The principal taxes applicable to companies in Germany are corporate income tax, municipal trade tax, value-added tax (VAT) and personal income tax. In addition, a solidarity surcharge on corporate income tax is levied to finance Germany’s reunification. Germany does not have a constant nationwide trade tax rate, since municipalities offer different tax rates. 

Corporate companies, such as the limited liability company (GmbH), based in Germany or with an executive board in Germany are liable to corporate income tax on globally generated income. Corporate companies who are not based in Germany nor have an executive board in Germany are only liable to corporate income tax on income generated inside Germany. Basically, limited liability companies are required to pay corporate income tax plus solidarity surcharge and municipal tax.

Corporate Income Tax

All companies incorporated in the country are liable for the corporate tax. The basis of taxation for corporation tax is the income which the corporation has made within the fiscal year. The determination of the taxable income is based on the results of the commercial accounting according to the German Commercial Code (HGB). Under German commercial law, corporate company annual profit is calculated according to the accrual basis accounting method. This is recorded in the annual financial statement and forms the basis for determining taxable income.

Corporate income tax is levied as a flat nationwide tax at a rate of 15 % of taxable corporate income. Also, a solidarity surcharge is added on top of the corporate income tax. The surcharge is 5.5 % of the 15 % corporate income tax; creating a total of 0.825 % of taxable income. Thus, corporate income tax and solidarity surcharge add up to a total of 15.825 percent.

Tax declaration obligations

Generally, companies must pay corporate tax in advance once per quarter year to their assigned tax office. An annual statement is made with the corporate tax return after the end of the calendar year.

The deadline for the submission of corporation tax return for the preceding calendar year is by 31 May. In general, the deadlines for the advance payments are March 10, June 10, September 10 and December 10. 

Trade Tax

All business operations in Germany are liable to pay trade tax irrespective of their legal form. Permanent branches of foreign businesses are subject to trade tax as well. The trade tax is determined by local authorities which means it can vary for each municipality. The tax rate varies, but in major cities averages between 14% and 17% of trade tax income, although in some cities it can be as high as 19%. Therefore, the overall tax burden can differ by up to 10 percent between locations.

Trade tax is based on taxable income as calculated for corporate income tax purposes. Trade tax is a local tax and is charged on a yearly basis. The solidarity surcharge is not levied on trade tax.

Trade Tax Rates

The respective rate of trade tax relies on two main factors:

   – The tax base rate (3,5% throughout Germany)

   – The multiplier (stipulated individually by each municipality)

The taxable income of the company is multiplied with the tax base rate (3.5 percent) which results in the so-called tax base amount. The tax base amount is then multiplied with the corresponding municipal multiplier; which results in a total of trade tax which is due.

The multiplier is set by each municipality. In general, the municipal trade tax multiplier rate in Germany ranges from 200% to 490%, for instance, Berlin has 410%, Dusseldorf has 440%, Hamburg has 470%. It is generally higher in urban areas than it is in rural areas.

Trade Tax Calculation

The tax base amount is calculated by multiplying your company’s taxable income with the tax rate 3,5%. The next step would be to multiply the so-called tax base amount with the respective municipal multiplier.

Trade Income = (Profit including tax-related additions and deductions) x 3.5% x Municipal Multiplier

Example for various cities in Germany: Suppose that a company has generated EUR 100,000 trade income:

Düsseldorf   : EUR 100,000 x 3.5% x 440% = EUR 15,400

Hamburg     : EUR 100,000 x 3.5% x 470% = EUR 16,450

Berlin            : EUR 100,000 x 3.5% x 410% = EUR 14,350

Calculating “Total Tax Burden” of a Company

      1.     Corporation tax (15 %)

      2.     Solidarity surcharge (0,825 %)

      3.     Trade tax (on average 14 %, but rates vary for each municipality)

For instance, suppose that a GmbH based in Dusseldorf generates a taxable profit of 100,000 Euro in a financial year.

Taxable Profit                      : 100,000 Euro

Corporate Tax                     : 15,000 Euro

Solidarity Surcharge         : 825 Euro

Trade Tax Düsseldorf        : 15,400 Euro

Total Tax Burden           : 31,225 Euro

Reducing tax liability is a top priority for every business owner. But in order to mitigate tax burden without breaking the law, investors are required to know basic terms of taxation. 

Tax Avoidance vs. Tax Evasion

Tax avoidance is the legitimate way of lessening tax burden through lawful methods specified in the tax law. These methods include all available deductions and allows you to shelter your income from taxes, which are often called as “tax shields“. These tax avoidance strategies are used as protection against higher taxes.

Tax evasion, on the other hand, is the illegitimate practice of not paying taxes, by not reporting income or reporting unallowed expenses not legally allowed. One of the common tax evasion instances is failing to pay turn over taxes to the proper tax authorities. Mainly, failing to report income, providing false information about business income or expenses, or deliberately understating your taxes obligation are also consider tax evasion. Tax fraud is basically the same as tax evasion, because it refers to act of deceiving or misleading about income or expenses.

Avoiding Tax Evasion Charges 

One of the best ways to avoid being charged with tax evasion is to be familiar with existing tax laws, learning what deductions are legitimate, and what records you have to keep for deductions in case of an auditing process.

Hire a diligent and reliable tax professional who can help you lower your tax burden while complying with the tax laws and regulations. Also, keep a good record of all your income and expenses, and be cautious about practices that constitutes tax evasion.