Germany Tax & Business Guide - Deloitte

Basic facts
Population 82.6m Inflation 1.7% (2006)*
Main languages German GDP per head US$36,280*
Currency Euro (ƒ) GDP growth 2.3% (2006)*
Economic communities European Economic Area, EU, WTO, OECD
GDP sources 1.0% agriculture, 29.0% industry, 70.0% services
*Economist Intelligence Unit estimates.
Political environment

Germany is a federation of 16 states (Lânder). Each state has its own constitution, government and independent court. The federal government and parliament are responsible for major legislation on economic policy. The federal parliament comprises a directly elected lower house (Bundestag) and an upper house (Bundesrat), which consists of the representatives of the Lânder governments.

Germany is currently ruled by a coalition of the Christian Democratic Union (CDU), its Bavarian sister party Christian Social Union (CSU) and the Social-democratic Party of Germany (SPD). The government is headed by the chancellor, currently Angela Merkel (CDU).
Foreign trade and investment
Exports US$1.1trn (2006)* Imports US$938.4bn (2006)*
*Economist Intelligence Unit estimates.

Major exports: Motor vehicles, machinery, chemical products, and metals and metal products.

Major export markets: France, the US, the Netherlands and the UK.

Foreign investment that provides new jobs is welcome.
Business and financing
Business forms Joint stock corporation, limited liability company

The most common form of incorporation is the limited liability company (Gesellschaft mit beschrânkter HaftungÛGmbH), followed by the joint stock corporation (AktiengesellschaftÛAG). Procedures for forming an AG are complicated. Generally, no permit is required to establish a business.

Foreign firms often rely on the major domestic commercial banks for capital.

Frankfurt is the centre of German finance.
Labour environment
Unemployment rate 10.8% (2006)* Minimum wage No statutory wage
*Economist intelligence Unit estimate.

Each industry agrees on minimum wages in regular collective-bargaining talks.

Social security contributions and fringe benefits are substantial.

Direct entry with a subsequent long-term stay is legally impossible for almost all non-European Economic Area (EEA) foreign workers who do not arrive with a job offer from a firm in Germany and a visa acquired abroad.
Taxation
Corporate tax
Main rate Total effective tax rate, 38Ò40% (including surcharge and trade tax)

Companies with a registered or administrative office in Germany are subject to corporate income tax on their worldwide income; non-resident companies pay tax only on German-source income. The federal tax rate is 25% plus a 5.5% solidarity surcharge. Municipal trade tax also applies, based on taxable income but with some adjustments. Trade tax is determined by applying a multiplier to the basic rate of 5%, rates in the main cities being 20Ò25%. Trade tax is deductible both from its own tax base and for corporate tax purposes.

The corporate income tax rate and the trade tax rate may be reduced under a corporate tax reform expected to become effective from January 1st 2008 to a combined effective tax rate of approximately 30%.
Individual tax
Progressive rates up to 42% (45% for income exceeding ƒ250,000 for single/ƒ500,000 for couples) plus solidarity surcharge

Resident individuals are taxed on their worldwide income; non-residents are taxed only on some German-source income. An individual is resident if the person has a home or a habitual place of abode (that is, where a person is physically present for more than six months) in Germany. Individuals are subject to progressive tax rates up to 42% plus a 5.5% solidarity surcharge (44.3% including the solidarity surcharge). The top income tax rate is 45% (47.5% including the solidarity surcharge) from January 1st 2007 for income exceeding ƒ 250,000 (single) and ƒ 500,000 (couples). Individuals in business are also subject to trade tax, which is, however, generally creditable against individual income tax. Individuals are taxed on 50% of dividends received.
Capital gains
Company gains taxed as income

Capital gains of businesses are taxed as income, with a 95% exemption for gains on the sale of most shareholdings by companies. Individuals are taxed on only 50% of capital gains from shares. Gains by individuals on the sale of non-business property are generally only taxable if the property is sold within a certain period of time after acquisition.
Indirect tax
Standard rate 19% Lower rates 7%, 0%

Value-added tax (VAT) applies to most transactions at the 19% standard rate. A 7% lower rate applies to food, public transport, books and newspapers, and other items. Exports are zero-rated. Exempt transactions include certain financial transactions and services, medical and educational services, and transactions covered by the real estate tax.

Registration is compulsory for businesses, but there is a special regime for small companies.
Tax administration and compliance
Tax year Corporations: accounting year; Individuals: calendar year

Companies must make four quarterly payments of advance tax. Tax returns, accompanied by financial statements, are due by May 31st following the end of the tax year, but this deadline can be extended to December 31st (or February 28th of the following year upon special application). An assessment is then raised by the tax authorities and the final balance of tax is payable within one month from receipt of the assessment. Employment income of individuals is taxed by way of withholding.
Additional tax information
Withholding taxes Dividends 21.1%, Interest generally 0%, Royalties 21.1%. Rates can be reduced by tax treaties or EU directives.
Tax treaties Germany has concluded more than 90 tax treaties.
Dividends Companies have a 95% exemption on dividends received; individuals are taxed on only 50% of dividends.
Revenue protection There is transfer-pricing, thin-capitalisation, offshore subsidiary (CFC) and anti-treaty shopping legislation.
Groups Organschaft for financially integrated companies.
Incentives Investment in former East Germany; investment by small businesses.
Other taxes Municipal trade tax, Municipal real estate tax, Real estate transfer tax, Solidarity surcharge.