Corporate tax in Germany

Summary

Corporate Income Tax Rate (%) 15 (a)
Trade Tax Rate (Average Rate) (%) 14
Capital Gains Tax Rate (%) 15 (a)
Branch Tax Rate (%) 15 (a)
Withholding Tax (%)
Dividends 25 (a) (b) (c) (d)
Interest 0 (e) (f)
Royalties from Patents, Know-how, etc. 15 (a) (b) (f) (g) (h)
Remuneration to Members of a Supervisory Board 30 (h)
Payments for Construction Work 15 (a) (b)
Branch Remittance Tax 0
Net Operating Losses (Years)
Carryback 1 (.i)
Carryforward Unlimited (j)

a) A 5.5% solidarity surcharge is imposed (see Section B).

b) On application, these rates may be reduced by tax treaties.

c) This withholding tax applies to dividends paid to residents and nonresidents. Under the 2009 Annual Tax Act, for dividends paid to nonresident corporate entities, this rate may be reduced to 15% if the nonresident dividend recipient qualifies as an eligible recipient under the German anti-treaty shopping rules.

d) These rates may be reduced under the European Union (EU) Parent-Subsidiary Directive. Under the EU Parent-Subsidiary Directive, on application, a with­holding tax rate of 0% applies to dividends distributed by a German subsidiary to an EU parent company if the recipient has owned 10% or more of the share capital of the subsidiary for a continuous period of 12 months at the time the dividend distribution takes place and if the German anti-treaty shopping rules do not apply.

e) A 25% interest withholding tax is imposed on the following types of interest:

  • Interest paid by financial institutions. The rate is 15% if the loan is not recorded in a public debt register.
  • Interest from over-the-counter business. Over-the-counter business refers to bank transactions carried out over the bank counter, without the securi­ties being on deposit at the bank.
  • Interest from certain types of profit-participating and convertible debt instruments.

The interest withholding tax is not imposed on intercompany loans. Non­residents may apply for a refund of the withholding tax if a treaty exemption applies. If a nonresident is required to file an income tax return in Germany, the withholding tax is credited against the assessed corporate income tax or refunded.

f) These rates may be reduced by tax treaties or under the EU Interest-Royalty Directive. Under the EU Interest-Royalty Directive, on application, German withholding tax is not imposed on interest and royalties paid by a German resident company to an associated company located in another EU member state. To qualify as associated companies, a minimum 25% share holding or a common parent is required, among other requirements.

g) The withholding tax rate on royalties from patents, know-how and similar items is 15% for payments to nonresident corporations if such items are registered in Germany or used in a German permanent establishment.

h) This withholding tax applies to payments to nonresidents only.

i) The loss carryback, which is optional, is available for corporate income tax purposes, but not for trade income tax purposes. The maximum carryback is EUR1 million.

j) The carryforward applies for both corporate income tax and trade tax purposes. Effective for tax years ending after 31 December 2003, the maximum loss car-ryforward that may be used for corporate and trade tax purposes is restricted to EUR1 million for each tax year plus 60% of annual taxable income ex­ceeding EUR1 million (so-called minimum taxation). The carryforward is subject to the change-of-ownership rule (see Section C).

Taxes on corporate income and gains

Corporate income tax. Corporations, such as stock corporations (Aktiengesellschaft, or AG) and limited liability companies (Gesellschaft mit beschraenkter Haftung, or GmbH), that have their corporate seat or place of management in Germany (resi­dent corporations) are subject to corporate income tax (Koerperschaftsteuer) on worldwide income, unless otherwise provided in tax treaties.

A nonresident corporation, whose corporate seat and place of management are located outside Germany, is subject to corporate income tax only on income derived from German sources. Income from German sources includes, among other items, business in come from operations in the country through a branch, office or other permanent establishment, including a permanent repre­sentative, and income derived from the leasing and disposal of real estate located in Germany.

Rates of corporate income tax. Corporate income tax is imposed at a rate of 15% on taxable income, regardless of whether the in­come is distributed or retained.

A 5.5% solidarity surcharge is imposed on corporate income tax, resulting in an effective tax rate of 15.825%. Prepayments of cor­porate income tax and withholding tax payments are also subject to this surcharge.

Companies that continue to have a corporate income tax credit balance resulting from retained earnings taxed in the years for which the imputation tax credit system applied (generally, 2000 and earlier years) receive a refund of this remaining balance in 10 equal amounts during the period of 2008 through 2017.

Companies that continue to have untaxed equity (known as “EK 02”) made up of various amounts of tax-free income generated in the years for which the imputation tax credit system applied (generally, 2000 and earlier years) must pay tax on this untaxed equity at a rate of 3%. Companies must pay this amount of addi­tional tax in 10 equal installments from 2008 to 2017 or as a one­time payment on a discounted basis.

Trade tax. Municipalities impose a trade tax on income. However, for purposes of this tax, taxable income is subject to certain ad­justments. The major adjustments include a 25% add-back of in­terest expenses with respect to debt, a 6.25% add-back of license payments, a 5% add-back of lease payments for movable assets and a 12.5% add-back of lease payments for immovable assets. The effective average trade tax rate amounts to approximately 14%. Taking into account the various municipality multipliers, the combined average tax rate for corporations (including corpo­rate income tax, solidarity surcharge and trade tax) ranges from approximately 23% to 33%.

If a company operates in several municipalities, the tax base is allocated according to the payroll paid at each site. Certain enter­prises, such as specified banks and real estate companies, receive privileged treatment under the trade tax law.

Withholding tax on construction work. Taxpayers and entities that are corporate bodies under public law (for example, cities and municipal ities) must withhold a tax of 15% from payments made for construction work provided in Germany. The tax must be withheld even if the work provider does not have a tax presence in the form of a permanent establishment or permanent represen­tative in Ger many unless the work provider obtains a “certificate of non-taxation” from the competent tax office. Construction work providers may obtain a refund of the withholding tax if they can prove that no German tax liability against which the with­holding tax could be applied exists.

