This country-specific Q&A provides an overview to tax laws and regulations that may occur in Germany.
It will cover witholding tax, transfer pricing, the OECD model, GAAR, tax disputes and an overview of the jurisdictional regulatory authorities.
This Q&A is part of the global guide to Tax. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/tax
How often is tax law amended and what are the processes for such amendments?
In Germany there is usually at least one major annual tax act, which includes a variety of changes to different tax laws. In addition, there might be specific acts which amend or introduce a singular rule or provision. Moreover, amendments to tax law are sometimes hidden in bills, which predominantly deal with other areas of law.
The consultation process in connection with the implementation of new tax laws is generally public. Several institutions and interest groups usually get the opportunity to comment on the draft bill and to make proposals for changes. Furthermore, there are hearings or consultations during the legislature process, which give experts in science or economy the possibility to raise theirs concerns.
In addition, German tax law is strongly influenced by decrees of the Federal Finance Ministry, which are continuously published throughout the year, and by case law of the Federal Tax Court.
What are the principal procedural obligations of a taxpayer, that is, the maintenance of records over what period and how regularly must it file a return or accounts?
In Germany, the principal procedural obligation of a taxpayer is to file annual tax returns. Returns have to be filed no later than 31 May of the following year or if the return is prepared with the assistance of a professional tax advisor no later than 31 December of the following year. Since salary and wages are subject to employer tax withhold and reporting, often employees are not obliged to file an income tax return, provided they have not received any income from sources other than dependent services.
As a matter of principle, tax relevant records have to be kept and stored for six years but this period may be longer if the assessment period for the relevant tax has not yet expired after the end of the six years. Depending on the nature of the records and whether or not the records relate to business income, more specific rules apply. For private individual taxpayers the record keeping rules are not that strict.
Who are the key regulatory authorities? How easy is it to deal with them and how long does it take to resolve standard issues?
The highest authority dealing with tax matters in Germany is the Federal Ministry of Finance. Another authority at the federal level is the Federal Central Tax Office (Bundeszentralamt für Steuer), which predominantly deals with international tax matters. At state level each of the federal states (Bundesländer) has a State Ministry of Finance. In addition, several regional tax authorities exist at the state level (Oberste Finanzbehörden der Länder). At the local level the tax offices (Finanzämter) deal with the day to day tax matters of the taxpayers, in particular with processing and reviewing the tax returns, issuing tax assessment notices, collecting the taxes and handling appeals. The officials of the local tax office are usually accessible during office hours and often open to resolve minor issues in a rather informal and cooperative way. The local tax offices are also responsible for dealing with applications for binding tax rulings (Anträge auf verbindliche Auskünfte). If a tax matter is more complex, of particular importance due to the amounts involved or affects a multitude of taxpayers the case may be escalated to a higher authority, in exceptional cases even up to the Federal Ministry of Finance. In such a case the taxpayer should factor in several months until the matter is resolved.
Are tax disputes capable of adjudication by a court, tribunal or body independent of the tax authority, and how long should a taxpayer expect such proceedings to take?
Yes, in case the appeal procedure at the administrative level is not successful, the taxpayer may file a court action with the responsible local tax court. The appellate court and highest German court dealing with tax matters is the Federal Tax Court (Bundesfinanzhof). Decisions of a local tax court can be appealed at the Federal Tax Court, if an approval for such an appeal is granted by the local tax court or an action against the denial of such an approval at the Federal Tax Court was successful.
According to the information published for 2013 by the Federal Statistical Office, the average duration of a dispute at a local tax court was approximately 16 months. Disputes at the Federal Tax Court typically take another one or two years before a final decision on the appeal is rendered.
Are there set dates for payment of tax, provisionally or in arrears, and what happens with amounts of tax in dispute with the regulatory authority?
Income tax and corporate income tax prepayments are due on 10 March, 10 June, 10 September and 10 December. Trade tax prepayments are due on 15 February, 15 May, 15 August and 15 November. The amount of the prepayment is generally determined on the basis of an income estimation for which the income of the previous years is relevant. Not all taxpayers are, however, obliged to make prepayments.
