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On the first level, corporations – such as the stock corporation (AG) and limited liability company (GmbH) – are subject to corporate income tax (Körperschaftssteuer), whereas partnerships and sole proprietorships are subject to personal income tax (Einkommensteuer). Both taxes are levied by the federal government.
On the second level, all business operations - corporations and partnerships alike - are subject to the trade tax (Gewerbesteuer), which is imposed by local municipalities (i.e. the town or city where the company is based).
Our model calculation shows how the overall tax burden for corporations and partnerships is determined.
Corporate income tax (Körperschaftssteuer) applies to all corporations such as the limited liability company (GmbH) or the stock corporation (AG).
On January 1, 2008, Germany’s reform of company taxation came into effect reducing the tax burden for all companies.
The reform’s core element is a nearly one-quarter reduction of the average tax burden for corporations. The standard corporate income tax rate has been reduced by ten percent from 25 percent to 15 percent on all corporation taxable earnings resulting in an overall tax burden of less than 30 percent.
Corporate income tax applies to both retained and distributed profits. However, once profits are distributed to shareholders, the shareholders must, in turn, pay final withholding tax (Abgeltungsteuer) at a rate of 25 percent (as of 2009) on these profits (i.e. dividends).
If a German subsidiary pays out dividends to a foreign parent corporation, generally a withholding tax (Kapitalertragsteuer) of 25 percent is due. In case there is a double taxation agreement between Germany and a foreign state, this withholding tax can be refunded to a certain extent, according to the rules set out in the double taxation agreement (There usually is a reduction concerningthe tax rate, e.g. tax rate of only 5, 10 or 15 percent.)
As of 2009, a refunding of 2/5 of the deducted withholding tax will be possible irrespective of any existing double taxation agreement.
In addition to corporate income tax, the solidarity surcharge (Solidaritätszuschlag) is also added. This was introduced in 1995 to finance German reunification. The surcharge is 5.5 percent of the assessed amount of corporate and personal income tax. Accordingly, the solidarity surcharge is 5.5 percent of the 15 percent corporate income tax, adding up to a combined corporate income tax + solidarity surcharge burden of 15.825 percent.
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