Capital gains and losses. Capital gains of corporations, except those derived from sales of shares, are treated as ordinary in come. However, rollover relief is granted if gains derived from disposals of real estate are reinvested in real estate within the following four years and if certain other conditions are met.

Capital gains derived by corporations from sales of shares in cor­porations are generally exempt from corporate income tax and trade tax. Five percent of the capital gain is deemed to be a non­deductible expense. As a result, the exemption is effectively lim­ited to 95% of the capital gain. This should also apply to nonresident corporate sellers if they have owned at least 1% of the capital stock of a German company at any time during the five years preceding the sale and if the nonresident seller cannot claim treaty protection. Under a recently proposed change to the law that is at an early stage of the legislative process, gains would become fully taxable if the corporate seller of the participation does not hold a minimum shareholding in the disposed company of at least 10% at the beginning of the calendar year (similar regulations apply to dividends). This change would apply to disposals taking place after 31 December 2017.

The 95% tax exemption for capital gains received by a corporate shareholder is not granted to banks, financial services institutions and financial enterprises (including holding companies) that purchase shares with the intention of realizing short-term profits for their own account.

However, to the extent that write-downs of the shares have previ­ously been deducted for tax purposes, capital gains from sales of shares are not exempt.

Capital gains derived from the disposal of tainted shares are, in principle, 95% exempt from tax. Tainted shares may result from corporate reorganizations (for example, contributions of qualify­ing businesses or partnership interests into corporations in return for shares or share swaps) that are carried out at tax book values or below fair market values. The subsequent disposal of the tainted shares results in a (full or partial) retroactive taxation of the origi­nal reorganization that gave rise to the share taint. In general, after a seven-year holding period, the shares lose their taint.

In general, capital losses are deductible. However, capital losses are not deductible if a gain resulting from the underlying trans­action would have been exempt from tax. Consequently, capital losses from sales of shares or write-downs on shares are not de­ductible. In addition, capital losses and write-downs on loans to related parties may not be deductible under certain circumstances.

Administration. The tax year is the calendar year. If a company adopts an accounting period that deviates from the calendar year, tax is assessed for the taxable income in the accounting period ending within the calendar year. The adoption of a tax year other than the calendar year requires the consent of the tax office.

Annual tax returns must be filed by 31 May of the year following the tax year. However, an extension to 31 December of the year following the tax year is usually granted if a licensed tax consul­tant prepares the return.

Payments made with respect to the estimated corporate income tax liability, usually determined at one-quarter of the liability for the previous year, are due on 10 March, 10 June, 10 September and 10 December. Prepayments of trade tax are due on 15 Febru­ary, 15 May, 15 August and 15 November. Final payments are due one month after the tax assessment notice issued by the tax authorities is received by the taxpayer.

Late tax payments and tax refunds are generally subject to inter­est of 0.5% per month. Interest begins to accrue 15 months after the end of the calendar year for which the tax is assessed. The interest is not deductible for corporate income and trade tax pur­poses if the tax itself is not deductible. Late payment penalties are also charg ed at 1% a month if the unpaid balance is not settled within one month from the date of the assessment notice issued by the tax office. A penalty of up to 10% of the tax liability, but not more than EUR25,000, can be assessed if the tax return is not filed by the due date, including extensions granted.

Dividends. Dividends received by German corporations and branch­es of nonresident corporations from their German and foreign corporate subsidiaries are exempt from tax. However, effective from 1 March 2013, a minimum shareholding requirement of 10% applies for this participation exemption for corporate income tax purposes. In addition to this domestic rule, an applicable tax treaty may provide for an exemption for foreign dividends. Begin­ning from the 2014 tax year, the tax exemption for dividends is granted only if the dividend payment is not tax-deductible as a business expense at the level of the distributing entity (linking rule).

Five percent of the tax-exempt dividend income is treated as a nondeductible expense, while the expenses actually accrued are deductible. Consequently, only 95% of the dividends received by a corporation is effectively exempt from tax. The 95% tax exemp­tion for dividends received by a corporate shareholder is not grant­ed for portfolio dividends (less than 10% shareholding) or to banks, financial services institutions and financial enterprises (including holding companies) that purchase shares with the in­tention of realizing short-term profits for their own account.

The participation exemption applies for trade tax purposes if the dividends are received from corporations in which the parent holds at least 15% as of 1 January of the calendar year in which the dividend distribution takes place. For dividends from EU cor­porations, the required minimum shareholding is 10%. For divi­dends of third-country corporations, the shares (minimum share­holding of 15%) must be held continuously since 1 January of the calendar year in which the dividend distribution takes place and the subsidiary’s gross income must be realized exclusively or almost exclusively from active business. A tax exemption on the basis of a double tax treaty may apply for trade tax purposes.

Foreign tax relief. Under German domestic tax law, income from foreign sources, except for foreign dividends received by a quali­fying corporate shareholder (see Dividends), is usually taxable, with a credit for the foreign income taxes paid, up to the amount of German tax payable on the foreign-source income, subject to per-country limitations. Excess foreign tax credit cannot be car­ried back or carried forward. In stead of a foreign tax credit, a deduction may be claimed for foreign income tax. This may be beneficial in loss years and in certain other instances. In general, German tax treaties provide for an exemption from German taxa­tion of income from foreign real estate and foreign permanent establishments.

Determination of trading income

General. Taxable income of corporations is based on the annual financial statements prepared under German generally accepted accounting principles (GAAP), subject to numerous adjustments for tax purposes. After the annual financial statements have been filed with the tax authorities, they may be changed only to the ex­tent necessary to comply with GAAP and the tax laws.

Acquired goodwill must be capitalized for tax purposes and may be amortized over 15 years. Intangibles acquired individually must also be capitalized for tax purposes and may be amortized over their useful lives (normally between 5 and 10 years). A com-pany’s own research and development and start-up and formation expenses may not be capitalized for tax purposes. They must be currently expensed.