Generally, appealing a tax assessment does not avoid that the underlying tax becomes due and enforceable. Only in case of a suspension of payment (Aussetzung der Vollziehung), the taxpayer does not have to pay the assessed taxes during the time the appeal is pending. The suspended tax is, however, subject to statutory interest of 0.5% per month (i.e. 6% per annum) during the time the payment obligation is suspended. To the extent the appeal is successful and the tax is eventually reduced, no interest has to be paid.
Is taxpayer data recognised as highly confidential and adequately safeguarded against disclosure to third parties, including other parts of the Government?
Generally yes. Pursuant to Sec. 30 of the German Tax Code (Abgabenordnung), German tax authorities have to observe the tax secrecy principle. This means that in general they are not allowed to disclose to other persons facts or circumstances that become known to them in a tax procedure. There are certain exceptions from the tax secrecy principle, for example if disclosing facts and circumstances serves to pursue criminal proceedings unrelated to tax.
It should be noted, however, that Germany has concluded a multitude of bilateral double tax treaties and agreements on the exchange of information with other countries under which the authorities shall assist each other through exchange of information that is relevant to the administration and enforcement of the respective tax laws. The information that can be exchanged under such treaties and agreements for example includes information that is relevant to the determination, assessment and collection of taxes, the recovery and enforcement of tax claims, or the investigation or prosecution of tax matters.
Due to OECD BEPS recommendations, the rights of the authorities to exchange taxpayer data will be further broadened, e.g. with respect to the exchange of tax rulings or country-by-country reporting.
Is it a signatory (or does it propose to become a signatory) to the Common Reporting Standard? And/or does it maintain (or intend to maintain) a public Register of beneficial ownership?
Yes, Germany is a signatory of the Common Reporting Standard and has implemented it in national law.
A public register of beneficial ownership is not part of the implementation. However, the exchange of information has increased recently and still increases based on the implementation of the OECD BEPS recommendations, changes at the level of the EU and FATCA.
Are there any plans for the implementation of the OECD BEPs recommendations and if so, which ones?
Even before the BEPS discussion gained momentum at the OECD and the EU, Germany had already adopted many rules that are now part of the OECD recommendations. For example, Germany has already operated for many years broad CFC-rules, an interest deduction barrier (Zinsschranke) and several anti hybrid-rules, just to name a few. In addition, Germany is currently in the process of adopting new laws, which implement some of the OECD recommendations (in particular, introducing country-by-country reporting and enhancing tax transparency).
Is there a GAAR and, if so, how is it applied?
Yes, German tax law operates a GAAR. As a matter of principle, it shall not be possible to circumvent tax legislation by abusing legal structuring options (Missbrauch von rechtlichen Gestaltungsmöglichkeiten). Abuse of law shall be given, if an inappropriate legal structure is chosen that results in tax advantages for the taxpayer or another person that are not foreseen by law compared to an appropriate legal structure. No abuse of law shall in contrast be given, if the taxpayer demonstrates the existence of non-tax reasons for the chosen legal structure, which are - according to the overall picture of the individual case - of relevance. In tax audits tax authorities frequently try to challenge structures that they regard as aggressive as abusive based on the GAAR. Local tax courts and the Federal Tax Court also apply the GAAR, but generally less extensive than the German tax authorities.
Does the tax system broadly follow the recognised OECD Model?
Does it have taxation of; a) business profits, b) employment income and pensions, c) VAT (or other indirect tax), d) savings income and royalties, e) income from land, f) capital gains, g) stamp and/or capital duties.
If so, what are the current rates and are they flat or graduated?
a. Taxation of business profits
Business profits derived by a corporation are subject to corporate income tax at a rate of 15% plus solidarity surcharge of 5.5% on the corporate income tax owed. In addition, trade tax is levied on business profits of a corporation. The trade tax rate depends on the municipality in which the business is located and is typically between 7% and 17.5%.
