Peter Scheller
Berater für Wirtschaftsprüfer, Rechtsanwälte, Steuer- und Unternehmensberater

„Wenn es knifflig wird.“

10 tax issues to be considered if doing business in Germany

von Peter Scheller

Germany is one of the biggest consumer markets in the world. Therefore it is of interest for foreign companies who want to sell products or services on the German market. Besides this German business entities are often a target of foreign business investors. In any case foreign companies and investors have to observe German tax regulations in order to avoid unnecessary risks.

1. Forms of business engagements in Germany

Foreign business entities who want to start business activities in Germany have various options. They may try to sell their products or services directly to German customers however, when marketing and sales activities become successful it can be beneficial to establish a business presence in Germany. There are various ways to go about this:

  • Subsidiary: In general a 'Gesellschaft mit beschränkter Haftung' (GmbH) would be the first choice. A GmbH is the German equivalent to a Limited Liability Company. Other legal forms are also available but in general not suitable to foreign businesses.
  • Permanent establishment: This can be a branch, office or any kind of place of business or installation. It is a legally dependent section of the foreign company. 
  • Registered establishment: A registered establishment is a legally dependent section of a foreign company which is registered with the German commercial register (Handelsregister): It requires a certain minimum of economical and organisational substance and is an option if the foreign company needs a legally recognised presence in Germany.

Which form is suitable to a foreign company depends on many factors such as volume of sales in Germany, trust of German business partners, administrational costs and many more which we can address per explicit business case.

Foreign investors in existing German businesses may be confronted with other sorts of companies such as an Aktiengesellschaft (AG) which is the German equivalent of a stock company or incorporation. Tax implications of corporations in Germany will be described in the next sections.

A lot of tax planning is required if a foreign investor is forced to invest into a German partnership. Unlike in most other countries, partnerships have a long tradition as trading entities in Germany. Their tax regime is completely different to the one of corporations and will be presented in a separate article.

2. Tax residence of corporations in Germany

Tax residents in Germany are usually Corporations, Associations and Asset funds with statutory seat or place of management in Germany. Germany has agreed Double Taxation Conventions (DTC) with some 80 different countries . If a DTC is applicable then a corporation is deemed to be a resident in the Country where the place of management is situated. The place of management is the place where the management executes its day-to-day managerial tasks. These are all executive actions connected with business, organisational and legal issues of the company. There are situations, where this definition does not result in a unique solution. Multinational companies may have more than one place of management or managers working and living in different countries. In cases like this the primary place of management of the mother company (or HQ) has to be determined first.

3. Taxation of corporations in Germany

A corporation which is tax resident in Germany is subject to the following taxes on profits:

  • Corporation (income) tax
  • Solidarity surplus tax charge
  • Trade and business tax

This also applies for non-resident companies which have a permanent establishment or a permanent representative in Germany (see also https://scheller-international.com/blog-beitraege/the-unwanted-permanent-establishment-in-germany.html) however, only the profits which are attributable to the permanent establishment will be subject to German taxes.

The corporation tax rate is 15%. On top of it there is a solidarity surplus charge of 5.5% of the corporation tax and in addition to that a trade and business tax of about 14 to 18% is also due (see more https://scheller-international.com/blog-beitraege/german-business-tax.html). Profit distributions will be tax exempt with 95% of the distribution if the shareholder is another corporation. If the shareholder is an individual, he or she receives income from capital investments which will be taxed at a flat rate of 25% plus solidarity surplus charge.

An approximate calculation can be seen in the following example:

   

   Shareholder is an/a

 

   

individual

corporation

 

 

Euro

Euro

Profit

 

100.000

100.000

Tax level corporation

     

Corporation tax

15,0%

15.000

15.000

Solidarity surplus charge

5,5%

825

825

Trade and business tax

16,0%

16.000

16.000

Tax burden of the corporation

 

31.825

31.825

Tax level shareholder

     

Profit distribution

 

68.175

68.175

Tax-free

95,0%

 

-64.766

 

 

68.175

3.409

Income tax

25,0%

17.044

 

Corporation tax

15,0%

 

511

Solidarity surplus charge

5,5%

937

28

Tax burden of the shareholder

 

17.981

539

Combined tax burden

 

49.806

32.364

Combined tax rate

 

49,8%

32,4%

4. Taxation of foreign shareholders

For foreign shareholders of a German company the following applies:

  • If they are resident in a country which has no double taxation treaty (DTT) with Germany, the shareholders a subject to a 25% withholding tax plus solidarity surplus charge. This tax is not refundable and therefore definite. This applies for foreign companies as well as for individuals.
  • If Germany has agreed a double taxation treaty with the respective country, foreign companies may be subject to a withholding tax of 0% to 10% (depending on the treaty). This provision is applicable for so called qualified participants.
  • In all other DTT-cases (non-qualified distributions to companies and contributions to individuals) the withholding tax rate of 15%.
  • German withholding taxes can be credited against the foreign income tax in DTT-cases. Some other countries (by following domestic tax regulation) do not tax the dividends (profit distributions) at all however, in general this tax-free status is combined with the denial of a tax credit. This means that the German withholding tax becomes definite.
  • Another issue is that the tax credit of the German withholding tax is limited by the provisions of the respective DDT to certain maximum amounts (0% to 15%). The German withholding tax is 25% plus solidarity surplus charge (total tax rate 26.375%). In order to avoid a double taxation because of the difference (11.375% to 26.375%) there are two possibilities. The foreign shareholder can apply for a certificate of exemption (Freistellungsbescheinigung) before the dividend has been paid out. In this case the German company is able to pay out the dividend without withholding tax. The other option is to apply for a refund of the difference at a later stage. Both applications have to be made with the Federal central tax office (Bundeszentralamt für Steuern). The foreign shareholder has to prove that he or she is a tax resident in the other country and registered there for tax purposes.

5. Capital gains

Capital gains may be subject to German corporation or income tax in the following cases:

  • The shares of or participation in the German company are sold. This applies in all cases if a foreign company is a shareholder of a German company. If the shareholder is an individual capital gains will only be taxed if the shareholder owns more than 1% of the shares.
  • Legal transformation transactions such as mergers, demergers, change of legal form etc. are deemed to be a sale of shares or participation. However, German restructuring tax law allows the tax neutral transfer if formal requirements are fulfilled and the restructuring process does not result in a loss or restriction to tax profits or capital gains in the future.
  • The liquidation of a German company is deemed to be a sale of shares or participants.
  • The same applies for exits. This is the case if the place of management of the German company is relocated to another country or an individual gives up his or her main tax residence in Germany.

Similar rules apply if a German permanent establishment is sold, terminated or transferred into another legal form such as a German corporation.

The profit is calculated as follows:

  • Sales price or market value of the shares or participation
  • minus book value of the shares or participation
  • minus costs of the transaction

There are special provisions in double taxation treaties in regard to capital gains.

6. Transfer price regulations

As in many other countries there are special transfer price regulations in Germany. This always applies for transactions between a German company and its foreign shareholder. All transactions of related parties have to follow the ams’s-length principle, meaning the transactions have to be carried out with the same conditions as with third (unrelated) parties. In practice the determination of a fair market price can be difficult if there is no sufficient market data available of transactions between third parties. The documentation rules in Germany for these kind of transactions are extensive. Germany also has unique tax regulations for the transfer of business functions (such as production, sales, marketing, research and development etc.) abroad.

Similar rules apply for the profit-split between a foreign headquarter and its German permanent establishment.

7. Tax avoidance regulations

Germany has a lot of tax avoidance regulation which tackle artificial arrangements such as subsidiaries in low tax jurisdictions or the diversion of dividend payment through countries which provide better tax treatment than the country where the mother company is situated. For more information see https://scheller-international.com/blog-beitraege/germanys-tax-avoidance-regulations.html.

8. Value added tax

Germany’s VAT-regulations are based on an EU-directive and similar to the VAT-laws in other EU member states. Taxable are in general supplies and services carried out in Germany. The VAT rate is 19%. There is a reduced rate of 7% for the supply of most food products, drinks, books, magazines, newspapers, certain medical items and other services and supplies. There are also tax-free (or zero-rated) supplies e.g. services of banks, insurance companies, insurance brokers, doctors, hospitals and certain services in the field of education, research etc.