Inventories. Inventory is basically valued at acquisition cost or production cost, unless a lower value, in terms of the lower of re­production or repurchase cost and market value, is indicated. Under certain conditions, the last-in, first-out (LIFO) method can be used to value inventory assets if the assets are of a similar type.

Provisions. In general, provisions established under German GAAP are accepted for tax purposes. However, in past years, the scope of tax-deductible provisions has been severely limited by certain rules, including, among others, the following:

  • Liabilities or accruals of obligations whose fulfillment is con­tingent on future revenue or profit may be recorded only when the condition occurs.
  • Provisions for foreseeable losses from open contracts may not be capitalized.
  • Future benefits arising in connection with the fulfillment of an obligation must be offset against costs resulting from the obli­gation.
  • Non-monetary obligations may be accrued using the direct cost and the necessary indirect cost.
  • Provisions for obligations resulting from the operation of a business must be built up in equal increments over the period of operation.
  • Provisions for pension obligations must be calculated on an actuarial basis using an interest rate of 6% and built up over the period of employment.

If built-in losses contained in the above provisions or liabilities materialize on their transfer at fair market value, the resulting losses may generally only be deducted for tax purposes over a period of 15 years.

Non-interest-bearing debt must be discounted at an annual rate of 5.5% if the remaining term exceeds 12 months.

Depreciation. For movable assets purchased or produced after 31 December 2007, tax depreciation must be calculated using the straight-line method (as an exception, the declining-balance method could have been applied for movable assets purchased or manufactured between 1 January 2009 and 31 December 2010). Useful lives of movable assets are published by the Federal Ministry of Finance, based primarily on tax audit experience; deviation from published useful life is possible, but requires jus­tification by the taxpayer. Tax depreciation rates for buildings are provided by law. The Federal Ministry of Finance has published tax depreciation rates for movable fixed assets generally usable in trade and industry. Schedules for assets specific to certain in­dustries are also available. The following are some of the straight-line rates under the general list.

Asset Rate (%)
Office equipment 6 to 14
Motor vehicles 16.6
Plant and machinery 6 to 12.5
Airplanes 5
Personal computers or notebooks and related equipment 33.3
Non-residential buildings (offices and factories)
Constructed before 1 January 1925 2.5
Constructed after 31 December 1924
and application for the construction
permit filed before 1 April 1985
2
Application for the construction permit
filed after 31 March 1985
3*

* The rate is 4% if the application for the construction permit was filed or the purchase agreement was dated before 1 January 2001.

Mark-to-market rule. Under a mark-to-market rule, a tax deduc­tion for the write-down of an asset because of a permanent impair­ment in value is allowed only if the value is permanently lower.

This rule is particularly relevant for assets that are not subject to ordinary depreciation, such as land or shares (however, write­downs of shares are not tax effective; see Section B). For assets that have been written down to their going-concern value, the write down must be reversed as soon as and to the extent that the asset has increased in value.

Disallowed items. After income for tax purposes has been deter­mined, certain adjustments need to be made to calculate taxable income. Major adjustments include the following nondeductible expenses:

  • Income taxes (corporate income tax, solidarity surcharge and trade tax) and any interest expense paid with respect to these taxes
  • Interest expenses (see General interest expense limitation)
  • Penalties
  • Fifty percent of supervisory board fees
  • Thirty percent of business meal expenses
  • Gifts to non-employees exceeding EUR35 per person per year and input value-added tax (VAT) regarding such expenses
  • Expenses incurred in direct connection with tax-exempt income items (see the discussion of dividends in Section B)

In addition, as a result of the exemption for capital gains derived from sales of shares (see Section B), losses from sales of shares, write-downs of shares or, under certain circumstances, write­downs on loans to related parties are no longer deductible for tax purposes and must be added back to the tax base.

General interest expense limitation. The interest expense limita­tion rule applies to all loans (that is, group and third-party loans, regardless of recourse) and to businesses resident in Germany, companies residing abroad but maintaining a permanent estab­lishment in Germany, and partnerships with a German branch.

Under the interest expense limitation rule, the deduction of inter­est expense exceeding interest income (net interest expense) is limited to 30% of taxable earnings before (net) interest, tax, de­preciation and amortization (EBITDA). Tax-exempt income and partnership income are not considered in the calculation of the taxable EBITDA.

The limitation rule does not apply if one of the following exemp­tion rules applies:

  • Exemption threshold. The annual net interest expense is less than EUR3 million.
  • Group clause. The company is not a member of a consolidated group (a group of companies that can be consolidated under International Financial Reporting Standards [IFRS]). The group clause does not apply if both of the following circumstances exist:

— A shareholder who, directly or indirectly, holds more than 25% in the corporation or a related party of such share­holder grants a loan to the company.

— The interest exceeds 10% of the company’s net interest expense.

  • Escape clause. The equity ratio of the German subgroup is at least as high as the equity ratio of the worldwide group (within a 2% margin). A “group” is defined as a group of entities that could be consolidated under IFRS, regardless of whether a consolidation has been actually carried out. The equity ratio is calculated on the basis of the IFRS/US GAAP/EU local country GAAP consolidated balance sheet of the ultimate parent. The same accounting standard is applied to a German group but subject to several complex technical adjustments, such as a de­duction for unconsolidated subsidiaries. The access to the es­cape clause is limited in the case of certain loans from non-consolidated shareholders (related party debt exception).

Unused EBITDA can be carried forward over a five-year period. However, the carryforward does not apply if one of the above-mentioned exemptions from the interest expense limitation rule applies or if a positive net interest balance exists. The EBITDA carryforward is forfeited in the course of reorganizations but not under the loss-trafficking rules (see Tax losses).

Nondeductible interest expense can be carried forward indefinitely but is subject to the loss-trafficking rules (see Tax losses). A deduc­tion is possible in the following years in accordance with the inter­est expense limitation rules. The nondeductibility is final in the case of a transfer, merger, termination or liquidation of the busi­ness or in the case of a permanent excess of limitation amounts (that is, net interest expense is permanently higher than 30% of the taxable EBITDA and the exemption clauses are not fulfilled; as a result, the deduction of all of the interest expense is perma­nently not achievable).

