Corporate Tax (Körperschaftsteuer) in Germany
Corporate tax in Germany, known as Körperschaftsteuer, is a federal tax imposed on the income of corporations and certain other legal entities. Along with trade tax (Gewerbesteuer) and the solidarity surcharge (Solidaritätszuschlag), it represents one of the three main tax burdens for businesses operating in Germany.
Taxable Entities
Corporate tax applies primarily to:
- Corporations: Limited liability companies (GmbH), stock corporations (AG)
- Cooperatives and mutual insurance companies
- Non-profit organizations, under certain conditions
- Foreign corporations with a permanent establishment (PE) or taxable income in Germany
Exempt Entities
Some entities are fully or partially exempt, such as:
- Non-profit, charitable, or religious organizations (subject to strict requirements)
- Certain pension funds and public entities
Corporate Tax Rate
Standard Rate
- The corporate tax rate in Germany is 15% of taxable income.
Solidarity Surcharge
- On top of the corporate tax, a 5.5% solidarity surcharge is levied, resulting in an effective corporate tax rate of 15.825%.
Combined Burden with Trade Tax
Since trade tax (levied by municipalities) also applies, the overall effective corporate tax burden in Germany typically ranges between 30% and 33%, depending on the location.
Determination of Taxable Income
Corporate taxable income is based on the annual financial statements prepared under German commercial law, with adjustments required by tax law.
Key Adjustments
- Non-deductible expenses (e.g., fines, certain entertainment expenses)
- Add-backs and deductions for trade tax purposes
- Loss carryforwards: Losses may be carried forward indefinitely but are subject to a minimum taxation rule (only €1 million can be offset fully; above that, only 60% of remaining income may be offset).
- Loss carrybacks: Limited to €10 million (as of current rules) and may be applied to the previous year.
Cross-Border Considerations
Foreign Corporations
Foreign companies are subject to German corporate tax if they:
- Operate through a permanent establishment in Germany, or
- Earn German-source income subject to limited tax liability (e.g., rental income, dividends).
Double Taxation Agreements (DTAs)
Germany has an extensive network of DTAs, including with the United States, which generally follow the OECD Model Convention. These treaties aim to:
- Prevent double taxation
- Allocate taxing rights between Germany and the partner country
- Provide relief through tax credits or exemptions
Dividends, Interest, and Royalties
- Dividends paid to foreign shareholders are generally subject to withholding tax of 25% plus solidarity surcharge, though reduced rates or exemptions may apply under DTAs or the EU Parent-Subsidiary Directive.
- Similar rules apply for interest and royalty payments, depending on the treaty.
Practical Aspects for Businesses
Compliance
- Corporations must file an annual corporate tax return electronically.
- Tax assessments are issued by the local tax office.
Planning
Cross-border groups often use tax planning strategies to optimize global effective tax rates while ensuring compliance.
The choice of legal form (corporation vs. partnership) significantly impacts the tax burden.
Structuring investments and financing (debt vs. equity) can affect deductibility and withholding obligations.