Doing Business in Germany
by Prof. Dr. Dieter Endres, Service Line Leader Tax & Andrew Miles Tax Editorial Board of PricewaterhouseCoopers AG, Germany
For decades, Germany has been a country with a highly developed, high-cost, economy. The opportunities - but also the risks - of a German investment are therefore numerous, real and calculable. On the positive side, Germany offers the foreign investor exciting national and international marketing and business perspectives. These are inextricably linked to the long-standing commitment to European integration and to the traditionally strong business and cultural ties to most other European countries. The cultured, highly trained and educated working population provides the medium for turning these perspectives to practical advantage.
The downside to this is that costs - and especially employment costs - when measured in terms of wage rates, social security and other charges levied on employers - are comparatively high. Investment success in Germany is thus dependent on a carefully planned, sophisticated operation. In this sense, Germany is very much an “up-market” country.
The German investment climate, both inward and outward, is both open and complex. Over the past few years, much has been done to encourage further investment, and more is planned. However, the complexity remains, so any encouragement measures benefit mostly those with a carefully considered investment structure. The article below has been adapted from our business guide “Doing Business and Investing in Germany” which gives those planning investments, in or from Germany, the necessary insight to determine their own specific areas of interest. The guide can be found at www.pwc.de. Any reader who would like a more detailed discussion of any of the subjects dealt with herein is cordially invited to contact a partner in any of our German offices.
Prof. Dr. Dieter Endres
Service line leader Tax
Taxation of corporations
Taxes, rates and total burden, accounting principles on which taxable income is based, variations for trade tax, losses, tax groups, transfer pricing and related and third party finance, special features of branches and anti-abuse provisions
Tax rates and total tax burden
German business profits are subject to two taxes, trade tax and then to income or corporation tax. The income or corporation tax is subject to a surcharge, the so-called “solidarity surcharge”, of 5.5% of the amount due.
All businesses are subject to trade tax regardless of their legal form. The basis of assessment is the taxable income derived from the before tax accounting profit under rules applicable throughout Germany. This basis is determined centrally by the tax office responsible for the company’s German taxation (the place of German management). The tax office then allocates this to the various local authorities where the company has business establishments, generally in proportion to the total wages paid to the employees in each. Special rules apply to German permanent establishments without employees, such as pipelines passing through Germany, but operated and controlled from abroad. Each local authority then issues its own notice of assessment to the taxpayer, that is, it charges its share of the overall basis of assessment to trade tax at its own local rate. The local authorities are also responsible for collection of trade tax.
Foreign corporations may freely repatriate their German branch profits, other forms of permanent establishment income, or profit shares from their partnership holdings without further taxation.
Trade tax rates of larger towns generally fall within the range of 14.5-17%. Those of smaller towns and country districts are usually between 12% and 16%, although there are a few isolated instances of local authorities with rates of lower than 12%. The legal minimum rate is 7%. Tax-rate competition between town and country tends to be overshadowed by the other distinctions between the two (rents and other costs are often more expensive in the towns, although communications are frequently better). However, there may well be a noticeable trade tax advantage in locating a factory, warehouse or similar facility immediately beyond the city limits rather than just inside them.
A company’s profit is then subject to corporation tax. Profits earned by individuals are charged to income tax. Partnerships pay trade tax in their own right but then allocate the taxable income to their partners in a profit-sharing ratio. The partners are then subject to corporation or income tax on their profit shares as their own trading income.
Corporation tax is levied at 15% on both domestic and foreign corporations. Thus, there is no difference in the rate of corporation tax levied on the profits of a German GmbH and that levied on those of the German branch (or partnership share) of a foreign corporation.
Foreign corporations may freely repatriate their German branch profits, other forms of permanent establishment income, or profit shares from their partnership holdings without further taxation. There is no form of “branch profits tax” or other substitute for a dividend withholding tax. Dividends repatriated by companies are subject to a dividend withholding tax, which will be a final burden from the German point of view, unless the recipient of the dividend is a German tax-resident corporation or natural person.
The domestic rate of dividend withholding tax is 20% plus the solidarity surcharge. Almost all the German tax treaties reduce this to 5%, 10% or 15% on dividends paid to foreign corporate shareholders with at least a 25% holding in the German company. The Swiss and - for holdings of at least 80% - US treaties waive it altogether. Treaty provisions not withstanding, the EU Parent/Subsidiary Directive exempts dividends paid by a German corporation to a shareholder incorporated in another EU country holding at least 10% for an uninterrupted period of at least 12 months. This period does not have to be completed before the dividend is paid; any withholding tax initially levied will be refunded, once the minimum period has expired.