Business profits derived by individuals are subject to personal income tax at a progressive rate going up to a maximum rate of 45% plus solidarity surcharge of 5.5% on the income tax owed and church tax, if applicable, of up to 9% on the income tax owed. Trade tax only applies, if the taxpayer maintains a permanent establishment in Germany through which the trade or business is carried on in Germany. For individual taxpayers (a part of) the trade tax can be credited against the personal income tax liability.
b. Taxation of employment income and pensions
Employment income is taxed at progressive rates going up to 45% plus solidarity surcharge of 5.5% on the income tax owed and church tax, if applicable, of up to 9% on the income tax owed. Pension income is subject to the same rates but may benefit from a partial tax exemption. Income tax on employment income is levied through employer wage tax withholding.
c. VAT (or other indirect tax)
Supplies of goods and services are generally subject to VAT. The standard German VAT rate is 19%. For some goods and services, reduced rates of 7% or exemptions may apply.
d. Taxation of savings income and royalties
Income from capital investments, such as interest income, earned by private individuals is taxed at a flat rate of 25% plus solidarity surcharge of 5.5% on the income tax owed and church tax, if applicable, of up to 9% on the income tax owed. If favourable, the taxpayer may opt for applying the individual rate also to income from capital investments. The flat tax on the capital investment income is typically collected by way of withholding at source.
Income from leasing and letting, including royalty income from licensing out rights, earned by private individuals is taxed at the progressive individual tax rate going up to 45% plus solidarity surcharge of 5.5% on the income tax owed and church tax, if applicable, of up to 9% on the income tax owed.
e. Taxation of income from land
Income from leasing and letting of immovable property earned by private individuals is taxed at the progressive individual tax rate going up to 45% plus solidarity surcharge of 5.5% on the income tax owed and church tax, if applicable, of up to 9% on the income tax owed.
f. Taxation of capital gains
Capital gains derived by private individuals from the sale of shares or other financial instruments generally qualify as income from capital investments and are taxed at a flat rate of 25% plus solidarity surcharge and, if applicable, church tax. If the individual holds or has held at any time within the last five years 1% or more in the share capital of the corporation the shares of which are sold or has held the shares disposed of as business assets, 60% of the capital gain is generally subject to personal income tax at the progressive rate going up to 45%. Capital gains derived by private individuals from the disposal of immovable property are generally only taxable if the time period between acquisition of the property and its disposal is not longer than 10 years.
Capital gains derived by corporations qualify as business income taxed at ordinary corporate income tax and trade tax rates. Capital gains from the disposal of shares by corporate shareholders are, however, generally exempt under the German participation exemption. 5% of such capital gain are, however, treated as non-deductible business expenses, effectively reducing the participation exemption to a 95% exemption. Exceptions from the participation exemption apply in certain situations for banks, other financial institutions, insurance companies and pension funds as shareholders. Capital losses from the disposal of shares by a corporate shareholder are, in general, non-deductible.
g. Stamp and/or Capital duties.
Currently, Germany does not levy stamp or capital duties.
Is the charge to business tax levied on, broadly, the revenue profits of a business as computed according to the principles of commercial accountancy?
Yes, the taxable income and, thus, the income tax liability of a business operation in Germany – whether corporate, partnership, single entrepreneur – is derived from its financial accounts established under German generally accepted accounting principles. The annual result according to commercial accounting is the starting point for determining the taxable income. Certain adjustments are however, made to arrive at the profit or loss for tax purposes and finally at the taxable income.
Are different vehicles for carrying on business, such as companies, partnerships, trusts, etc, recognised as taxable entities?
Yes, German tax law recognises differences in entity structures. A partnership is fiscally transparent for income tax purposes, so that the business profits generated by a partnership are allocated to its partners and taxed in the hands of the partners. In contrast, corporations qualify as taxpayers separate and distinct from their shareholders. With view to trade tax, both trading partnerships and corporations are generally liable to trade tax.
Is liability to business taxation based upon a concepts of fiscal residence or registration?
German tax law distinguishes between unlimited resident taxation and limited non-resident taxation. A corporation is subject to “unlimited” resident taxation, if it has its statutory seat or place of effective management in Germany. Individuals are in turn liable to unlimited resident taxation in Germany, if they have a residence or their place of habitual abode in Germany. German resident taxpayers have to tax their worldwide income in Germany, except to the extent certain parts of income are exempt from German taxation, for example on the basis of a double taxation treaty. Non-resident taxpayers are only taxed on their income from German sources, for example business income derived through a permanent establishment maintained in Germany.