The interest expense limitation rules may be incompatible with German constitutional law according to the German Federal Tax Court, which has recently referred the case to the German Consti­tutional Court.

Constructive distributions of income. Adjustments to taxable in­come as a result of a violation of arm’s-length principles are deemed to be constructive distributions of income (see the dis­cussion of transfer pricing in Section E).

Tax losses. Tax losses may be carried forward without time limi­tation. Under the restrictions of the so-called minimum taxation, only 60% of annual taxable profits in excess of EUR1 million can be offset by loss carryforwards. As a result, 40% of the por­tion of profit exceeding EUR1 million is subject to tax.

This tax loss carryforward rule applies for both corporate income tax purposes and trade tax purposes. For corporate income tax (not trade tax) purposes, an optional loss carryback is permitted for one year up to the maximum amount of EUR1 million.

Under the German loss-trafficking rule, tax loss carryforwards are forfeited proportionally if, within a five-year period, more than 25% of the shares of a loss-making entity are directly or indirectly transferred to a single new shareholder or a group of shareholders. If, within a five-year period, more than 50% of the shares are transferred, the entire loss carryforward is forfeited. To prevent abuse of the rule, the rule includes a measure under which investors with common interests and acting together are deemed to be one acquirer for the purposes of the rule.

The following exceptions apply to the loss-trafficking rule:

  • Insolvency restructuring exception (under suspension). For share transfers after 31 December 2007, the loss-trafficking rule does not apply if the intention for the transfer of the shares is the removal or prevention of the insolvency or overindebtedness of the loss-making company and if the structural integrity of the company remains unchanged. The application of the exception is currently suspended because the European Commis sion con­siders the exception to be unlawful state aid.
  • Group restructuring exception. A transfer of shares is not con­sidered to be harmful if it occurs within a “100% controlled group.” A group is considered to be a “100% controlled group” if, after a direct or indirect transfer, the same person owns di­rectly or indirectly 100% of the transferor and transferee, or if the acquirer is holding all of the shares in the seller of the shares or the seller is holding all of the shares in the acquirer of the shares. This recently expanded group restructuring exception applies to all transfers of shares taking place in assessment pe­riods beginning after 31 December 2009.
  • Built-in gain exception. For harmful share transfers, a loss carry-forward is not forfeited up to the amount of built-in gains to the extent that these built-in gains are taxable in Germany. Conse­quently, built-in gains allocable to subsidiaries are not taken into account; see the discussion of capital gains and losses in Section B.

Loss carryforwards are also forfeited in the course of a merger, change of legal form and liquidation of the loss-making company.

Groups of companies. German tax law provides a tax consolidation for a German group of companies (Organschaft), which allows losses of group companies to be offset against profits of other group companies. Only German resident companies in which the parent company has held directly or indirectly the majority of the voting rights since the beginning of the fiscal year of the subsid­iary may be included (this requirement is known as financial in­tegration). A tax consolidation may cover corporate income tax, trade tax and VAT. To make the Organschaft effective for corpo­rate in come tax and trade tax purposes, the parent company and the German subsidiaries must enter into a profit-and-loss absorp­tion agreement (Gewinnabfuehrungsvertrag) for a minimum pe­riod of five years. Partnerships do not qualify as sub sidiaries in an Organschaft.

An Organschaft subsidiary must have its place of management in Germany and its legal seat in Germany or an EU/European Eco­nomic Area member state.

A domestic or foreign corporation, individual or partnership may become the head of an Organschaft if, in addition to the above requirements, the following requirements are met:

  • The company has an active trade or business (generally assumed for corporations).
  • The investments in the subsidiaries are assets of a German branch.
  • The branch profits (including the income of the subsidiaries) are subject to German taxation for both domestic direct tax and tax treaty purposes.

The Organschaft for VAT requires the following:

  • Financial integration (see above).
  • Economic integration of the lower-tier entities. Economic inte­gration exists if the business activities of the members of the group complement each other.
  • Integration in organizational matters. Organizational integra­tion exists if the group parent is able to impose its will on the group members and does so in the day-to-day business.

In contrast to the other Organschaft forms, Organschaft for VAT can begin and end during the course of the fiscal year.

Other significant taxes

The following table summarizes other significant taxes.

Nature of tax Rate (%)
Real property tax, on assessed standard value
of real property; rate varies by municipality
0.65 to 2.83
Real estate transfer tax (RETT), on sales and
transfers of real property, including buildings,
and on certain transactions that are deemed
to be equivalent to transfers of real property,
such as the assignment of at least 95% of the
shares of a German or foreign company that
holds the title to domestic real property (however,
a group exception may apply); levied on the
purchase price of the real property or, in certain
situations (such as when at least 95% of the
shares of a real estate-owning company are
transferred), on the assessed standard value
of the real property
Rate for real estate located in Bavaria and Saxony 3.5
Rate for real estate located in Hamburg 4.5
Rate for real estate located in Baden-Württemberg, Bremen, Lower Saxony, Mecklenburg-West Pomerania, Rhineland-Palatinate, Saxony-Anhalt
and Thuringia
5
Rate for real estate located in Berlin and Hesse 6
Rate for real estate located in Brandenburg,
North Rhine-Westphalia, Saarland and
Schleswig-Holstein
6.5
Value-added tax (VAT or Umsatzsteuer); on
application, foreign enterprises may receive
refunds of German VAT paid if they are neither
established nor registered for VAT purposes in
Germany; this application must be filed by non-EU
enterprises by 30 June and by EU enterprises
by 30 September, in the year following the year
in which the invoice was received by the claimant)
Standard rate 19
Reduced rate 7

Miscellaneous matters

Foreign losses. In principle, losses incurred by foreign permanent establishments are not deductible if a German tax treaty provides that a permanent establishment’s income is taxable only in the country where it is located. However, these losses may be taken into account if they are incurred in non-treaty countries or if a tax treaty provides for the credit method, subject to the condition that the foreign branch is engaged in a specified active trade.

