Germany country tax guide

German. Foreign documents should be translated in German when provided to the German tax authorities. In justified cases, the submission of an even certified translation or a translation prepared by a publicly appointed or sworn interpreter or translator may be requested. 

The taxation of companies in Germany depends on the legal form. In principle, all profits of the company are subject to German taxation, regardless of the place where the income is generated. However, this principle is restricted by certain double taxation treaties.

Income of corporations is subject to corporation tax (15%, plus solidarity surcharge of 5.5% thereon). In addition, trade tax is due if a trade or business is carried out at a fixed place in Germany. The amount of trade tax depends on the competent municipality (about 7–17.15%) and often amounts to about 15%.

The taxation of partnerships in Germany is transparent (unless the partnership has opted for a taxation as corporation, possible as of 2022). This means that the shareholders are subject to tax in Germany. If the partner is a corporation, the tax consequences are as shown above. If the partner is a natural person, income tax is due according to the individual (progressive) tax rate, up to 45% (plus solidarity surcharge of about 5.5% thereon). In addition, trade tax applies at the partnership’s level if a trade or business is operated in Germany as shown above. To avoid the unequal taxation compared 
to the corporation, the trade tax can be offset against income tax for a partner who is a natural person. 

Corporate wealth tax

Germany does currently not levy a corporate wealth tax.

The taxation of dividends in Germany depends on the legal form of the receiving shareholder:

• If a corporation receives dividends from another corporation, these are exempt from corporation tax if a minimum shareholding of 10% in the distributed corporation is reached. However, 5% of the dividend are treated as non-deductible expense; thus, de facto 95% of the dividend remains tax exempt. The tax exemption is also granted for trade tax purposes; here, however, the minimum shareholding must generally be 15%.
• If a partnership receives a dividend, the tax consequences depend on the tax position of its partners (transparent taxation). If the partner is a corporation, the aforementioned treatment applies accordingly. If the partner is a natural person, a tax exemption of 40% is granted for the dividend payment. No minimum shareholding is required for a tax exemption for income tax purposes. However, the minimum shareholding of 15% must generally also be met for trade tax purposes.

Capital gains resulting from the sale of shares in a corporation are taxed similar to a dividend as described above. However, no minimum shareholding is required. 

German tax law does generally not provide for any general regime of exemption or taxation at a reduced rate. Only certain non-profit corporations can receive tax benefits.

German tax law is linked to the concepts of domicile and habitual residence. In Germany, a person is “resident for tax purposes” in this sense if he or she has his or her domicile in or habitual residence in Germany. 

Domicile (translation for the German term Wohnsitz) is defined as the “occupation” of a place to stay, e.g. apartment or house (which in principle does not have to meet any particular minimum standards or have any particular features). It is important that the person can freely dispose over the apartment and has the possibility to use it at any time. Whether the centre of the person’s vital interests is located there is irrelevant. Only in the case of a temporary use of the apartment or house, a residence may be denied under certain circumstances.  

A person’s habitual residence is where he or she is staying under circumstances that indicate that he or she is staying at that place or in that area on more than a temporary basis. A habitual residence shall always and from the beginning be deemed to be a continuous stay of more than six months; short-term interruptions shall not be taken into account. 

Subject to tax treaties, German tax residents are liable to German income tax on their worldwide income, whereas non-residents are liable only on their German source income only (domestic income).

From an annual income of EUR 9,985, the basic tax rate is 14% and then increases with the amount of income. The top tax rate is 42% and is due from an annual income of EUR 58,597 (for 2022). From an annual income of EUR 277,826 (for 2022), there is a three-percentage point wealth tax surcharge, i.e. 45%. 

The so-called solidarity surcharge is due as a surcharge on income tax. This amounts to 5.5% of the calculated income tax. Since 2021, the solidarity surcharge only applies as of a certain income level (the tax exemption limit is EUR 62,127 taxable income per year; for married couples it is set to double, i.e. EUR 124,255 per year.)

Married couples and individuals living under a civil union (registered partners) are subject to a joint taxation regime. In such a case, a special tax tariff reduction is granted, which leads to tax advantages in the event of unequal income levels between the spouses. 

