Mehmet Akif Özmen | Sworn Financial Advisor - CPA | Founder, CEO
Germany stands out as one of the most attractive business destinations in Europe with its strong economy, central location and opportunities for entrepreneurs. However, it is of great importance to have information about the tax system for entrepreneurs who want to establish a company or do business here. Although the tax system in Germany may seem complicated with its varying practices depending on the type of company, various tax types and obligations, it is possible to benefit from the advantages of this system with the right roadmap.
In this article, we have brought together the most up-to-date and necessary information on the German tax system for entrepreneurs who want to do business in Germany. When stepping into the business world full of opportunities in Germany, you can make an advantageous start with a solid tax knowledge.
Basic Principles of the German Tax System
The German tax system offers a comprehensive structure for both individuals and companies based on the principles of fairness, transparency and efficiency. Progressive taxation according to income, different tax rates according to the type of business and international tax treaties are the key elements of the system. Tax liability is applied equally to all, while exemptions and exceptions set by law are clearly defined. Under the principle of fairness, taxpayers with higher incomes pay more tax, while individuals with similar economic status have similar tax obligations. The ability to pay tax principle ensures that taxpayers are taxed according to their income, wealth and consumption levels.
One of the cornerstones of the system is the principle of legality of taxation; taxes can only be determined by law and cannot be changed arbitrarily by the administration. In calculating the tax base, the principle of netting is applied, taking into account business expenses and other deductions. At the same time, the principle of tax neutrality aims to ensure that tax policies do not directly influence economic decisions. While the transparency and comprehensibility of the tax system helps taxpayers to fulfil their obligations easily, the principle of continuity enables long-term planning by ensuring that tax rules do not change frequently.
While tax collection in Germany is carried out in a cost-effective manner, international co-operation and information sharing are of great importance. In line with the principle of social state, higher income groups pay more tax, contributing to the reduction of income inequalities. In addition, sustainable development is supported by applying carbon emission and energy taxes within the scope of environmentally friendly policies. Tax administration accelerates processes through digital systems and prevents tax evasion through audits. Taxpayers, on the other hand, have the right to object to tax decisions and to apply for judicial remedy.
The taxation process is generally based on self-declaration (Selbstveranlagung), i.e. taxpayers are obliged to declare their income and gains. In Germany, the tax authorities (Finanzamt) ensure the proper functioning of the system by supervising the tax obligations of businesses and individuals. Tax administration is shared between federal, state and local governments, which allows the system to be shaped according to regional differences rather than a centralised structure.
An important feature of the tax system in Germany is the various advantages and double taxation agreements provided for international companies and investors. This system, which is in line with European Union regulations, provides a predictable and reliable business environment for both domestic and foreign entrepreneurs.
Main Types of Taxes in Germany for Companies
Corporation Tax (Körperschaftsteuer)
Companies operating in Germany are liable to pay corporate tax on their profits. The corporate tax rate is 15%, plus a solidarity surcharge (Solidaritätszuschlag) of 5.5%. Thus, the total corporate tax rate is calculated as 15.825%.
Trade tax (Gewerbesteuer)
Business tax is a tax levied by local authorities in Germany and is calculated on the profits of companies from their business activities. The rate of trade tax varies from municipality to municipality and usually ranges between 7% and 17%. Trade tax is deductible from corporate income tax.
Important Note: The effective tax rate for companies in Germany is calculated by combining the federal corporate tax rate (15%) with additional taxes imposed by the municipalities, such as the trade tax (Gewerbesteuer) and the solidarity surcharge (Solidaritätszuschlag). Together with these additional taxes, the total effective corporate tax rate is usually around 30 per cent. However, this rate may vary depending on the region in which the company operates and other factors.
VAT (Mehrwertsteuer or Umsatzsteuer)
Value Added Tax (VAT) is a tax levied on goods and services sold in Germany. The standard VAT rate is 19%, with a reduced rate of 7% for certain goods and services (e.g. food, books, hotel services). Small businesses with an annual income of less than EUR 22,000 may be exempt from VAT under the Kleinunternehmerregelung. Companies are obliged to pay VAT to the government for VAT received from their customers and can deduct VAT received from suppliers.
Withholding tax (Quellensteuer)
In Germany, withholding tax is levied on certain types of payments. For example, withholding tax is withheld on income such as dividends, interest payments and licence fees. The standard withholding tax rate is 25%, which increases to 26.375% with the solidarity surcharge. Under double taxation agreements, lower rates may apply for some countries.
Property Tax (Grundsteuer)
In Germany, property owners are obliged to pay property tax. Property tax rates may vary depending on the municipality where the property is located. Property tax is usually calculated annually on the value of the immovable property.