Are there any special taxation regimes, such as enterprise zones or favourable tax regimes for financial services or co-ordination centres, etc?
Generally speaking, Germany does not have specific enterprise zones or favourable tax regimes for financial services enterprises or co-ordination centres. However, German tax law foresees a number of special rules for financial institutions, e.g. with view to VAT, withholding taxes and the availability of the participation exemption. Moreover, when investing in Germany, the trade tax rate may play a role as to the question where to establish the business. Trade tax is levied by the local municipality, where the business is located. Some municipalities have trade tax rates, which are below 10% (minimum is 7%). There is no maximum rate, but virtually no municipality has a trade tax rate higher than 17.5%. In terms of indirect taxes, Helgoland and Büsingen are zones where VAT and duty free shopping is possible.
Are there any particular tax regimes applicable to intellectual property, such as patent box?
No, Germany does not have a specific tax regime for intellectual property such as a patent box.
Is fiscal consolidation employed or a recognition of groups of corporates for tax purposes and are there any jurisdictional limitations on what can constitute a group for tax purposes? Is a group contribution system employed or how can losses be relieved across group companies otherwise?
Yes, Germany allows the pooling of income and losses among members of a fiscal unity (Organschaft) . The prerequisites for establishing an Organschaft are quite complex and formalistic. It is inter alia required that the controlled subsidiary and the controlling parent enter into profit and loss pooling agreement with a minimum term of five years that is actually performed for so long it is in place. During the minimum term the profit and loss pooling agreement may only be terminated for good cause.
If an Organschaft is in place, the (positive or negative) taxable income of the controlled entity is attributed to the controlling parent company and taxed at the level of the parent. Therefore, a liability to pay income taxes typically only arises at the level of the controlling parent. The controlled subsidiary is, however, secondarily liable for those taxes of the controlling parent, for which the Organschaft between the two entities is relevant from a tax perspective.
Is there a CFC or Thin Cap regime?
Yes, Germany operates a tight CFC regime and the interest barrier limits the deductibility of interest expenses.
Under the German CFC rules, income of a controlled foreign corporation is subject to taxation in Germany in the hands of the German shareholder if (and to the extent):
- more than 50% of the shares in a foreign entity are (directly or indirectly) held by German tax residents (the threshold is reduced to 1% in the case of passive income with capital investment character);
- the foreign entity derives income from activities other than certain privileged activities (i.e., passive income); and
- this passive income is subject to low taxation in the foreign state (i.e., at a rate of less than 25%).
The German CFC-rules not only apply to foreign subsidiaries directly held by German taxpayers but also to lower tier companies. As a matter of principle, low taxed passive income generated by controlled foreign corporations that have their statutory seat or place of effective management in a member state of the EU/EEA shall not give rise to a CFC inclusion in Germany, if and to the extent the German resident shareholders demonstrate that such controlled foreign corporation pursues an actual economic activity with respect to the relevant income in the foreign EU/EEA member state and that the arm's length principle has been observed.
The deductibility of interest expenses in Germany is limited by the so-called interest barrier. Under this rule the net interest expense (interest expense less interest income) of a business is deductible only up to 30% of the Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) of the business as specifically calculated for tax purposes. This so called taxable EBITDA can deviate substantially from the EBITDA as determined under financial accounting (e.g. in case of tax exempt income, such as dividends, which are part of the financial EBITDA but not of the taxable EBITDA). Any interest expense that is not deductible under the interest barrier can be carried forward into future tax years, as can unused EBITDA-amounts (the latter up to five years only). There are several exemptions from the interest barrier rules, one of which applies for business with a net interest expense below EUR 3m in a tax year. The Federal Tax Court recently argued that the interest barrier is in violation of the German constitution and submitted this question to the Federal Constitutional Court for a final decision.
Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?
Yes, generally speaking, prices and terms and conditions agreed on for transactions between related parties will be accepted for tax purposes only in cases where the arm’s-length principle is met. Specific statutory regulations outline how the arm’s-length principle has to be applied. For example, the law provides for the statutory prioritization of the comparable uncontrolled price, resale minus and cost plus methods. If, possibly after adjustments, the values obtained are fully comparable with the tested transaction prices, the full range of such arm’s-length values can be used. There are also specific rules on determining the hypothetical arm’s-length price for the transfer of functions (business restructurings in OECD terminology).
