Personal taxation in Berlin
Effective personal income tax rate
Teleport city rankings for personal income tax
Resident individuals are taxed on their worldwide income; nonresidents are taxed only on German-source income.
An individual is resident if he/she is domiciled or has a habitual abode in Germany. A habitual abode is deemed to exist if the individual spends more than six months in Germany. Domicile can be presumed where an individual has permanent accommodation at his/her disposal in Germany; it is not necessary that the individual actually uses the accommodation.
Married couples and civil partnerships living together may opt for joint or separate assessment.
Rates are progressive up to 45%. A solidarity surcharge of 5.5% (resulting in a top rate of 47.5%) and a church tax of 9% (8% in Bavaria and Baden-Württemberg) are levied on the income tax.
Deductions and allowances
Personal allowances are available for the taxpayer and his/her children. Other deductions, which are subject to restrictions, are available (e.g. social security contributions, insurance, medical expenses, etc.). Expenses may be deducted from the tax base provided they were necessary to generate the income.
Taxable income is the sum of income from employment, the exercise of a trade or profession, agriculture and forestry, capital, rent and leasing or other income. Private investment income, including capital gains, generally is subject to a 25% (26.375%, including the solidarity surcharge) final withholding tax. Taxpayers may opt for taxation at their individual tax rate, if lower.
Sales of real estate and rights to private property (not business property) are subject to tax if the taxpayer owned the property for less than 10 years. The sale of other private assets is taxable if the taxpayer held the assets for less than one year. Normal tax rates apply.
Other taxes on individuals
Real property tax
Tax is levied by the municipality in which real estate is located. The general rate is 0.35% of the tax value of the property, multiplied by a municipal coefficient.
Inheritance and gift tax rates range from 7% to 50%, with various exemptions available. Business property/assets are valued at fair market value. Under certain conditions, the inheritance of business property can be 85% or 100% tax free. New rules are expected in 2016.
Employed individuals are required to make a contribution for pension, health, nursing care and unemployment insurance. The employer bears 50% of the total contribution.
Compliance for individuals
Filing and payment
The tax year is the calendar year. The entrepreneur must file an electronic quarterly preliminary VAT return by the 10th day of the following month and pay the VAT due. A refund will be paid if the input tax exceeds the VAT. If the tax for the previous calendar year was more than EUR 7,500, monthly preliminary returns must be filed.
See under “Corporate taxation”. Value added tax:
The standard rate is 19%, with a reduced rate of 7% applying to specified transactions. Certain transactions are exempt.
VAT is levied on the sale of goods and the provision of services.
German entrepreneurs generally must register for VAT purposes. The registration threshold is turnover of EUR 17,500 in the previous calendar year and estimated turnover of EUR 50,000 in the current calendar year. Nonresidents that make taxable supplies of goods or services in Germany also must register.
Corporate taxation in Berlin
Teleport city rankings for corporate income tax
Residents are taxed on worldwide income; nonresidents are taxed only on Germany-source income. Branches are taxed the same as subsidiaries.
Taxation of dividends
Dividends received by a German resident corporation (from both resident and foreign corporations) generally are 95% tax exempt; however, the exemption is not applicable if the dividends are treated as tax deductible expenses for the payer.
A corporation is resident if it maintains its registered office (as determined by its articles of incorporation) or central place of management in Germany.
Losses may be carried back one year and carried forward indefinitely. Losses may be offset against profits up to EUR 1 million without restriction, but only 60% of income exceeding EUR 1 million may be offset against loss carryforwards. A direct or indirect change in ownership of more than 25%/50% to one purchaser/related party results in a partial/complete forfeiture of all tax loss carryforwards. Loss carryforward forfeiture may be avoided in certain intragroup restructurings. Loss carryforwards continue to be available to the extent built-in gains in the loss company are subject to tax in Germany.
Incentive programs are available, e.g. investment allowances for certain start-ups and for small and medium-sized businesses. No tax incentives are available for R&D, but attractive nonrepayable cash grants are offered, e.g. for R&D in the energy sector.
The corporate tax rate is 15% (15.825%, including the solidarity surcharge). The municipal trade tax typically ranges between 14% and 17%. The effective corporate tax rate (including the solidarity surcharge and trade tax) typically ranges between 30% and 33%.
See under “Taxation of dividends” and “Capital gains”.
A 5.5% solidarity surcharge is levied on the income tax or corporate income tax.
Foreign tax credit
Foreign tax paid may be credited against German tax that relates to the foreign income or may be deducted as a business expense. Germany typically applies the exemption system.
Corporation tax is imposed on a company's profits, which consist of business/trading income, passive income and capital gains. Business expenses may be deducted in computing taxable income.
Capital gains generally are included in taxable income. Capital gains derived from the sale of a domestic or foreign corporate subsidiary generally are 95% tax-exempt.
Other taxes on corporations
Real property tax
Tax is levied by the municipality in which real estate is located, at a rate of 0.35% of the tax value of the property, multiplied by a municipal coefficient.
The employer is required to bear 50% of the wage- related social security contributions (health, nursing care, unemployment and pension insurance). Additional charges (e.g. statutory accident insurance, insolvency fund levy, etc.) may apply.
Municipal trade tax is an income tax levied by municipalities at a minimum rate of 7%. All entrepreneurs with commercial activities carried out through a subsidiary or a nonresident’s commercial permanent establishment in Germany are liable for trade tax. Corporations always are deemed to carry on commercial enterprises (trade or business), regardless of their actual activities. (Individuals, alone or in partnerships, are not liable for trade tax on professional or other independent services unless the activities are deemed to be commercial under the income tax law.) The municipal trade tax rate varies, but averages between 14% and 17% of income. The trade tax is based on taxable income as calculated for corporate income tax purposes, with several income adjustments.