Based on German Federal Court decisions, an EU branch’s losses are, in principle, deductible in Germany if the losses cannot be utilized for actual reasons in the respective EU country. These so-called final losses should be allowed, for example, if the branch is sold or transferred to another company, closed down or con­verted into a corporation. However, losses do not qualify as final if they cannot be utilized in the EU country because they are for­feited or have expired under the EU country’s loss carryforward regulations. In addition, the German tax authorities refuse to grant the deduction of EU branch losses, and such cases will need to be litigated.

Foreign-exchange controls. No controls are imposed on the trans­fer of money in and out of Germany. However, specific reporting requirements for certain transactions must be met.

Debt-to-equity rules. The interest expense limitation rule (see Section C) replaced the former thin-capitalization rules. Conse­quently, no statutory debt-to-equity ratio currently applies.

Anti-avoidance legislation. Several tax laws contain anti-avoidance legislation. The Corporate Income Tax Act deals with construc­tive dividends by corporations, both in Germany and abroad. The Foreign Transactions Tax Act deals with all kinds of related or affiliated taxpayers, such as individuals, partnerships and corpo­rations, and is restricted to cross-border transactions. It contains extensive provisions on controlled foreign company (CFC) and passive foreign investment company income. The General Tax Code contains a general anti-abuse rule stating that a tax liability cannot be effectively avoided by an abuse of legal forms and methods if obtaining a tax advantage is the only reason for such an arrangement.

The Income Tax Act provides anti-abuse rules that are aimed at preventing the unjustified reduction of German withholding taxes under a tax treaty, under the EU Parent-Subsidiary Directive or under the EU Interest-Royalty Directive (treaty or directive shop­ping). Effective from 1 January 2012, the German anti-treaty-shopping rule was changed to conform to EU law. How ever, the increased substance requirement must still be fulfilled (see Sec­tion F).

Germany’s newer tax treaties include “switch-over” clauses as well as “subject-to-tax” clauses. Domestic treaty-overriding rules, which are aimed at preventing double non-taxation, also exist.

Transfer pricing. German tax law contains a set of rules that allow the adjustment of transfer prices. These rules include general mea­sures on constructive dividend payments and constructive con­tributions and a specific adjustment provision in the CFC legis­lation. All of the measures mentioned in the preceding sentence are based on the arm’s-length principle. Germany has imple­mented the Authorized Organisation for Economic Co-operation and Development (OECD) Approach (AOA). As a result, perma­nent establishments and partnerships are now treated as separate entities, as corporations are treated.

The Foreign Transactions Tax Act now expressly provides that the preferential bases for determining the transfer price are the standard-pricing methods (comparable uncontrolled price meth­od, resale-minus method and cost-plus method) if comparable transactions can be determined. In addition, the code contains express language with respect to the determination of the arm’s-length character of a transfer price if no comparables can be found. Effective from 1 January 2008, a special set of rules directed at securing the German tax revenue have been incorporated into the code. These rules deal with the determination of transfer prices in the event of a transfer of business functions abroad.

Specific documentation rules apply for transfer-pricing purposes. On request of a tax auditor, the taxpayer is required to submit the transfer-pricing documentation within 60 days (in the case of ex­traordinary business transactions, within 30 days). Non-compliance with these rules may result in a penalty of EUR100 per day of delay up to a maximum of EUR1 million. If no documentation is provided or if the documentation is unusable or insufficient, a surcharge of 5% to 10% of the income adjustment is applied with a minimum surcharge of EUR5,000.

Real estate investment trusts. Effective from 1 January 2007, Germany introduced the real estate investment trust (REIT), which is a tax-exempt entity. In general, an REIT is a listed German stock corporation (AG) that satisfies certain conditions, including, but not limited to, the following:

  • It has a free float (volume of shares traded on the stock ex – change) at the time of listing of at least 25%.
  • Its real estate assets account for at least 75% of its gross assets.
  • Rental income from real estate accounts for at least 75% of its total income.
  • Ninety percent of its income is distributed to its shareholders.

Mutual assistance. Germany exchanges tax-relevant information with various countries based on tax treaties, other bilateral agree­ments (for example, the Foreign Account Tax Compliance Act [FATCA] agreement between Germany and the United States) and the EU Mutual Assistance Directive. The directive has been incorporated into German law and will allow exchange of infor­mation within the EU from 1 January 2015 for the 2014 tax year and subsequent tax years.

Treaty withholding tax rates

The rates listed below reflect the lower of the treaty rate, the rate under domestic tax law or the rate under the EU Parent-Subsidiary Directive, which has been incorporated into the German Income Tax Act (Section 43b ITA).

Under the amended German anti-treaty shopping rules, effective from 1 January 2012, tax relief is denied if and to the extent that the foreign company does not earn its gross income from its own economic activities and if at least one of the following two condi­tions is met:

  • For income not resulting from the foreign company’s own eco­nomic activity, no economic or other relevant reason exists to interpose the foreign company.
  • The foreign company does not participate in the general market­place with appropriately equipped business premises.

In addition, a foreign company not earning its gross income from its own economic activities has the burden of proof that the above-mentioned conditions are not met and, as a result, the withholding tax relief should be granted; that is, the foreign company has the burden of proof with respect to the existence of economic or other relevant reasons for its interposition and the burden of proof with respect to its business substance. If a foreign company earns its gross income from genuine economic activities, no business pur­pose test or substance test as mentioned above is required for the application of the tax relief under a treaty or an EU directive. If a foreign company earns income from both genuine economic ac­tivities and non-genuine economic activities and if, with respect to the non-genuine business activities, the business purpose and substance tests are met, the foreign company can obtain tax relief under EU law and/or the applicable tax treaty, regardless of the fulfillment of any percentage threshold for the income from genu­ine economic activities. If either of the conditions is not met, then the relief is denied for the income from non-genuine economic activities.

