Taxation in Germany: Corporate tax, Trade tax, VAT, Payroll and other German taxes
We often get questions from our clients about taxation of GmbH and UG companies and German tax rates. The topic of taxes of GmbH and taxes of UG is very important and just as complicated. In this article and the below video we’ll explain the main aspects of taxation in Germany. However we strongly recommend that you get an individual consultation from a tax advisor in Germany, since it is not only a matter of personal material liability of the managing director, it might also be a matter of criminal liability.
The information in this article will be true for GmbHs as well as UGs. For convenience, we will refer to both types of companies as GmbH here.
Being a corporation and therefore a legal entity, a GmbH is subject to taxation in Germany with its profit. Moreover, the managing director of a GmbH has a personal liability and also must fulfil tax obligations. Even if he or she is not one of the shareholders of the company. As mentioned before, it is not only a matter of the material liability, it might also be a matter of criminal liability.
Let’s see the main German taxes that a GmbH is subject to (business taxes in Germany).
Taxation in Germany
1. Corporation tax / Corporate tax in Germany (Körperschaftsteuer)
The corporation or corporate tax in Germany (Körperschaftsteuer) is one of the main taxes. The German corporate tax rate is 15%.
It is important to understand that a GmbH pays taxes not from the turnover but from its profit. Which means that if the turnover of the GmbH amounted to 100 000 euros, and the expenses are 90 000 euro, then the part subject to taxation in Germany is: 100 000 – 90 000 = 10 000 euros.
There are also many tax deductions: rent, personnel salary, business trips, costs of materials, outside services and even the managing director’s salary. The list of deductables is quite long. A good tax consultant in Germany can legally essentially minimize the tax base. By the way, the cost of tax adviser services that you outsource is deductable from the tax base as well.
2. Trade tax in Germany (Gewerbesteuer)
The trade tax in Germany (Gewerbesteuer) is calculated on a basis of the “trade income”. Again, there are many tax deductions that can be applied. The total trade tax rate depends on the area the GmbH is registered in and varies from 7% to 17%. The average trade tax in Germany is around 14-15%.
We are often contacted by foreign entrepreneurs who ask us to register a company in Germany for them. To the question in what city they’d like to have the company registered, many of them answer: where the lowest German taxes are.
Let’s talk about it.
1. Firstly, the trade tax in Germany is paid not from the turnover, but from the so-called trade income. It means that in order for the taxes to be chargeable from your company it needs to have income. From this follows the next matter.
2. Secondly, as a rule, a relatively low trade tax is in rural areas. Such areas might not be suitable at all for developing a business. It might be impossible to find enough clients and buyers who would need your products and services. There might not be the needed logistics or, for example, finding a place for a storage could be impossible.
When choosing a city to set up a company, you need to take the interests of the business into account in the first place and not the matter of taxation in Germany. You should see if there are the services and logistics you require, if the place has market potential.
3. If you are planning to apply for a residence permit in Germany through business immigration, it is important to keep the needs of the specific region in mind. Because regional demand and the business being beneficial for the region are some of the main requirements for a residence permit through business immigration. If your business is not in demand in the chosen region, you will most likely never manage to get a residence permit there.
We reviewed the requirements to the business for getting a residence permit in Germany as a self-employed in our previous articles and videos. As you can see, German taxes are not the only factor that’s important when choosing where to open your business.
Watch our video about taxation in Germany to learn about German taxes:
3. Solidarity surcharge / Solidarity tax in Germany (Solidaritätszuschlag)
The solidarity tax (Solidaritätszuschlag) amounts to 5.5 % of the corporation tax, capital gains tax and wage tax.
Please note that it is charged from the tax amount. Let’s go back to our example with the corporate tax in Germany: 10 000*15%=1500 euros. Then, the solidarity tax would be as follows: 1500*5.5%=82.5 euros.
4.Non-wage labor costs (Lohnnebenkosten)
This is another important part of taxation in Germany. If you hire an employee, the non-wage labor costs will be deductable from their monthly salary. The non-wage labor costs include constributions to the social security system, pension plans, unemployment insurance and health insurance plans.
It is quite hard to calculate the non-wage labor costs. On average, the part that a GmbH pays amounts to 25-30%. The employee is also charged up to 20% of social security contributions and their salary is subject to the German income tax that depends on the amount of salary and varies from 0% to 45%.
Since the managing director of a GmbH has a personal liability to fulfil tax obligations and understanding all the nuances of the German taxes system is not simple at all, we recommend that you hire an accounting company. Such services are usually outsourced and don’t cost a lot.
When clients register a company in Germany with us, we can refer them to a tax adviser who has a great experience with international clients and takes care not only of payroll tax in Germany (Lohnsteuer) but all tax-related matters. Income and payroll taxes in Germany (Einkommensteuer / Lohnsteuer) vary, so it’s a good idea to have a professional tax adviser on your side.
When talking about German taxes it is worth mentioning that if the managing director of a GmbH who is also a shareholder is considered a self-employed person, then both the managing director and the GmbH can save quite a lot on social security payments. In total, the amount of saving can reach up 40%. In terms of taxation in Germany this is one of the main advantages of business immigration (getting a residence permit as a self-employed) compared to other types of immigration to Germany.
5. Withholding tax in Germany (Abgeltungssteuer)
The withholding tax in Germany (Abgeltungssteuer) is charged from profits that are distributed to private shareholders in form of dividends. It amounts to 25% plus the solidarity surcharge. However in case the private shareholder is a resident of another country and is subject to double taxation, the withholding tax rate might be reduced.
6. VAT in Germany (Umsatzsteuer)
The standard rate of the VAT in Germany in 2021 is currently 19%. Unless the GmbH is considered a Small businesses (Kleinunternehmer) that makes less than 22 000 euros gross per year in their first year of operation and 50 000 euros per year thereafter, it is required to add VAT to its prices. The reduced German VAT rate is 7% and applies to certain services and goods (food, hotel accommodation, local public transport etc).
There are exemptions from the VAT in Germany. We strongly recommend that you contact a tax adviser who will explain all the nuances of taxation in Germany and German tax rates in your particular case, e.g. how you should charge the VAT in Germany (Umsatzsteuer), explain the reverse charge system, tax return in Germany and other crucial aspects. German taxes are quite complicated and should be taken seriously to avoid any issues in the future.
Nexus-Europe GmbH is happy to assist you with opening your own successful business in Germany. We manage complex projects on turn-key basis to make doing business in Germany as comfortable as possible for you. We also help you apply for the German residence permit through business immigration or the EU Blue Card.
This document (and any information accessed through links in this document) is intended for general informational purposes only and is not a substitute for professional advice. Each situation is unique and professional advice should always be obtained before taking or refraining from any action.