“Explore the latest developments in German Income Tax for 2023, including changes influenced by the Russia-Ukraine conflict. With the Indo-German free trade agreement looming, understanding corporate tax intricacies becomes crucial. This comprehensive guide covers aspects like Corporate Income Tax, Trade Tax, Corporate Withholding Tax, Tax Returns, and more. Stay informed about the evolving tax landscape in Germany, Europe’s largest economy, to navigate compliance and leverage potential benefits effectively.”
Recent war between Russia and Ukraine necessitated adequate changes in the corporate income tax of Germany, the largest economy in Europe. With the Indo-German free trade agreement on the anvil, it’s good to acquaint oneself with the intricacies of German income tax, especially the corporate tax with its new developments.
The website of the German tax authority is as follows:
https://www.bzst.de/EN/Private_individuals/Tax_return/tax_return_node.html
Given its industrial prowess, Germany’s corporate income tax receives priority coverage.
Corporate Income Tax
German business profits are subjected to two taxes: corporation tax and trade tax.
The corporation tax is levied at a uniform rate of 15% and then subjected to a surcharge of 5.5% (solidarity surcharge). This culminates in a total tax rate of 15.825%.
Trade Tax
The trade tax rate comprises a uniform tax rate of 3.5% (base rate) combined with a municipal tax rate (Hebesatz), which varies depending on the location of the business’s PEs. Currently, municipalities with a minimum of 80,000 inhabitants have a trade tax ranging from 8.75% (Hebesatz of 250%) to 20.3% (Hebesatz of 580%).
The basis for this tax is the adjusted profit for corporation tax purposes. Specifically, 25% of all financing costs over 200,000 euros (EUR), inclusive of implicit financing costs in leasing, rental, and royalty payments, are added back to taxable income.
If the basis for both taxes is the same, the overall tax burden on corporate profits earned in Munich would be approximately 33%. In Frankfurt, the burden would be 32%, and in Berlin, it might be 30%.
The recent EU energy crisis led to the introduction of the Windfall tax (EU energy crisis solidarity contribution). This is applicable to entities in the oil, natural gas, coal, and refinery sectors during 2022-2023. The supplementary tax rate of 33% is based on a specific calculation, which is not detailed here.
Corporate Withholding Tax
The situation is based on data as of 30 June 2023.
The following taxes are subjected to a WHT, and a solidarity surcharge of 5.5% is also applicable:
| Recipient of German Source income | Dividends | Interest | Royalties (WHT %) |
|---|---|---|---|
| Resident Corporations/individuals | 25 | 0.25 | 0 |
| Non-resident corporations | |||
| EU corporations | 0.25 | 0.25 | 0.15 |
| Non-Treaty corporations | 25 | 0.25 | 15 |
| Non-Treaty individuals | 25 | 0.25 | 15 |
The tax year in Germany adheres to the calendar year.
Tax Returns
Business returns are filed annually and are due by 31 July of the subsequent year. Due to the COVID-19 pandemic, the deadlines for tax returns from 2019 to 2024 have been extended.
Electronic Returns
Returns such as monthly or quarterly ones for WHT from employee salaries, dividends, interest, royalties, and other payments, including annual returns for corporation tax, trade tax, and VAT, are submitted electronically. Financial statements accompanying the above returns are also included in the electronic filing requirements.
Notably, under special procedures for foreign taxable individuals, certain VAT-related reports and applications, like the EC Sales List and VAT refund applications, must be submitted electronically.
Typically, taxes due are payable on a quarterly basis. For quarters ending in March, June, September, and December, payments are due by the 10th of the following month.
For trade tax, the due dates are the 15th day of February, May, August, and November. Failing to pay by the due date, even after a three-day grace period, incurs a penalty of 1% per month.
Assessments for corporation and trade tax incur interest on the net amount payable after the deduction of all credits and previous payments. Generally, the interest period starts 15 months after the year-end for which the taxes are assessed. However, for tax years 2020 through 2024, the interest period has been postponed by two to six months due to the extended filing deadlines because of the COVID-19 pandemic.
Interesting Taxation Titbits
Can companies obtain advanced rulings from tax offices by paying a fee that varies between EUR 266 and EUR 120,721? Yes, they can. This is especially beneficial for large corporations considering significant contracts and potential tax implications. Likewise, the Central Tax Office can negotiate on behalf of a taxpayer with a foreign tax office regarding related inter-party transactions. This is commonly known as the mutual agreement procedure under a treaty, which carries a fee of EUR 30,000.
Statute of Limitations
The statutory limitation period for the issue or correction of assessments is four years from the end of the year in which the return was submitted. If no return was filed, the period begins at the end of the third year following the year of assessment. This four-year period extends to five in cases of taxpayer negligence and to ten in cases of evasion.
The statutory limitation period for collecting tax debts is five years from the end of the year when payment was due.
Important Issues for Tax Authorities
Germany, with its multitude of large corporations with substantial exports and subsidiary/partially-owned entities, can expect extensive field audits of taxpayers. There’s a particular emphasis on transfer pricing transactions, with a special review of documentation to verify the statements of facts provided by taxpayers to support their calculations.
Individual Taxation
Germany is emulating many of its neighbors in the European Union by modernizing its tax system. With the introduction of the tax identification number (IdNo), the Federal Ministry of Finance and the federal government have simplified the taxation procedure and reduced bureaucracy.
Tax ID (IdNo)
You can generally find your IdNo in:
- Your income tax assessment
- Your employment tax statement
- The informational letter from the federal central tax office.
If you can’t find your IdNo in the mentioned documents, you can request it via the Federal Central Tax Office input form or by letter. The IdNo can only be conveyed through the mail for data protection reasons. The IdNo can be sent to an address differing from your registered address only with your written authorization (by letter, accompanied by a valid personal ID).
In Germany, taxes are usually administered by individual federal states. This means a local tax office is generally responsible. In some instances, customs or the BZSt also play a role. The appropriate contact persons for most common types of tax can be found here.
Contact Persons for Most Common Types of Tax
| Type of Tax | Contact Person |
|---|---|
| VAT | Local tax office |
| Income tax | Local tax office |
| Trade tax | Municipal tax office |
| Vehicle tax | Customs |
| Electricity tax | Customs |
| Energy tax | Customs |
Conclusion
The German taxation system is indeed a blend of the traditional and the new. With the largest economy in Europe, it’s vital for businesses and individuals to understand the intricacies of the tax system, ensuring compliance and maximizing benefits.
Author Bio