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Taxation of Individual Enterprises in Germany
Individual enterprises refer to persons who run their businesses in Germany on their own behalf. In Germany, individual enterprises (Einzelunternehmen) are generally subject to income tax (Einkommensteuer) and value added tax (Mehrwertsteuer/Umsatzsteuer). Individual entrepreneurs declare their business earnings directly as their personal income and pay progressive income tax on this income.
Income tax rates vary between 0% and 45% depending on annual earnings. For small businesses, a regulation called Kleinunternehmerregelung allows entrepreneurs with an annual turnover of less than EUR 22,000 to be exempt from VAT. However, if this exemption is not preferred, individual entrepreneurs are obliged to apply the standard VAT rates (19% or 7%).
Individual entrepreneurs may also be required to pay trade tax (Gewerbesteuer), which varies according to the municipality in which they are located. However, there is a trade tax exemption for earnings up to EUR 24,500 per year. In Germany, it is recommended that individual entrepreneurs file regular tax returns and manage their accounting processes meticulously.
The ability to deduct losses incurred by companies in their early years from profits in the following years (Verlustvortrag and Verlustrücktrag) is also an important tax advantage. Furthermore, R&D expenditures, investment incentives and regional support programmes offer additional opportunities to reduce the tax burden of companies. Therefore, it is recommended that newly established companies work with a tax advisor to make the best use of tax advantages.
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Explore our comprehensive guide for all the details on starting a business and opening a branch in Germany!
Additional Tax Liabilities for International Companies Operating in Germany
International companies operating in Germany are subject to similar tax obligations as local companies, but may also face additional obligations arising from their international activities. These obligations relate to double taxation, transfer pricing, VAT and other special regulations. Here are important additional tax obligations for international companies operating in Germany:
Double Taxation Agreements (Doppelbesteuerungsabkommen – DBA)
Germany has entered into agreements with many countries to avoid double taxation. Through these agreements, international companies can avoid taxation of the same income both in Germany and in another country. Companies can claim tax refunds or obtain tax exemptions in accordance with the terms of the agreements.
Transfer Pricing (Verrechnungspreise)
International companies must comply with transfer pricing rules for intra-group transactions (e.g. purchase and sale of goods or services, licence fees). Germany has adopted the OECD transfer pricing guidelines. Companies are obliged to prepare transfer pricing documentation and submit it to the tax administration.
Taxation of Foreign Earnings
Companies resident in Germany are liable to tax their worldwide earnings. Earnings from foreign branches or subsidiaries may be subject to double taxation treaties. In some cases, tax exemptions or deductions may apply to foreign earnings.
VAT and Intra-EU Transactions
Germany applies special VAT rules for transactions within the European Union (EU). For supplies of goods and services within the EU, VAT declaration and Intrastat notification may be required. For transactions with countries outside the EU, export and import VAT rules must be observed.
Foreign Capital Rules (Fremdfinanzierungsregeln)
Germany has introduced limitations on interest paid by companies on financing from foreign sources. Interest payments are tax deductible within certain rates and conditions. In case of excessive borrowing, interest payments can be added to the tax base.
Controlled Foreign Company Rules (Hinzurechnungsbesteuerung)
German resident companies may be taxed on the passive income (e.g. interest, rent, licence fees) of their foreign subsidiaries. This rule aims to prevent profit shifting abroad for tax purposes.
Tax on the Digital Economy and Digital Services
Germany may apply special tax rules for international companies offering digital services. Regulations such as the EU’s digital services tax may affect international companies.
Tax Investigations and Documentation
International companies may be subject to more frequent tax inspections in Germany. Comprehensive documentation on transfer pricing, foreign earnings and other international transactions must be prepared.
Permanent Representation (Betriebsstätte)
When foreign companies open a permanent establishment (e.g. branch or office) in Germany, they can be taxed on this establishment. The permanent establishment is considered an independent taxpayer and must file its own tax returns.
EU Tax Harmonisation Rules
Germany has harmonised with the EU’s tax harmonisation directives. For example, the ‘Anti-Tax Avoidance Directive’ (ATAD) seeks to prevent hybrid mismatches, earnings deferral and other tax avoidance methods.
Tax Planning and Structuring
When tax planning in Germany, international companies should comply with the law and avoid aggressive tax avoidance methods. When fulfilling their tax obligations in Germany, they must comply with both local and international regulations. Tax declarations, documentation and payments must be made on time.
Professional tax advisory services help companies to comply with the law and minimise tax risks. By cooperating with tax advisors and lawyers, it is possible to optimise the company’s tax burden.
How to Make a Tax Declaration in Germany?
