Entrepreneurs

Get your taxes right!

Complaints about the complexity of German tax legislation are just the first verse of the lament about Germany's industrial policy for small and medium-sized enterprises. Very few entrepreneurs and founders are in a position to do without the support of a tax adviser. The information in this section can therefore only provide a rough overview.
For independent traders, the most important taxes are the following:

1. Value added tax (VAT)

Every supply of goods and services that a business carries out in Germany for payment in the course of its business is subject to value added tax. Imports and intra-community purchases of items in Germany for payment and the withdrawal of goods and services from the business for non-commercial purposes are also subject to value added tax, unless they are exempted by other regulations. The Value Added Tax Act (Umsatzsteuergesetz, UStG) defines further details.
For used or second-hand goods the applicable value added tax can be calculated by what is known as differential taxation: then only the difference between the purchase and the resale price is subject to VAT.
How high is the tax rate?
The regular tax rate is defined in Section 12 UStG as 19 per cent. It is applied to the net invoice amount.
The reduced VAT rate is 7 per cent (list of items subject to the reduced rate). It applies to the supply, import and intra-community purchase of practically all food – apart from drinks and restaurant sales – to most agricultural and forestry products, books, brochures, artworks, a number of other items and certain services, such as entrance tickets to theatres, concerts, cinemas and museums.
If articles are supplied that are not included in the above list, then the regular tax rate applies.
The invoice
If taxable products or services are supplied to another business in Germany an invoice must be written, which pursuant to Section 14 paragraph 4 UStG in conjunction with Section 14a UStG has to include the following information:
Invoice data
  • Complete name and address of the provider and recipient of the goods or services
  • Tax number or VAT identification number
  • Date issued
  • Serial invoice number
  • Quantity and type (standard description) of the articles supplied or scope and type of other services
  • Date of supply
  • Payment amount, listed separately by tax rates and exemptions
  • Any discounts agreed in advance
  • Amount of payment and applicable tax, plus reference to tax exemption
For small amounts up to €150 the amount of tax the net payment and the tax number do not have to be shown separately in the invoice; it is sufficient for the tax rate and the gross amount to be shown.
Input VAT
A business can deduct the VAT charged to it by other companies from its own VAT liability to the German tax authorities if it meets the requirements for what is known as input VAT.
Example:
Monthly figures 
Revenue in euros  
VAT in euros
Business revenue
100,000.00
19,000.00
Goods purchased
75,000.00 
./. 14,250.00
Payable to tax authority  
4,750.00
The business has to calculate itself the amount of VAT that it owes the tax authority, submit an electronic preliminary VAT return by the 10th of the following month and pay the amount owed.
Preliminary VAT return
Depending on the tax owed, and with exceptions for start-ups, the following deadlines for returns and payments apply as of 01/01/2009:
Deadlines
Previous year's figure
Euro
Monthly
for tax liability of more than
7,500.00
Monthly
for net input VAT in previous calendar year (option) of more than
7,500.00
Quarterly
for tax liability not exceeding  
7,500.00
Annually
for tax liability not exceeding 
1,000.00
Unless they are small businesses, start-ups in the first two calendar years must file their preliminary VAT return and settle the tax owed monthly. The tax authority can make the reimbursement of excess input VAT subject to the payment of a deposit.
Example:
Established in February 2015
monthly preliminary return until December 2016 inclusive
Established in December 2015
monthly preliminary return until December 2016 inclusive
The preliminary VAT return must be sent online using the official form in accordance with the Tax Data Transmission Regulation. From 01 January 2013 onwards the online return also has to be authenticated.
Extended deadlines for the preliminary VAT return
On request the tax authority can permanently extend the deadline for monthly and quarterly preliminary returns by one month. For the monthly extension (but not the quarterly one), a special advance payment has to be made, which is offset against the VAT owed at the end of the year.
Payment agreed or received?
Normally the business has to pay VAT on the amount of payment it has agreed with its customers, e.g. on sales for which contracts have been signed. This means the VAT liability arises in the reporting period in which the service is performed. This can be before an invoice is sent and before payment is received. As a rule, input VAT is offset in the reporting period in which the incoming invoice is received.
On request, however, the tax authority can permit businesses to remit VAT on the basis of payment received, in accordance with Section 20 UStG. Then the VAT liability generally arises at the end of the reporting period in which the payment is received. As a rule, input VAT is offset in the reporting period in which the incoming invoice is received, regardless of whether it has been paid yet. The following conditions apply for VAT returns on the basis of payment received:
 