Dividends (1)

%

Interest (2)

%

Royalties

%

Albania 5 (y) 5 5
Algeria 5 (y) 10 (e) 10
Argentina 15 (c) 15 (d)(e)(f) 15
Australia 15 10 (e) 10
Austria 0 (y)(ii) 0 0
Azerbaijan 5 (c)(y) 10 (d)(o) 5/10 (nn)
Bangladesh 15 (c) 10 (d)(e) 10
Belarus 5 (c)(y) 5 (d)(e)(f) 3 (t)
Belgium 0 (ii) 15 (h) 0
Bolivia 10 (c) 15 (d)(e) 15
Bulgaria 0 (c)(y)(ii) 5 (d) 5
Canada 5 (c)(y) 10 (d)(e)(i) 10 (q)(r)
China (u) 10 (c) 10 (d)(e) 10 (r)
Côte d’Ivoire 15 (c) 15 (d)(e) 10
Croatia 5 (c)(y) 0 (d) 0
Cyprus 0 (y)(ii) 0 0
Czechoslovakia (ff) 0 (y)(ii) 0 5
Denmark 0 (y)(ii) 0 0
Ecuador 15 15 (e)(f) 15
Egypt 15 (c) 15 (d)(e)(bb) 15 (p)
Estonia 0 (c)(y)(ii) 10 (d)(e) 10 (r)
Finland 0 (c)(y)(ii) 0 (d) 5 (t)
France 0 (c)(y)(ii) 0 (d) 0
Georgia 0 (c)(y) 0 (d) 0
Ghana 5 (c)(y) 10 (d)(e) 8
Greece 0 (ii) 10 (e) 0 (n)
Hungary 0 (c)(y)(ii) 0 (d) 0
Iceland (s) 5 (y) 0 0
India 10 (c) 10 (d)(e) 10
Indonesia 10 (c)(y) 10 (d)(e) 15 (cc)(ee)
Iran 15 (y) 15 (e) 10
Ireland 0 (a)(y)(ii) 0 (a) 0 (a)
Israel 25 (a)(oo)(pp) 15 (a)(e) 5 (a)(q)
Italy 0 (c)(y)(ii) 10 (d)(e) 5 (q)
Jamaica 10 (y) 12.5 (e)(k) 10
Japan 15 (c) 10 (d)(e) 10

 

Dividends (1)

%

Interest (2)

%

Royalties

%

Kazakhstan 5 (c)(y) 10 (d)(e)(ll) 10
Kenya 15 15 (e) 15
Korea (South) 5 (c)(y) 10 (d)(e) 10 (r)
Kuwait 5 (c)(y) 0 (d) 10
Kyrgyzstan 5 (c)(y) 5 (d)(e) 10
Latvia 0 (c)(y)(ii) 10 (b)(d)(e) 10 (r)
Liberia 10 (y) 20 (e)(k) 10 (v)
Liechtenstein 0 (qq) 0 0
Lithuania 0 (c)(y)(ii) 10 (b)(d)(e) 10 (r)
Luxembourg 0 (y)(ii) 0 5
Macedonia 5 (c)(y) 5 (d) 5
Malaysia 5 (c)(y) 10 (d) 7
Malta 0 (c)(y)(ii) 0 (d) 0
Mauritius 5 (y) 0 10
Mexico 5 (c)(y) 10 (d)(e)(jj) 10
Mongolia 5 (c)(y) 10 (d)(e) 10
Morocco 5 (a)(y) 10 (a)(e) 10 (a)
Namibia 10 (c)(y) 0 (d) 10
Netherlands 0 (y)(ii) 0 (g) 0
New Zealand 15 (c) 10 (d)(e) 10
Norway 0 (c)(y) 0 (d) 0
Pakistan 10 (c)(y) 20 (d)(e)(k) 10
Philippines 10 (c)(y) 15 (d)(e)(f) 10 (w)
Poland 0 (c)(y)(ii) 5 (d)(e) 5
Portugal 0 (c)(ii) 15 (d)(e)(k) 10
Romania 0 (c)(y)(ii) 3 (d)(e) 3
Russian Federation 5 (c)(y) 0 (d) 0
Singapore 5 (y) 8 (e) 8
Slovenia 0 (y)(ii) 5 (d)(e) 5
South Africa 7.5 (y)(dd) 10 (a) 0 (a)
Spain 0 (c)(y)(ii) 0 (d) 0
Sri Lanka 15 (c) 10 (d)(e) 10
Sweden 0 (c)(ii) 0 (d) 0
Switzerland 0 (c)(y)(z) 0 (d)(z) 0
Syria 5 (c)(y) 10 (d) 12
Tajikistan 5 (c)(y) 0 (d) 5 (oo)
Thailand 15 (y) 25 (e)(k) 15 (x)
Trinidad and Tobago 10 (a)(y) 15 (a)(e)(k) 10 (a)(t)
Tunisia 10 (y) 10 (e) 15 (t)
Turkey 5 (c)(y) 10 (d) 10
Ukraine 5 (c)(y) 5 (b)(d)(e) 5 (l)
USSR (gg) 15 (c) 5 (d)(e) 0
United Arab Emirates 5 (c)(y) 0 (d) 10
United Kingdom 0 (a)(c)(y)(ii) 0 (a)(d) 0 (a)
United States 0 (c)(y)(aa) 0 (d) 0 (w)
Uruguay 5 (c)(y) 10 (d)(e) 10
Uzbekistan 5 (c)(y) 5 (d)(e) 5 (r)
Venezuela 5 (c)(y) 5 (d)(e) 5
Vietnam 5 (c)(y) 10 (d)(e)(kk) 10 (mm)
Yugoslavia (hh) 15 0 10
Zambia 5 (y) 10 (e) 10
Zimbabwe 10 (c)(y) 10 (d)(e) 7.5
Non-treaty
countries
25 (oo)(pp) 0/15/25 (j)(pp) 15 (pp)

(1) These rates also apply to silent partnership income. Under German tax law, income from a silent partnership is regarded as a dividend if the silent part­nership is characterized as a typical silent partnership. Profits from an atypical silent partnership are considered business profits. Income from participation rights (Genussrechte) is treated as a dividend if the holder participates in profits and liquidation results. Otherwise, the income from participation rights is considered to be interest for treaty purposes.