The tax declaration process in Germany is of great importance for businesses to fulfil their legal obligations. Companies must declare their income and earnings through the Finanzamt (tax office) every year. The tax declaration process is usually carried out via digital platforms and the ELSTER (Elektronische Steuererklärung) system allows companies to submit their declarations online.
Here are some of the main points to be considered when making a tax declaration:
– Annual Tax Declaration: Companies subject to corporation tax and trade tax must file their annual tax return each year within the deadline set after the close of the financial year.
– Value Added Tax (VAT) Declaration: Companies subject to VAT are obliged to file VAT returns on a monthly or quarterly basis. For small businesses, this process can also be carried out annually.
– Advance Tax Payments: For companies with high revenues, prepayments may need to be made during the year based on the estimated tax amount. This practice is applied to prevent the accumulation of large tax debts.
The timely and complete submission of tax returns is important to avoid possible criminal sanctions. In addition, since tax audits are carried out regularly in Germany, companies are required to keep their financial records meticulously and act in accordance with legal regulations. Due to the complexity of the tax process, it is recommended that businesses work with a tax advisor or financial advisor.
Tax Deductions and Incentives for Companies in Germany
Germany offers various tax advantages to support the growth of companies and innovation. The country, which attaches particular importance to R&D activities, provides significant tax deductions to companies working in this field. A portion of the expenses incurred to develop new products, processes or services can be deducted from the tax base. In addition, patent protection expenses can also benefit from tax advantages.
Investment incentives are another factor that attracts companies in Germany. There are additional tax deductions especially for investments made in the eastern regions and in the renewable energy sector. Incentives for environmentally friendly technologies also support companies in achieving their sustainability goals. There are also special tax breaks and grant programmes for SMEs.
Companies in Germany can also benefit from funds and grants from the European Union. In particular, the EU supports companies investing in areas such as digitalisation, green energy and innovation. These incentives encourage entrepreneurs to develop more sustainable and innovative business models in Germany.
Advantages and Challenges of the Tax System in Germany
The tax system in Germany offers several advantages for both domestic and foreign entrepreneurs. Firstly, the system is transparent and predictable, making it easier for companies to carry out long-term financial planning. Tax regulations are clearly defined and digital tax filing systems (such as ELSTER) make transactions fast and efficient. Furthermore, R&D incentives, investment incentives and special tax advantages for certain sectors make it attractive to start a business in Germany. In particular, double taxation agreements provide a significant advantage for businesses operating internationally.
However, Germany’s tax system brings some challenges. High tax rates can increase costs, especially for small and medium-sized enterprises (SMEs). Corporate tax, value added tax (VAT) and income tax rates are higher than in other European countries. Moreover, the complexity of tax legislation may cause businesses to incur additional costs and bureaucratic burdens in the harmonisation process. As financial transactions and accounting records need to be meticulously maintained, companies often need professional tax advisors.
In general, while the tax system in Germany provides a stable and reliable business environment, high tax rates and complex legal processes are among the elements that need to be considered for businesses. Therefore, it is important for entrepreneurs planning to do business in Germany to make strategic planning with expert support in order to make the most of the opportunities offered by the tax system.
Tax Audits and Criminal Sanctions in Germany
The tax system in Germany is highly regulated and tax evasion is considered a serious offence. Therefore, the tax authorities regularly audit companies. During audits, the financial records of companies are examined in detail and it is checked whether the tax base is calculated correctly. Companies caught in tax evasion may face serious consequences.
Both administrative and criminal sanctions can be imposed as penalties for tax evasion. Administrative sanctions include additional tax, delay interest, tax penalties and tax assessment. Criminal sanctions are more severe and may result in imprisonment, fines and ban from commercial activity.
Being prepared for tax audits helps companies minimise the risks they may face. Companies can protect themselves by keeping detailed and up-to-date records, following tax legislation and getting support from a tax advisor.
What Can We Do For You?
As MHR & Partners, we are directly and indirectly active in more than 20 countries worldwide. We aim to operate with 10 branches in 100 countries in 10 years. We offer you end-to-end consultancy and support services in establishing a company, obtaining a residence permit, and in all operational processes abroad, primarily financial issues.
Our priority is to provide consultancy services to companies with a growth vision and business strategy abroad. We attach particular importance to the uninterrupted continuation of our services with the assurance of MHR & Partners (Mühür YMM AŞ) after the company establishment stages. Our core mission is to be a safe harbor and provide sustainable services.
We want to be a bridge to our customers’ business plans for growth and development, even in the most remote parts of the world.
To establish a business in Turkey or Europe (Germany, The Netherlands, Belgium, UK, Romania, Bulgaria, Montenegro), you can contact Sworn-in Certified Public Accountant Mehmet Akif Özmen directly (+90 542 830 3408 or akif.ozmen@mhrpartner.com).
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