Germany has statutory transfer pricing documentation requirements. Documentation must be presented upon request by the tax authorities within 60 days in case of ordinary business transactions and within 30 days in case of extraordinary business transactions (e.g., business restructurings). For extraordinary business transactions, transfer pricing documentation has to be prepared contemporaneously. There are penalties in case of failure. The statute also establishes a rebuttable presumption that the income of the German company has been reduced by inappropriate transfer prices. In addition, tax authorities are authorized to adjust transfer prices to the least favorable end of the arm’s-length range. Germany has introduced country-by-country reporting in line with Action 13 of the BEPS project of the OECD at the end of 2016. In addition to the local file, starting 2017, taxpayers have to prepare a master file if its revenue exceeded EUR 100 m in the previous year. The master file shall provide an overview of the group’s worldwide operations and overall transfer price policy.
Both unilateral advance rulings and bilateral /multilateral Advance Pricing Agreements (APAs) are available in Germany. However, the Federal Ministry of Finance issued administrative regulations stipulating that in cases where a double tax treaty contains a clause on mutual agreement procedures with the country of the foreign enterprise, the German taxpayer should not be granted a unilateral advance ruling but advance rulings may only be obtained by way of bilateral APA.
In connection with the implementation of legislative changes based on the OECD BEPS recommendations, Germany just recently introduced rules for the automatic exchange of cross-border tax rulings and APAs on transfer prices between multinational companies. There are no official statements on how the German tax authorities are going to deal with unilateral rulings on transfer prices and APAs in light of the Starbucks and Apple decisions. By law, they have to treat each case individually. A certain level of bias with respect to similar structures can, however, not be ruled out.
Are there any withholding taxes?
Germany levies a variety of withholding taxes. In a business environment the most prominent ones are withholding tax on royalties paid to non-resident taxpayers(rate 15% plus solidarity surcharge), dividend withholding tax (rate 25% plus solidarity surcharge) and withholding tax on construction services rendered in Germany (15% plus solidarity surcharge). Generally speaking, the aforementioned withholding taxes have to be withheld by the German remuneration debtor, even if a double tax treaty or a European directive provides for relief from the tax, unless a withholding tax exemption certificate has been obtained by the time the relevant payment is made.
The German limitation of benefits provision, which restricts the availability of treaty or directive relief from withholding taxes, has repeatedly been challenged as being in violation of EU law. In July 2016, a local tax court escalated a former version of the German limitation of benefits provision to the European Court of Justice.
Are there any recognised environmental taxes payable by businesses?
Yes. As part of the indirect taxes, there are several excise duties which are imposed on the consumption of resources, such as mineral oil, natural gas, coal or electric current. For some businesses relief from energy duty or electricity duty may be available.
Is dividend income received from resident and/or non-resident companies exempt from tax? If not how is it taxed?
Yes, dividend income received by a domestic or foreign corporation is generally exempt from corporate income tax. However, 5% of the dividend income is deemed to be a non-deductible business expense, thereby effectively reducing the 100% exemption to a 95% exemption. Exceptions from the participation exemption apply in the following situations:
- For dividends received from portfolio shareholdings (less than 10% participation);
- In the event the distributed amounts reduced the tax basis of the distributing entity (e.g., if they are deducted as business expense for tax purposes at the level of the distributing entity); and
- In certain situations for banks, other financial institutions, insurance companies and pension funds as shareholders.
The taxable 5% of the dividend income is taxed at the ordinary corporate income tax rate of 15% plus solidarity surcharge.
For corporate taxpayers the 95% exemption for dividend income generally also applies for trade tax purposes subject to the additional requirements that:
- the shareholder receiving the dividend holds a participation of at least 15% in the distributing entities from the beginning of the fiscal year in which the distributions are made; and
- the distributing entities generate their gross income exclusively or almost exclusively from certain qualifying active business activities.
For distributions made by companies that have their statutory seat and place of effective management in the EU the participation threshold is principally reduced to 10% and the activity requirement for dividend income should not apply.