For  companies operating internationally there are various tax-exemptions of major importance, for example:

  • Export of goods (to Non-EU member states)
  • Intracommunity supplies to EU member states
  • Supplies and services connected to commercial maritime traffic and international air traffic
  • Supplies and services connected to the building or repairing of ships and aircrafts for commercial use

German companies and foreign companies who have a fixed establishment within Germany will always be liable to German VAT if they trade in taxable supplies in Germany. A fixed establishment should not be confused with a permanent establishment of income tax law (see above). A fixed establishment requires sufficient resources to carry out or to receive supplies or services. For more information see https://scheller-international.com/blog-beitraege/the-unwanted-permanent-establishment-in-germany.html.

Nevertheless, a foreign business entity may carry out taxable supplies or services even if the company is not situated or does not have a fixed establishment in Germany. Here are some examples:

In cases like this a foreign entity has to register for VAT purposes and to fulfill all tax relevant obligations (declaration, documentation, payment etc.) even if not registered for income tax purposes.

If a foreign business entity carries out taxable supplies or services it is entitled to claim German VAT invoiced by other businesses as input VAT. This entitlement also applies for certain zero-rated supplies and services (e.g. exports, intracommunity supplies, maritime and aviation services). If a company carries out other zero-rated supplies it is not entitled to deduct input VAT. The same rules apply for import-VAT if goods are imported from non-EU member states. Business entities who are registered for VAT purposes can deduct input- and import-VAT against their tax burden which has to be declared in monthly VAT returns. If the input- and import VAT exceeds the VAT burden, this amount will be refunded by the German tax authorities. If a foreign business entity is not VAT registered in Germany it is entitled to reclaim input- and import-VAT in a special refunding procedure with the Federal central tax office. See also https://scheller-international.com/blog-beitraege/termin-umsatzsteuerverguetung-vat-refund-48.html.

Special rules apply for supplies and services of non-VAT registered business entities to German business entities:

  • Supplies from other EU-member states to Germany have to be billed without VAT. The German customer has to declare an intracommunity acquisition. If the receiver of the goods is in general entitled to reclaim input VAT it can deduct also the acquisition-tax as input VAT. The foreign business entity has to bill without any VAT and has to show its own VAT-ID number as well as the VAT-identification number of the German customer and a statement that the supply is a tax-free intracommunity transaction on the invoice.
  • Supplies from Non-EU member states will, in general be subject to import-VAT at a rate of 19%. A foreign business entity should bill without any VAT and without any special statements.
  • Services by foreign business entities will be subject to the reverse charge procedures. This means that the German business entity has to declare the relevant VAT in its monthly VAT returns. If the receiver of the services is in general entitled to reclaim input VAT it can deduct also the same amount as input-VAT. Foreign businesses from EU-member states have to bill without any VAT and has to show its own VAT ID number) as well as the VAT ID number of the German customer and a statement that the reverse charge rule is applicable in the invoice. A foreign business entity should bill without any VAT and without any special statements.

Special rules are applicable to triangular and other chain transactions and to consignment stocks.

9. Customs and excise taxes

Customs regulations are harmonised in the EU. Therefore any import and export is (at least in principle) subject to the same regulations in all EU member states. In Germany customs are administered by a special customs authority. Customs authorities are also responsible for other issues such as export control and excise taxes.

Imports are subject to import duties. These are customs duties, import VAT and if applicable excise taxes for certain excisable goods. At this stage there are no customs duties on exports within the EU. Nevertheless the export is administered by customs authorities in order to supervise export control regulations.

Often there is an economic need to avoid import duties and other trade measures. European customs law has various customs procedures in order to avoid import duties and trade measures. These are for example:

  • External transit procedure: This can be used to transport goods within the EU under suspension of import duties. Import duties will only be applicable if the goods will be released into free circulation.
  • Customs (bonded) warehouse. This is a procedure to avoid import duties for an indefinite time. This is especially very beneficial if goods are going to be re-exported. In this case no import duties will be due at all.
  • Inward processing: This is a suitable procedure if goods from Non-EU member states will be worked on or processed further within the EU and then re-exported. In this case no import duties will be due at all.
  • Temporary use: This procedure is especially beneficial if goods shall be exhibited within the EU and re-exported after eg. a Trade Fair.

EU customs law is very restrictive. Therefore companies have to make sure that they follow the appropriate customs' regulations at all time and in detail.

Certain goods are subject to excise taxes. In Germany these goods are:

  • Energy products and electricity
  • Alcoholic beverages
  • Tobacco
  • Coffee

There are special rules for import and export as well as for intracommunity transactions.

