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German Coporate Tax Treaty 2010

Taxes 2010

• Corporate tax rate: 15 %
• Surplus tax: 5.5 % of the 15%
• Trade tax rate: 3.5 %
• Multiplier for trade tax in Frankfurt: 460% of the 3.5%

German Corporate Tax

There is a standard corporation tax rate of 25 percent for both a company's retained (undistributed) profit and its distributed profits.

However, if profits are distributed to shareholders, the shareholders must in turn pay income tax on these profits. The "half-income system" is used to reduce this double taxation burden. In this procedure, the shareholder only has to pay further taxation on 50 percent of the dividends and profit payouts. As a result, after payout to the shareholder, only this 50 percent is subject to income tax, whereas the other half remains tax-free.

Example:

For a dividend payout of 100,000 euros the corporation tax is 25 percent = 25,000 euros. Of the remaining 75,000 euros, the company transfers withholding tax of 20 percent – i.e. a further 15,000 euros to the tax authority before the payout is made to the shareholder.

However, this withholding tax counts as an advance payment for the shareholder's income tax once the dividend has been paid out, and therefore added again when the shareholder's income tax is calculated.

Of the remaining 75,000 euros to be assessed after the dividend payment, only 50 percent = 37,500 euros are subject to income tax, the other 37,500 euros are tax-free. Supposing the income tax rate to be 35 percent, this would lead to income tax of 13,125 euros on the taxable half.

This is then offset against the withholding tax of 15,000 euros deducted before the dividend payment, resulting in a tax rebate of 1,875 euros from the tax authority. Ultimately, therefore, the shareholder receives an amount of 61,875 euros after tax has been deducted.

 

Trade Tax

The trade tax on income (Gewerbeertragsteuer) is based on the federal Trade Tax Act, but is levied by the local authorities (Finanzamt). A German Finanzamt is allowed to adjust their own trade tax rate depending on how high its industry is, therefore its area is beeing commercialized. The trade tax deduction on income usually ranges between 9 % and 20 % of the business income. Trade tax is also deductible as an expense against taxable income within the year of assessment.

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