  • Total revenue as defined in Section 19 paragraph 3 UStG of less than €500,000 in the preceding calendar year.
  • Exempt from accounting obligations in accordance with Section 148 Tax Code (AO) or
  • if revenue is generated from a liberal profession as defined in Section 18 Income Tax Act (EStG).
Small businesses
No VAT is levied on small businesses, which are therefore not permitted to show VAT separately on their invoices. A small business is one whose total revenue, including VAT, was less than €17,500.00 in the preceding calendar year and is not expected to exceed €50,000.00 in the current year. Total revenue in this sense is revenue as defined in Section 19 paragraph 3 UStG, i.e. not more than €14,705.88 net in the preceding year and €42,016.80 in the current year at a VAT rate of 19 per cent). On the other hand, small business are not entitled to deduct input VAT. Small businesses do have to remit import duty on imports of goods from third countries and intra-community purchases from EU countries, however.
In accordance with Section 14 paragraph 4 UStG, the invoices of small businesses for VAT purposes as defined in Section 19 UStG, drawn up for an amount of more than €150.00 (limit for minor invoices) must contain the following information:
  • Full name and address of the business performing the service
  • Full name and address of the business receiving the service
  • Tax number
  • Serial invoice number
  • Invoice date
  • Quantity and type of the articles supplied or scope and type of other services
  • Date of supply
  • Fee for the product or other service
  • Small business are recommended to add the line "Small business: VAT not charged pursuant to Section 19 paragraph 1 UStG", but this is not obligatory.
In a letter dated 16 June 2009 the German Finance Ministry (BMF) stipulated that as of 1 January 2010 that for travel services as defined in Section 25 UStG and for differential taxation as defined in Section 25a UStG, the assessment base for small businesses in accordance with Section 19 VAT Act (UStG), is no longer to be calculated on the basis of the difference between the costs of goods sold and the sales price, but on the basis of payment received.
If the business only operated for part of the year in which it was established, the actual revenue is converted to total annual revenue, but here the limit for the current year is €17,500.00 (or €14,705.88, see above) and not €50,000.00.
Example:
A woman set up a business on 01/02/2013 and generated revenue of €14,000 in 2013. She would therefore have generated €15,272 for the calendar year 2013 (scaled up to 12 months) and so is below the limit of €17,500. In 2014 she generated revenue of €32,000, so less than €50,000. So for VAT purposes she is still a small business. In 2015 her revenue was €38,000. This is still below the threshold of €50,000, but she was already above the limit of €17,500 in the previous year (2014) and so is now liable for VAT.
If a business that is not a start-up exceeds the limit of €17,500 in the course of a calendar year, it becomes liable for VAT on the normal basis in the next calendar year.
The business can forego taxation as a small business in accordance with Section 19 paragraph 2 UStG by writing to the tax authority. In this case it is liable for VAT according to the general provisions of the VAT Act. A corresponding declaration may be sent until the time at which the tax assessment becomes definitive. The business is then bound by its application for exemption for 5 years, however. After the five years have passed, the business can revoke the declaration at any time with effect from the beginning of a calendar year. It may make sense to forego the tax exemption if, for example,
  • the customers of the business are mostly businesses themselves, which want an invoice showing VAT separately or
  • if there are substantial start-up expenses and the input VAT can be offset.
VAT logbook for pedlars and market traders
Business that sell goods on markets, on public streets or from door to door in Germany (see section 22 paragraph 5 UStG) are generally required to keep a VAT logbook based on an official template to record their sales and input VAT.
Recording obligations
Defined records must be kept for VAT purposes. In particular, invoices or copies must be kept for ten years as accounting receipts (Section 147 paragraph 1 no. 4 paragraph 3 Tax Code). The ten-year period begins at the close of the calendar year in which the invoice was issued.
Trade in goods and services with EU countries and third countries
For trade in goods and services with EU member states and third countries (i.e. non-EU states) there are many special rules to be taken into account, also concerning evidence of delivery.
 