10. Other tax issues

If a foreign business employs staff in Germany, it has to observe withholding general wage taxes and social security regulations. Unlike in other countries, income taxation of employees (wage tax issues) and social security affairs are totally separated from each other. While the taxation is administered by local tax offices, social security issues are administered by official social security agencies. This results in a quite complex situation in regard to payroll accounting:

  • Withholding wage tax: Employers situated in Germany have to withhold the wage tax from the gross income of their employees. They have to file a monthly tax return and have to pay the withheld tax to the local tax office. They have to fulfill formal requirements such as filing payroll accounts for every employee, extensive documentation requirements and are subject to audits by the tax authorities. “A German employer” is every employer who is a tax resident in Germany or has a permanent establishment or a permanent representative in Germany. If a foreign employer has not such an establishment in Germany but employs staff in Germany, the foreign business entity is not deemed to be a “German employer”. In this case the entity is not entitled to file monthly tax returns and is not obliged to fulfil any of above mentioned obligation. In cases like this the employee has to file yearly income tax returns and has to pay the income tax in instalments.
  • Social security contributions: The situation in regard to social security contributions is different. Contributions have to be paid by the employer and employee in equal shares. The employee’s share has to be withheld by the employer and to be paid together with the employer’s share to the relevant social health insurance agency. Every employer is obliged to file monthly social security declarations and to fulfil certain formal obligations. The problem is that there are 110 different social health insurance agencies in Germany. The number is steadily decreasing. In the year 1995 there were 960 agencies. Every employee has the choice of electing one of these agencies. This means that an employer with 10 employees may have to file 10 different monthly declarations and pay contributions to 10 different agencies if every employee is a member of a different agency. The above mentioned restrictions in regard to foreign employers do not exist in social security law. This means that a foreign employer without a business establishment in Germany cannot fulfill his or her wage tax obligation but has to fulfil it in regard to social security contributions. For more information see https://scheller-international.com/blog-beitraege/german-social-security-rates-2017.html.
  • If foreign employers assign staff to Germany, special assignment rules are applicable; see also https://scheller-international.com/blog-beitraege/assignment-and-social-security.html.

If a foreign business entity is the owner of German real estate. It will be liable to an (in general moderate) local real estate tax. If real estate is purchased a real estate tax is due. The tax rates vary between 3.5% and 6.5% of the sales price depending on the federal state (County) where the real estate is located. Restructuring transactions such as mergers, demergers, change of legal form etc. can result in a real estate tax burden. Therefore a careful tax planning is required if corporations who are involved in a restructuring process own German real estate.

Glossary

Aktiengesellschaft (AG)

Stock Company (Incorporation)

Gesellschaft mit beschränkter Haftung (GmbH)

Limited Liability Company

Körperschaft

Corporation

Personengesellschaft

Partnership

Körperschaftsteuer

Corporation (income) tax

Einkommensteuer

(Individual) income tax

Gewerbesteuer

Trade and business tax

Solidaritätszuschlag

Solidarity surplus charge

Steuersatz

Tax rate

Freistellungsbescheinigung

Certificate of exemption

Bundesszentralamt für Steuern

Federal central tax office

Veräußerungserlöse

Capital gains

Umsatzsteuer (USt)

Value added tax (VAT)

Vorsteuer

Input-VAT

Einfuhrumsatzsteuer

Import-VAT

Innergemeinschaftliche Lieferungen

Intracommunity supplies

Innergemeinschaftlicher Erwerb

Intracommunity acquisition

Umsatzsteueridentifikationsnummer

Value added tax identification number

Reihengeschäfte

Chain transactions

Kommissionslager

Consignment stocks

Zoll

Customs

Externes Versandverfahren

External transit procedue

Zolllager

Customs warehouse

Aktive Veredelung

Inward processing

Vorübergehende Verwendung

Temporary use

Verbrauchsteuern

Excise taxes

Lohnsteuer

Withholding wage tax

Sozialversicherungsbeiträge

Social security

Sozialversicherungsträger

Socials security agencies

Gesetzliche  Kankenkassen

Social health insurance agencies

Grundsteuer

Real estate tax

Grunderwerbsteuer

Real estate transfer tax

Author: Peter Scheller, Steuerberater, Master of International Taxation, Fachberater für Zölle und Verbrauchsteuern

Bildquelle: www.fotalia.com

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