total of 15.825%.

In general, 95% of dividends taken by a German resident corporation or branches of nonresident corporations is tax exempt. Nevertheless, if the dividends are regarded as tax-deductible expenses for the payer, the exemption will not be applied; for the exemption a minimum shareholding of 10% is required.

Dividend payments on the basis of a Double Taxation Agreement are taxed at a reduced rate of taxation at levels of just 5, 10 or 15%. According to the latest DTA between Germany and China, dividend payments are taxed at a rate of 5% as long as these two requirements are met:

  • The beneficiary obtaining the dividend is a corporation, and
  • directly owns at least 25% of the share capital of the company distributing the dividends.

Besides dividends, capital gains are commonly included in the taxable income. Moreover, capital gains resulted from foreign or domestic corporate subsidiaries are known as 95% tax-exempt.

In our next chapter of this series Starting a business in Germany (3): Income tax, we will talk about the German income tax for natural persons- so stay tuned!

Richard Hoffmann

Richard Hoffmann, ECOVIS Beijing

Richard Hoffmann is a partner at Ecovis Beijing China. Richard obtained an honors degree in law and worked in Germany, the United States, and China for various prestigious law firms prior to joining Ecovis. In addition to being a member of the board of Ecovis International, he is Supervisor for the China business of several respected German companies and shares his extensive knowledge to students by teaching commercial law in China at SRH Hochschule Heidelberg. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV stations. Contact: richard.hoffmann@ecovis-beijing.com

Ecovis Beijing

Ecovis Beijing is the trusted tax and legal advisor to several embassies and official institutions in China. It specializes in mid-sized international companies and is focused on tax & legal advisory, accounting and auditing. If you’re interested in finding out more about tax and legal, don’t hesitate to sign up for our Newsletter, give us a call +86 10-65616609 or contact us directly via service@ecovis-beijing.com.