Special rules apply
  • to deliveries within the EU
  • to imports from third countries
  • to exports to third countries.
Please get in touch with us for detailed information on international matters. There are also special cases in which the "reverse-charge" procedure applies and the customer has to remit the VAT to the tax authorities.

2. Trade tax (Gewerbesteuer, GewSt)

Every trading business in Germany is liable for trade tax. Trade tax is levied on "trade earnings" (derived from profit) and remitted to the municipality (in Hamburg, the tax authority). The amount of trade tax is no longer deductible as a business expense for the purpose of calculating the profit from the business.
Trade earnings form the assessment base for the trade tax. It is calculated in four stages:
  1. Firstly, the profit or loss from the trade is determined, as defined for sole traders and partnerships in the Income Tax Act (EStG) or for limited liability companies in the Corporation Tax Act (KStG) in conjunction with the EStG (Section 7 Trade Tax Act – GewStG).
  2. Certain amounts are then added to this profit (additions in accordance with Section 8 GewStG). 25 per cent of all interest payments, annuities, permanent expenses and profits attributable to silent partners are added to the profit. A financing component is assumed at a flat rate for other payments, of which 25 per cent are also added to the profit. The flat rates for financing components are as follows:
– 25 per cent for licences and concessions;
– 20 per cent for rents, land leases and lease payments for mobile assets;
– 50 per cent for rents, land leases and lease payments for immobile assets.
  1. Discounts, bonuses and rebates granted in the course of normal operations as well as distribution licences are not included in the additions.
    Furthermore, an allowance of €100,000 has been introduced for the additions in accordance with Section 8 GewStG, i.e. the total amount added for interest payments and flat-rate financing components.
Then the total of profit plus additions is reduced by various statutory amounts (deductions in accordance with Section 9 GewStG).
These three steps determine the relevant trade earnings in accordance with Section 10 GewStG.
  1. Finally, any trade loss carryforward is deducted from the trade earnings (Section 10a GewStG). A trade loss results if the trade earnings (profit plus additions, less deductions) are negative. This amount is assessed formally and can be offset in future. Current trade earnings are reduced by trade losses from prior tax periods.
Calculating trade earnings
Profit according to Income Tax Act or Corporation Tax Act
+ Additions according to Section 8 GewStG
- Deductions according to Section 9 GewStG
- Trade losses according to Section 10a GewStG
= Trade earnings according to Sections 6, 7 and 11 GewStG (rounded down to next full €100)
- Allowance of €24,500 for partnerships (e.g. OHG, KG), allowance of €5,000 for associations, etc.
but not more than the rounded-down trade earnings
= Trade earnings after allowance
A tax base is used to calculate the trade tax, which is obtained by multiplying trade earnings by the tax multiple.
Trade tax = trade earnings x tax multiple x municipal rate
Sole traders and partnerships (GbR, OHG, KG) have an allowance of €24,500 for trade earnings. Limited liability companies (GmbH, AG, KGaA) have no allowance, however. The tax multiple of 3.5 per cent is the same everywhere in Germany and regardless of the legal structure.
The trade earnings are multiplied by the tax multiple to give the tax base:
  • for partnerships there is an allowance of €24,500 for trade earnings; the tax multiple of 3.5 per cent applies to trade earnings above €24,500.
  • for limited liability companies (e.g. AG, GmbH) the tax multiple is 3.5 per cent from the first euro of trade earnings. This means that for trade earnings of €100,000, the tax base is €3,500.
The municipal tax rate set by the local municipality is applied to the tax base; in Hamburg the rate is currently 470 per cent.
Example: Sole trader/partnership
 
Trade earnings
€100,000
Tax multiple
Tax base for trade earnings
For the first
€24,500
0% (allowance)
€0
Above €24,500
€75,500 x
3.5%
€2,642.50
Tax base multiplied by Hamburg tax rate of 470 per cent
 
 
€2,642.50
times
470 per cent
Trade tax in Hamburg
 
 
= €12,419.75
Example: Limited liability companies 
 
Trade earnings
€100,000
Tax multiple
3.5%  
Tax base for trade earnings = €3,500
Tax base multiplied by Hamburg tax rate of 470 per cent
 
 
€3,500.00
times
470 per cent
Trade tax in Hamburg
 
 
= €16,450.00
Trading businesses in Hamburg have to submit an annual trade tax declaration to the tax authority based on the trade tax assessment notice. Quarterly trade tax advance payments (payment as of 15 February, 15 May, 15 August, 15 November of each year) are to be made after the amount has been set and offset against the tax liability for the year.