In addition, a monthly paid child benefit or a (yearly) child allowance is granted for each child (depending on what leads to a better result for the taxpayer).

Interest, capital gains (expect for shares in corporations with a shareholding exceeding 1%) and dividends are taxed at a flat rate of 26.375% (25% income tax plus 5.5% solidarity surcharge thereon). Income from investment funds is also subject to the flat rate, but depending on the type of fund, a certain portion of the income is tax-exempt (at source).

An option for the standard progressive income tax is available if the progressive tax rate does not exceed the flat rate. 

Capital gains resulting from the sale of shares in a corporation with a shareholding exceeding 1% are subject to the progressive tax rate, considering a 40% tax exemption.

Capital gains derived from the sale of real estate are only taxable (at the progressive tax rate) if the property has been owned for less than ten years. If the real estate was used for own living purposes, special rules apply.

Currently, there is no direct wealth tax levied in Germany. However, property taxes are levied, for example, on real property (land tax).

Subject to applicable tax treaties, gifts and inheritance transmissions are subject to German taxes if one of the following conditions is met: 

• the donor, decedent or beneficiary is a German tax resident; requirements for unlimited tax liability are as shown under page 5.; or,
• if none of the parties involved in the gift or inheritance is subject to unlimited inheritance /gift tax in Germany, the subject matter of the gift is a so-called domestic assets (in particular, real estate, entrepreneurial participations, whereby in the case of corporations the shareholding must be at least 10%).

In addition, German citizens are subject to unlimited tax liability for further five years if they move abroad.

The tax classes and the personal allowances are determined by the relationship of the acquirer to the testator or donor. The closer the relationship, the lower the applicable tax rate and the higher the personal allowance. Several asset transfers granted by the same person within a period of ten years are added together for applying the tax-free amount. The tax-free amount can therefore only be claimed every ten years.

Tax incentives 

• German law allows the possibility to split the ownership of a property into two different parts to be held by a usufruct holder and a bare owner. It is possible (and quite common) to transfer the bare ownership of an asset and to retain a lifetime interest. The tax impact is the following: 
  • the basis for gift taxes is reduced compared to a gift of the full ownership; and,
  • at the end of the usufruct duration (which could be the lifetime of the usufruct holder), full ownership of the property is carried over to the bare owner without any liability for tax purposes.
• Business assets (interest in a partnership or shares in a corporation) can be (partially) transferred tax free under certain conditions:
  • Shareholding in a corporation must be more than 25%. – Only “favoured” business assets can benefit from an exemption, 
  • there is a legal definition of non-privileged business assets (e.g. securities, land rented to third parties, pictures, yachts, cash holdings etc.),
  • the use of the tax exemption is tied to holding periods (e.g. no sale within this holding period),
  • in addition, it must be ensured that the sum of the wages of the last five years before the transfer is still reached within the retention period at a specified level (so-called total wage test, serves to maintain the jobs).
• The family home (property, centre of family life) can be transferred to the spouse tax-free.

Germany does not have such a regime.

There are no specific rules regarding residence permits for HNWI in Germany.

As Germany belongs to the Schengen Space, German citizen and persons having a German visa or residence permit are allowed to travel within the European-Union with the corresponding verification. These rules can be currently modified due to the specific provisions taken to face the Covid-19 pandemic.

Trusts and similar foreign structures are not recognised.

Foundations can be set up under German law. The purpose of the foundation can be freely determined, provided it is legal.

Foundations are not subject to any special disadvantageous tax regime. 

So-called Family foundations, i.e. foundations that permanently serve the interests of a family, are subject to inheritance tax, i.e. every 30 years the assets of the foundation are subject to inheritance tax (fiction of generational transfer).

Nevertheless, there may be negative taxation consequences in Germany if a domestic donor or 
beneficiary participates in a foreign family foundation or similar vehicle (e.g. non-transparent trust) (so-called “Hinzurechnungsbesteuerung”, i.e. adding of the income of such vehicle to the income of the donor or the beneficiaries).