Taxation of Foreign Companies in Germany
Taxation of Foreign Companies in GermanyUpdated on Thursday 09th March 2023
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The German taxation system is based on more than 40 types of taxes that are established based on strict rules. The effective tax burden in Germany varies very much because tax payers benefit from numerous exemptions and deductions.
Non-resident individuals and foreign investors will only be levied the income tax on the income they make in Germany. The same regulations apply to foreign corporate entities that will be levied the corporate tax and the municipal trade tax if they have a registered office and management in Germany.
Foreign companies that set up a branch or a subsidiary in Germany will be required to observe the corporate taxation principles, as well as the regulations concerning tax compliance. While consolidated returns are not possible in many cases, as companies file separate tax returns, our accountants in Germany can give you details about tax consolidation in case of certain parent companies.
The Controlled Foreign Companies Regime in Germany
Controlled foreign companies in Germany fall under the regulations of the Foreign Tax Act (AStG) from 1972 that was replaced by the Annual Tax Act of 2010. The controlled foreign companies regulations (CFC rules) apply as it follows:
- to German resident taxpayers holding over 50% in a foreign company,
- to a foreign company established in Germany receiving passive income.
The German corporate income tax is levied at a flat tax rate of 15%, but an additional 5.5 % solidarity surcharge tax applies.
German subsidiaries of foreign companies are subject to 25% withholding tax on dividends. However, if a double taxation agreement is enforced between Germany and another country, the dividend tax may be reimbursed.
Foreign companies are subject to different taxation rules, as can be detailed by our team. However, non-resident companies that male taxable supplies of services or goods in the country will always need to comply with VAT registration in Germany, irrespective of the annual turnover they record. Our team can give you more details about the registration process, as well as filing and payment.
The trade tax applied to foreign companies in Germany
Corporate entities in Germany are subject to the municipal trade tax if they generate business incomes. Foreign companies that have a permanent establishment in Germany are also subject to the municipal trade tax that ranges between 7% and 17.2% depending where the permanent establishment is located.
Any dividend incomes or capital gains repatriated to another corporation, the foreign company will benefit from tax exemptions for trade tax purposes. The exemption is applied by excluding the dividend income or capital gains from the trade income, thus reducing the tax burden to approximately 1.5%. In order to qualify for the exemption of dividends from the trade tax, the foreign company must hold at least 15% of the shares in the German permanent establishment. VAT applies on the supply of certain goods and services, according to a certain threshold.
If you want to set up a company and need details about the taxation system please contact our law firm in Germany.