3. Corporation tax (KSt)

Businesses in the form of a limited liability company (e.g. Unternehmergesellschaft [UG], GmbH, AG, KGaA) are separate legal entities whose profits are subject to tax. They have to pay corporation tax and a solidarity surcharge (5.5 per cent of the corporation tax payment). Commercial and corporation tax legislation have to be taken into account when calculating company profits, as well as some provisions of income tax law.
The tax period is the financial year, which is normally the calendar year. On request the financial year may differ from the calendar year.
The tax rate is 15 per cent, regardless of whether the company retains or distributes its earnings. The assessment base is the taxable profit. (Section 7 paragraph 1 KStG).
If the amount of corporation tax is set by a tax assessment, the payment is due one month after the tax assessment is sent, unless the liability has already been settled by advance payments. Such advance payments are due on 10 March, 10 June, 10 September and 10 December.

4. Income tax (Einkommensteuer, ESt)

The income of all individuals (natural persons) registered or normally resident in Germany is subject to income tax. [This does not require a fixed abode in Germany. An unbroken stay of more than six months (183 days) is generally sufficient. Brief trips abroad are not counted.]
If a business is operated with others in the form of a partnership (e.g. Gesellschaft bürgerlichen Rechts (GbR), offenene Handelsgesellschaft (OHG) or Kommanditgesellschaft (KG)), its income is taxed at the level of the individual partners. This means tax is not paid at the level of the partnership. Instead, the profit attributable to each partner is calculated and taxed at the respective partner's individual tax rate (tax transparent in accordance with Section 179f Tax Code (AO)).
However, if a company is a legal person in its own right (e.g. a GmbH) then it is also liable separately for taxes: the profit of the GmbH is subject to corporation tax and only taxed at the level of the shareholders when it is distributed as a dividend.
All taxable income is aggregated for the purposes of income tax. This includes income from employment and self-employment, from capital gains, rental income and from agriculture and forestry. Professional and operating expenses can be declared for each category of income. Married taxpayers can choose whether both partners' income should be aggregated (and taxed at rates defined in the "splitting table") or taxed separately (at rates defined in the "basic table"). Various allowances, tax loss carryforwards, special expenses and exceptional financial burdens can be deducted from total income to determine taxable income. Taxable income forms the basis for the tax assessment, which calculates the amount of income tax still owed or any reimbursement, taking advance payments into account.
Marginal income tax rates start at 14 per cent and go up to 42 per cent, with a basic tax-free allowance for 2014 of €8,354. A top marginal tax rate of 45 per cent applies to incomes of more than €250,731 for an unmarried person.

5. Pay-as-you-earn tax (Lst)

Employers must deduct from all income payments to employees the pay-as-you-earn tax (PAYE) and solidarity surcharge (5.5 per cent of the PAYE amount) (see Section 41a EStG) plus any church tax (if the employee is a member of a church). PAYE reports must be sent online and the retained amounts remitted to the relevant tax authority by the 10th day of the following month. For PAYE reporting there is no opportunity to extend deadlines.
The reporting period and the remittance of PAYE are as follows:
  PAYE liability in the previous year in EUR
Advance reporting
PAYE 
more than 4,000
Monthly
PAYE 
more than 100 but not more than 4,000
Quarterly
PAYE
not more than 1,000
Annually
 
Although it has been checked carefully, we cannot guarantee that the information provided above is correct. Furthermore, these brief comments on taxes will certainly not be enough to enable compliance with all aspects of commercial and tax legislation. We therefore recommend that you speak to a tax adviser or ask your local tax authority for further information.