Tax System
Germany has a competitive tax system for companies which combine flexibility and simplicity with moderate tax rates.
Companies in Germany are subject to two types of tax that need to be paid. All companies no matter the type of industry are subject to a trade tax, levied by the local municipalities of the city where the company is based. The second type of tax depends on the business form chosen.
Corporations, which include stock corporations and Limited Liability Companies are subject to the so called corporate income tax; partnerships are taxed with the usual individual income tax. This is the same type of tax that is to be paid by every employee, too. The rates are imposed by the federal government.
Individual Income Tax
Individual Income tax instead of corporate income tax is to be paid if the chosen business form is a partnership. The applicable rate is determined by the level of income earned; all earnings bellows € 7,664.00 are exempt from taxation. After that a scaled rate is applied depending on the level of the income. The maximum rate is 45% and is applied if the income from all sources exceeds € 250,000 per year.
Corporate Income Tax
The usual rate to be paid is 15% on all corporation taxable earnings. Taxable earnings include retained and distributed profits.
Unless there is an existing double taxation agreements, dividends of a German subsidiary paid to a foreign parent corporation are subject to an additional tax, the so called withholding tax, the current rate of which is 25%. New Zealand and Germany have a double taxation agreement since 1978.
Trade Tax
Trade tax is to be paid to the local municipalities of the city where a company is based and by all types of businesses in Germany. The applicable tax rate is based on two criteria:
- Assessment Rate: The current rate lies at 3.5% and is the standard trade tax base rate according to the German Trade Tax Code
- Municipal Collection Rate: This rate is individually specified by every municipality and must be at least 200% and can be as high as 490%.
GST
The German abbreviation for GST is MwSt (”Umsatzsteuer”) and stands at 19% for most products / services. However, there are exemptions from taxation, e.g. for financial services, exports, insurance services. A reduced GST rate of 7% is to be applied to all magazines & books, tickets for public transport, certain art objects and a number of groceries that are not beverages or restaurant turnovers.
Foreign companies and entrepreneurs providing the market with goods and services that are subject to GST in Germany have to declare this to the tax authority of their own home country. However, traders who do not trade in Germany but are burdened with the German GST are entitled to a reimbursement and need to run through a refund procedure specifically designed for foreign entrepreneurs.
Tax Returns
Tax returns need to be filed by every taxpayer on an annual basis and are to be submitted to the tax authority. The financial year is equivalent with the calendar year for most businesses; some have their financial year running from October 1 until 30 September the following year. As the German tax system tends to be very complex in comparison to the New Zealand taxation system it is advised to seek the services of a tax consultant to ensure the correct procedures are followed.