(2) German interest withholding tax is imposed only on interest paid by financial institutions, on interest from over-the-counter business and on interest pay­ments on convertible and profit-sharing bonds and participating loans (for details, see foot note (g) to Section A). In addition, interest on loans secured by fixed property located in Germany is subject to a limited German tax liability; tax on such interest is not imposed by withholding tax but by the issuance of an assessment notice on the filing of a tax return. If not otherwise noted, the treaty with holding tax rate also reduces the German statutory tax rate for interest on loans secured by fixed property located in Germany.

a) The rate applies if the income is subject to tax in the other state.

b) The rate is 2% (0% under the Latvia and Lithuania treaties) for interest on loans granted by banks or for interest on loans granted in connection with sales on credit of industrial, commercial or scientific equipment or sales of merchandise or services between enterprises.

c) Silent partnership income is taxed at the domestic rate of 25% (reduced on application for refund to 15% if the recipient is a corporation and if the German anti-treaty shopping rules do not apply).

d) Interest on participating loans and profit-sharing bonds is taxed at 25% (re­duced on application for refund to 15% if the recipient is a corporation and if the German anti-treaty shopping rules do not apply).

e) Under the Bolivia and Kazakhstan treaties, interest is exempt from withhold­ing tax if it is paid to a contracting state. Under the other treaties, interest paid to the contracting states or subdivisions or paid to certain banks may be exempt from withholding tax.

f) A 10% rate (0% under the Belarus treaty) may apply to certain types of inter­est, such as interest paid on bank loans, or interest paid in connection with the sale of industrial, commercial or scientific equipment or with financing activities in the public sector.

g) Interest on convertible bonds and profit-sharing bonds is taxed at 15%.

h) Interest paid to an enterprise is exempt from withholding tax if either of the following applies:

  •  The recipient is a company owning more than 25% of the paying company.
  •  The interest is derived from bonds other than commercial bills of exchange.

i) Interest on securities issued by a contracting state or subdivision thereof or paid to certain state banks or to a contracting state or subdivision thereof is exempt from withholding tax.

j) Interest on loans secured by immovable property located in Germany may be subject to the 15% (25% until 2007) corporate income tax rate.

k) Interest payments to banks or on loans granted by banks may be subject to a 10% withholding tax rate.

l) A 0% rate applies to royalties for the use of, or right to use, scientific rights, patents, marks, samples, models, plans, formulas or procedures, as well as to royalties for the disclosure of industrial, commercial or scientific know-how.

m) Interest payments to a company that is genuinely carrying on a banking enterprise or is controlled by one or more companies genuinely carrying on such an enterprise are exempt from tax.

n) Royalties for motion picture films are treated as business profits.

o) Interest is exempt from withholding tax in Germany if the recipient is the government, the Central Bank of Azerbaijan or the national petroleum funds. Interest is exempt from withholding tax in Azerbaijan if it is paid on a loan guaranteed by the German government or if the recipient is the government, the German Central Bank, the Reconstruction Loan Corporation or the German Investment and Development Company (DEG).

p) Trademark royalties are taxed at a rate of 25%.

q) Copyright royalties for literary, dramatic, musical or artistic works (except motion picture films or television videotapes for Canada and Israel) are exempt from withholding tax.

r) For royalties with respect to the use of technical, commercial or scientific equipment, the rate is reduced to 0% under the Canada treaty, to 7% under the China treaty, to 5% under the Estonia, Latvia and Lithuania treaties, to 2% under the Korea treaty and to 3% under the Uzbekistan treaty.

s) Agreement has been reached on a new tax treaty, but the content has not yet been published.

t) A 0% rate applies to royalties for the use of, or the right to use, copyrights, including those for films and television. For Tunisia, the rate is 10% and does not apply to film and television copyrights. For Finland and Tunisia, copy­rights specifically include those for literary, scientific and artistic works. For Trinidad and Tobago, they specifically exclude film and television copy­rights. Under the Belarus treaty, the rate is 5% for royalties paid for the use of, or the right to use, copyrights of literary and artistic works, including films, television and broadcasts.

u) This treaty does not apply to the Hong Kong and Macau Special Administra­tive Regions (SARs). A new double tax treaty with China was signed in March 2014 but, at the time of writing, it had not yet entered into force. Withholding tax rates under the new double tax treaty will be 5% and 10% for dividends and 10% for interest and royalties.

v) A 20% rate applies to payments made for trademarks or for copyrights, ex-clud i ng motion picture films or tapes for television or broadcasting.

w) Royalties for copyrights of literary or artistic works, motion picture films, or television or broadcasting are taxed at 20% (Philippines, 15%).

x) Royalties for copyrights of literary, artistic or scientific works are taxed at 5%.

y) The treaty withholding tax rate increases to 15% (Albania, Estonia, Mongo­lia, Switzer land, Syria, Ukraine and United Arab Emirates, 10%; Georgia, 5%/10%; United States, 5%/15%; Vietnam, 10%/15%; Iran, Thailand, Trinidad and Tobago and Zimbabwe, 20%) if the recipient is not a corpora­tion owning at least 25% (Algeria, Austria, Bulgaria, Canada, Croatia, Cyprus, Denmark, France, Ghana, Hungary, Ireland, Kuwait, Macedonia, Malaysia, Malta, Mauritius, Mexico, Mongolia, Namibia, Poland, Romania, Russian Federation, Singa pore, Spain, Syria, Tajikistan, United Arab Emirates, United King dom and Uruguay, 10%; Georgia, 10%/50%; United States, 10%/80%; Venezuela, 15%; Belarus, Pakistan, Switzerland and Ukraine, 20%; Vietnam, 70%/25%) of the distributing corporation or if the participation does not have a specific value (Azerbaijan EUR150,000; Belarus EUR81,806.70; Georgia EUR3 million/EUR100,000; Russian Federation EUR80,000). Under the treaty with the United Arab Emirates, a tax rate of 15% applies to real estate investment corporations that are not or only partially subject to tax.

z) A 0% rate may apply under the EU-Switzerland treaty.

