Companies Liable to Corporate Income Tax
Any corporate company such as the limited liability company (GmbH) or the stock corporation (AG), which is based in Germany or has an executive board in Germany, is liable to pay corporate income tax on the income that they generate worldwide. Any dividends that are earned and taxed abroad may be exempt from corporate income tax or the tax which was paid abroad can instead be offset as an expense against any taxable income in Germany. Any corporate company which is not based in Germany and doesn't have an executive board in Germany is only liable to pay corporate income tax on the income that is earned nationally (i.e. within Germany via a permanent establishment, dividends or licenses).
Corporate Income Tax Base
Taxable income (i.e. the annual profit of the business) is the basis for any corporate income tax which is due. Under the German commercial law, any corporate company should calculate their annual profit using the accrual basis of accounting. This is then recorded and shared through their annual financial statements and will form the basis for calculating the taxable income for the corporation. However, it's important to note that German tax law provides different accounting options and income correction rules, which mean that the taxable income often will differ from the annual profit which is released in the financial statements. For more information on this topic you should refer to our chapter on tax deductions or contact us directly.
Corporate Income Tax Rate
The corporate income tax that the business must pay is levied as a flat nationwide tax rate of 15% on the taxable income. In addition to this the company must also pay a solidarity surcharge (Solidaritätszuschlag) on top of any corporate income tax. This surcharge was introduced in 1995 in an attempt to finance the reunification of Germany. The surcharge itself is currently set at 5.5% of the 15% corporate income tax; meaning a total surcharge of 0.825% on any taxable income. Therefore, corporate income tax and the solidarity surcharge come to a total of 15.825% on any taxable income.
Taxation of Dividends
If any German subsidiary company were to distribute its profits to its corporate foreign parent company (a dividend payment) then they would face a 25% withholding tax (Kapitalertragssteuer) which is payable in Germany. In the event that the corporation is taxed twice (DTA) by the Federal Republic of Germany and another country, then the sum of the withholding tax that is paid can then be reimbursed in accordance with the agreements made in the DTA. As a general rule, dividend payments that are in accordance with the DTA are taxed at a reduced rate of taxation of 5, 10 or 15 percent. At a partial level there is also the possibility that the corporation will be initially exempt from the withholding tax. This withholding tax is paid in Germany and it can also be used to credit against the tax liability of the parent company which is based abroad or the parent company will be made exempt from the withholding taxation in regard to the dividends it received. This essentially means that no double taxation will take place. In the some cases, 2/5th's of the withholding tax which is paid can be reimbursed if the creditor of the dividend paying German corporation is a corporation based abroad and there is also no DTA between Germany and the foreign country. Within the European Union, any dividend payments made between a corporate subsidiary company in Germany and a foreign parent company will be tax-free over a 10% stake.
Profits which are distributed via a dividend to any private stock-owners are liable to a withholding tax (Abgeltungssteuer) of 25%, plus the standard solidarity surcharge. The final withholding tax will be retained by the debtor of the paid dividend or the institution which manages the deposit (i.e. a bank) and is then to be paid to the tax office. However, the application of any DTA can sometimes lead to a lower withholding tax if the private stock-owner resides in a foreign country.