A real estate transfer tax of 3.5% to 6.5% of the sales price/value of transferred German real estate or 95% or more of the shares in a real estate-owning company is levied. The rate depends on the state in which the real estate is located. Exceptions may apply for certain intragroup restructurings.
No, but the employer is required to withhold wage tax on a monthly basis from an employee's income and remit it to the tax authorities. Wage tax certificates must be transmitted electronically and be authenticated by the employer.
Compliance for corporations
Although companies may be taxed on a consolidated basis, each company must file a separate tax return (except for VAT). Tax consolidation for corporate income tax and municipal trade tax purposes (Organschaft) requires that the parent in the consolidation holds the majority of the voting rights in the subsidiary from the beginning of the subsidiary's fiscal year. The parties must conclude a profit and loss transfer agreement (PLTA), which must be in effect and carried out for at least five years, unless an important reason exists for termination of the agreement (e.g. sale of the subsidiary) before the end of the five-year period. Strict formal requirements for a PLTA apply. Tax consolidation for VAT purposes does not require a PLTA, but the subsidiary in the consolidation must be financially, organizationally and economically integrated in the parent company.
Penalties may be imposed for late filing (up to 10% of the tax due and a maximum of EUR 25,000), as well as for late payment of assessed taxes (1% on the outstanding rounded down tax amount per month or part thereof). Findings in tax audits generally do not result in penalties. However, taxes assessed as a result of an audit are subject to interest of 0.5% per full month (6% per year). The interest calculation begins 15 months after the calendar year in which the assessment became effective. Penalties also can be imposed if the taxpayer does not comply with the transfer pricing documentation requirements. If the taxpayer fails to submit, or submits inadequate documentation, an additional charge between 5% and 10% of any transfer pricing adjustment (a minimum of EUR 5,000) can be assessed. An additional charge for the late submission of documentation can be assessed of at least EUR 100 per day, up to EUR 1 million.
A taxpayer may apply for an advance ruling on the tax consequences of a proposed transaction. Administrative fees may apply.
The tax year is 12 months or the period for which accounts are prepared, if shorter. The tax accounting period may not exceed 12 months in total.
The tax return generally must be filed electronically by 31 May of the year following the tax year; extension of the filing deadline to 31 December of the year following the tax year typically is granted if a tax advisor is involved. Quarterly advance payments of corporate tax are due in March, June, September and December.
Other taxation in Berlin
Controlled foreign companies
Passive income of subsidiaries in low- or no-tax jurisdictions will be attributed to German shareholders that hold, directly or indirectly, more than 50% of the subsidiary (lower ownership percentages apply where the low-taxed CFC generates passive investment income). Typical passive income is income from the rental of real estate, income from licensing or income from the lending of capital. A jurisdiction is regarded as a low-tax jurisdiction if the income of the subsidiary is subject to an effective tax rate of less than 25%. Credit and refunds at the shareholder level are taken into account when determining whether the effective tax rate abroad falls below the 25% threshold. Credit for tax paid on attributed income can be granted upon application of the taxpayer.
A taxpayer generally must disclose all facts relevant for taxation, especially regarding transactions with foreign related parties.
Business dealings between related persons must be in accordance with transactions that would have been agreed upon by independent third parties dealing at arm's length, whereby the underlying principle is the normal degree of commercial prudence shown by a sound and conscientious business manager. Taxpayers are required to document all facts and evidence that support their positions. Specific transfer pricing rules apply to cross-border intragroup transfers of functions. An exit tax will be imposed on the "profit potential" that is deemed to be transferred based on the discounted cash flow value of the subsidiary/branch before and after the restructuring. Germany generally applies the authorized OECD approach.
A taxpayer may immediately deduct (net) interest expense up to 30% of taxable earnings before net interest expense, tax, regular depreciation and amortization (tax EBITDA). An EBITDA carryforward is generated if the taxpayer has net interest expense lower than 30% of the EBITDA for tax purposes, unless an exception to the interest limitation (see below) applies. The difference between 30% of the EBITDA and the net interest expense (excess EBITDA) may be carried forward and used in the following five years when the net interest expense exceeds 30% of current EBITDA. The limitation does not apply where (i) the annual (net) interest burden is less than EUR 3 million; (ii) the taxpayer is not part of a group of companies; or (iii) it can demonstrate that the equity ratio of the German borrower is at least equal to the worldwide group's equity
Foreign exchange control
No restrictions are imposed on the import or export of capital; however, a declaration must be filed with customs for cash transfers of more than EUR 10,000 into or out of the EU.
Accounting principles/financial statements
German commercial GAAP/IFRS. Financial statements must be prepared annually. Taxpayers are required to maintain their books in Germany, although electronic bookkeeping may be transferred abroad if prior approval is obtained from the tax authorities.
Principal business entities
These are the joint stock company (AG), limited liability company (GmbH), general and limited partnership, sole proprietorship and branch of a foreign corporation.
A statutory rate of 25% (26.375%, including the solidarity surcharge) applies, with a possible 40% refund for nonresident corporations, giving rise to an effective rate of 15.825%, unless the rate is reduced under a tax treaty. No tax is levied on dividends qualifying under the EU parent-subsidiary directive.
Withholding tax generally is not levied on interest, except for interest on publicly traded debt, interest received through a German payment agent (usually a bank), convertible bonds and certain profit participating loans. The statutory rate is 25% (26.375%, including the solidarity surcharge) unless the EU interest and royalties directive applies or the rate is reduced under a tax treaty.
The withholding tax on royalties paid to a nonresident corporation or an individual is 15% (15.825%, including the solidarity surcharge), unless the EU interest and royalties directive applies or the rate is reduced under a tax treaty.
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