(aa) The United States treaty provides for a 0% rate if the participation is at least 80% for a period of 12 months and if the conditions of the Limitation of Benefit test under Article 28 are fulfilled.

(bb) The rate is reduced to 0% for interest paid on a loan guaranteed by Hermes-Deckung (this relates to security given by the German government for loans in connection with deliveries by German suppliers to foreign customers, particularly customers in developing countries).

(cc) The rate is reduced to 10% for royalties for the use of commercial or scien­tific equipment.

(dd) The 7.5% rate applies to dividends paid to companies owning at least 25% of the voting shares of the payer. A 15% rate applies if a recipient company owns less than 25% of the voting shares and if it is subject to tax on such dividend income. Otherwise the full domestic German rate applies.

(ee) The withholding tax rate applicable to fees for technical services is 7.5%. (ff) Germany has agreed with the Czech Republic and the Slovak Republic to apply the treaty with the former Czechoslovakia.

(gg) Germany honors the USSR treaty with respect to all former Soviet republics except for Belarus, Estonia, Georgia, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, the Russian Federation and Ukraine. This has been acknowledged by Armenia, Moldova and Turkmenistan. Germany has entered into tax trea­ties with Azerbaijan, Belarus, Estonia, Georgia, Kazakhstan, Kyrgyz stan, Latvia, Lithuania, the Russian Federation, Tajikistan, Ukraine and Uzbekistan. Withholding tax rates under these treaties are listed in the above table. Ger­many is engaged in tax treaty negotiations with Armenia and Turkmenistan.

(hh) The treaty with the former Yugoslavia applies to Bosnia and Herzegovina, Kosovo, Montenegro and Serbia. Germany has entered into tax treaties with Croatia, Macedonia and Slovenia. The tax rates under these treaties are listed in the table above.

(ii) Dividends distributed by a German subsidiary to an EU parent company are exempt from withholding tax if the recipient owns 10% or more of the sub­sidiary. This exemption also applies if the participation is 10% or more and if the EU country where the parent company is located provides the exemp­tion reciprocally. If the EU directive does not apply, the following rules apply:

  • The withholding tax rate increases to 5% (Finland and Netherlands, 10%) if the recipient owns at least 10% (Czechoslovakia, Estonia, Fin land, Italy, Latvia, Lithuania, Netherlands and Slovenia, 25%) of the distributing company.
  • For Belgium, Czechoslovakia, Italy, Portugal and Sweden, the withhold­ing tax rate increases to 15% (Ireland, 10%; Greece, 25%) for all share­holdings (under the Sweden treaty, only for shareholdings of less than 10%). Under the United Kingdom treaty, a rate of 10% applies for divi­dend payments to pension schemes.

(jj)      The rate is 5% for interest on loans granted by banks.

(kk) The rate is reduced to 5% as long as German domestic law does not impose

withholding tax on interest payments to nonresidents.

(ll)      The rate is 0% for interest in connection with sales of merchandise.

(mm) The rate is reduced to 7.5% for royalties in connection with the use of technical equipment.

(nn) Under the Tajikistan treaty, the 5% rate applies to the following:

  • Royalties for the use of, or the right to use, copyrights of literary or ar­tistic works, including motion picture films, or for the use of, or the right to use, names, pictures or similar personal rights
  • Royalties for the recording of artistic or athletic shows for television or radio broadcasting
  • Royalties for the use of, or the right to use, scientific rights, patents, trade­marks, samples, models, plans, formulas or procedures for commercial and industrial or scientific know-how

Under the Azerbaijan treaty, a 10% rate applies to the royalties described in the first two bullets above, while a 5% rate applies to the royalties described in the third bullet.

(oo) Under the 2009 Annual Tax Act, the rate may be reduced to 15% if the non­resident dividend recipient qualifies under the German anti-treaty shopping rules.

(pp) A 5.5% solidarity surcharge applies.

(qq) The 0% rate applies to corporations if, at the time the dividend distribution takes place, the recipient has held a direct and continuous shareholding of at least 10% of the voting rights for the last 12 months. The withholding tax rate is increased to 5% if the corporation does not fulfill the requirement of 10% of the voting rights for the last 12 months before the dividend distribu­tion. However, on application, the 5% tax can be refunded if the require­ment of 10% of the voting rights for a continuous 12 months is fulfilled after the dividend distribution has taken place. A 15% withholding tax rate applies in all other cases.

Germany has initialed and/or signed new tax treaties with Armenia, Belgium, China, Costa Rica, Croatia, Ecuador, Egypt, Fin land, France, Greece, Iceland, Ireland, Israel, Jersey, Mace­donia, the Netherlands, Norway, Oman, the Philippines, Poland, Singapore, South Africa, Sri Lanka, Tunisia, Turkmenistan, the United Kingdom and Uzbekistan. At the time of writing, the domestic legal procedures for the entry into force of those trea­ties had not yet been concluded.

Germany is negotiating or renegotiating tax treaties with Argen­tina, Australia, Canada, Colombia, Denmark, Ghana, the Hong Kong SAR, India, Indo nesia, Japan, Jordan, Korea (South), Kuwait, Kyrgyzstan, Liberia, Mexico, Morocco, Namibia, Portu­gal, Qatar, Rwanda, Serbia, South Africa, Sweden, Switzerland, Tajikistan, Thailand, Trinidad and Tobago, Ukraine and Vietnam.