21/08/2017

Corporate Income Tax & Personal Income Tax

Companies in Germany are usually taxed on two levels. On the first level, corporations – such as the stock corporation (AG) and limited liability company (GmbH) – are subject to corporate income tax (Körperschaftssteuer), whereas partnerships are subject to personal income tax (Einkommenssteuer). Both taxes are levied by the federal government. On the second level, all business operations – corporations and partnerships alike – are subject to the trade tax (Gewerbesteuer), which is imposed by local municipalities (i.e. the town or city where the company is based).

Corporate Income Tax for Corporations

All corporations are liable to pay corporate income tax. The rate of tax is 15% on the taxable profits of the company. Corporate income tax is payable on undistributed as well as distributed profits. The so-called solidarity surcharge (Solidaritätszuschlag) is added to the corporate income tax. This totals 5.5% of the 15% rate of corporate income tax, or 0.825%. Taken together, the corporate income tax and solidarity surcharge amount to a total of 15.825%.

Personal Income Tax for Partnerships

Partnerships are not managed as independent legal entities in the same way as corporations. The individual partners carry all of the rights and obligations. Accordingly, it is not the partnership itself which is taxed (as is the case with corporations), but the individual partners - with the personal income tax rate for the corresponding partner being the deciding factor.

The taxable profit is determined at the company level and allocated to the individual partners according to their shares. As a rule, both the undistributed and distributed profits of a partnership are liable to personal income tax. Income tax starts at:

  14% for income that exceeds the annual exemption of EUR 8,004, and
  progressively increases to a top rate of 42% (starting at an annual income of EUR 52,882).
  A higher rate of tax of 45% is levied on every euro earned over EUR 250,731 per year.

As with corporate income tax, the solidarity surcharge of 5.5% is also added to the partner's corresponding rate of personal income tax. Amendments to the annual exemption from income tax are currently being considered.

 

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