What you should know about taxes before starting a business in Germany
Starting a business in Germany requires a comprehensive understanding of the country’s complex tax system. Germany has many taxes that may apply to your company compared to other countries, including five key types. Each of these taxes has unique factors that can impact your company’s financials, including the type of business structure you choose, your revenue and profitability, and the location of your operations. By understanding the different types of taxes and how they apply to your business, you can better plan for the financial obligations of operating in Germany and ensure that your company is set up for success before your company formation.
trade tax (Gewerbesteuer)
Gewerbesteuer, also known as trade tax, is a tax on business activity that is levied by local municipalities in Germany. The tax is calculated based on the company’s revenue and the location of its business activities. The amount of Gewerbesteuer paid varies depending on the business’s location. The tax rate is determined by the Hebesatz, which is set by each municipality individually. The Hebesatz is a percentage rate applied to the taxable amount of the company’s revenue. It can vary significantly between municipalities, with the lowest rate in Zossen in Brandenburg and Langenwolschendorf at 200 and the highest rate in the municipality of Wettlingen in Rheinland-Pfalz at 600.
The total amount of Gewerbesteuer, a company, can range from 8.75% to 20.3% of its revenue, depending on the municipality and the company’s profitability. The tax is typically paid annually after the yearly statements are made. Additionally, the tax office may calculate quarterly pre-payments based on the estimated turnovers or profits of the company. The tax allowance amount for Gewerbesteuer is 25.000 EUR.
Corporate tax (Körperschaftssteuer)
The corporate tax, also known as Körperschaftssteuer, is a tax in Germany levied on corporations’ profits, such as GmbHs and UGs. The tax rate for Körperschaftssteuer is currently 15%. It’s important to note that Körperschaftssteuer applies to the company’s profits after deductions for expenses, including salaries, depreciation, and interest payments.
When considering Körperschaftssteuer, one key factor to remember is the impact on the company’s overall tax liability. Depending on the company’s income and expenses, Körperschaftssteuer can be a significant or minor expense. Working with a qualified tax professional is important to understand how Körperschaftssteuer and Gewerbesteuer will impact your company’s financials and to develop strategies to minimize your tax liability, especially when the tax office may apply pre-payments based on estimated profits or revenue. The corporate tax, like Gewerbesteuer, has to be paid yearly.
Solidarity surcharge (Solidaritätszuschlag)
The Solidaritätszuschlag, commonly referred to as “Soli,” is an additional tax in Germany that was introduced in 1991 to finance the costs of reunification between East and West Germany. The tax is at 5.5% of the company’s corporate tax liability. While the original purpose of the Solidaritätszuschlag has been achieved, the tax has remained in place to fund other government initiatives. Recently, there has been debate about whether the tax should be abolished or reformed, as some argue it places an unnecessary burden on taxpayers. However, for the time being, the Solidaritätszuschlag remains an important source of revenue for the German government.
Make it easy – apply the 30% rule!
Considering company formation in Germany, it is important to factor in the country’s tax system when calculating your business opportunities. You should plan for approximately 30% of your revenue to be allocated toward taxes. This includes taxes such as trade tax, corporate tax, and the Solidaritätszuschlag. By factoring in the expected tax liability into your business plan, you can more accurately calculate your potential revenue and profit margins and ensure that your company is financially prepared to operate in Germany. Working with a qualified tax professional can also help you navigate the complex tax system in Germany and identify strategies to minimize your tax liability.
The monthly reporting for fiduciary taxes
In addition to the taxes mentioned above, there are two other important taxes that businesses in Germany need to be aware of. VAT and personal income tax are fiduciary taxes that directors are responsible for forwarding & paying correctly. These taxes typically have to be reported and paid monthly.
Value Added Tax (VAT)
Value Added Tax (VAT) is a tax on selling goods and services in Germany. The current VAT rate is 19%, but there are also reduced rates of 7% for certain goods and services. Companies can claim back VAT for invoices that they pay. Additionally, companies can make VAT-zero transactions across countries. VAT declarations must usually be submitted to the tax office by the 10th of the month, and the amount owed must be paid directly to the tax office. Check out our Company Calendar to see on which dates in Germany you have to keep in mind.
Personal Income Tax (Einkommenssteuer)
Personal income tax, or Einkommenssteuer, is a tax on individual income in Germany that employers are responsible for withholding and remitting on behalf of their employees. When considering the impact of Einkommenssteuer on your business, it’s important to remember the administrative burden of withholding and remitting the tax. The tax is typically paid every month, and employers must ensure that they are withholding and remitting the correct amount of tax. By working with a qualified payroll accountant, employers can ensure that they comply with local tax laws and regulations and minimize the administrative burden of personal income tax. Please read our guide about employee costs for a company owner to understand how this category should be calculated.
Work with professionals and read more
Understanding the different types of taxes that apply to businesses in Germany is crucial for making informed decisions about company formation and managing financials. All taxes have unique considerations and tradeoffs, and working with a qualified consultant is important to understand how these taxes will impact your company. First, you should begin with the correct tax registration for your GmbH or UG. You can read our step-by-step article showing how to do that through the online portal of the federal central tax office.
