Germany

The basic corporate tax (Körperschaftsteuer) rate is currently 15% until the end of 2027 when it will be reduced to 10%. In addition, corporations must pay a solidarity surcharge (Solidaritätszuschlag) of 5.5% on corporate tax, bringing the combined rate of corporate tax and solidarity surcharge to 15.825%. Corporations are also required to pay trade tax (Gewerbesteuer) on their taxable income, which currently ranges from approximately 7% to 22%.

Germany has a global minimum tax. According to the German Minimum Tax Act (Mindeststeuergesetz), Germany has implemented a global minimum tax for companies located in Germany that are part of a corporate group with annual revenues exceeding EUR 750 million in at least two of the four fiscal years immediately preceding the current fiscal year, irrespective of the provisions set out in any double taxation treaty.

Income tax for corporations

Corporate income is taxed in accordance with the Corporate Income Tax Act (Körperschaftsteuergesetz) and the Trade Tax Act (Gewerbesteuergesetz). For a corporation (such as a limited liability company or a stock corporation), all income is treated as business income.

The Corporation Tax Act generally provides for the taxation of income at the level of the individual corporation. However, a corporate tax group may also be established, with the result that the income of the subsidiary is attributed to the parent company. The prerequisite for a corporate tax group is:

• the financial integration of the controlled entity, that is, the controlling entity must, in principle, hold an uninterrupted interest in the controlled entity from the beginning of the fiscal year to such an extent that it holds the majority of voting rights from the shares in the controlled entity;
• the parent company must be a corporation not exempt from corporate income tax; and
• a profit transfer agreement must be concluded between the parent company and the subsidiary for a term of at least five years and must be implemented for the duration of its validity.

The following aspects are frequently relevant in practice:

• Intercompany legal relationships (e.g. provisions regarding clearing, netting, and cash pooling) must generally be clearly and unambiguously defined in writing in advance; otherwise, there is a risk that the expenses associated with conducting these relationships will not be recognised for tax purposes.
• The deductibility of interest expenses is generally limited under certain conditions.
• The deductibility of loss carryforwards is limited. Loss carryforwards are above EUR 1 million only deductible up to (currently) 70% of the total income exceeding EUR 1 million with priority over special expenses, extraordinary charges, and other deductible amounts (loss carryforward).
• Dividend payments between two corporations or profits from the sale of shares in other corporations are generally subject to corporate income tax only at the amount of 5%, although numerous special provisions apply in this context.
• If, within five years, more than 50% of the subscribed capital, membership rights, participation rights, or voting rights in a corporation are transferred, directly or indirectly, to a purchaser or persons closely related to the purchaser, or if a comparable situation exists (detrimental acquisition of a participation), any negative income (unused losses) that has not been offset or deducted by the time of the detrimental acquisition of a participation is no longer deductible in full. Although the provision is currently the subject of proceedings before the Federal Constitutional Court, it remains applicable at this time.
  The Corporation Tax Act provides for exceptions to the aforementioned rule, for example:
  • If shares are transferred within a 100% ownership chain, and the acquirer or seller holds a 100% direct or indirect interest in the transferring entity, and the acquirer or seller is a natural person, a corporation or a partnership, such transfer should not constitute a detrimental acquisition.
  • Furthermore, a non-deductible unused loss may be deducted to the extent that it does not exceed the total domestic taxable hidden reserves of the corporation’s business assets existing at the time of the detrimental acquisition of a participation.
  • If the transfer of shares is made for the purpose of restructuring the corporation’s business operations, there is also no harmful acquisition of a participation. Restructuring is a measure aimed at preventing or eliminating illiquidity or over-indebtedness while preserving the essential operational structures.

Capital gains tax

Capital gains are generally taxed at a preferential tax rate of (total) 26.375%, including capital gains tax (Kapitalertragsteuer) of 25% and an additional solidarity surcharge (Solidaritätszuschlag) of 5.5% on the capital gains tax.

For shareholders (natural persons) holding at least 1% of a corporation’s capital within the last five fiscal years, 40% of the profit resulting from the sale of shares or dividends is tax exempt, with the remaining 60% subject to income taxation.

If the shareholder is also a corporation, dividends or profits resulting from the sale of shares in a corporation are generally tax exempt for 95% of the respective dividend or profit. Detailed rules and exceptions apply.

If a natural person subject to taxation in Germany holds shares in a corporation and transfers their tax residence abroad, an exit tax may apply under the German Foreign Tax Act (Außensteuergesetz).

Foreign-sourced income

Income from foreign sources is also subject to taxation in Germany, as Germany taxes the “worldwide income”.

In cases of double taxation, the rules of German international tax law and treaties for the avoidance of double taxation may apply.

Various indirect taxes apply in Germany, in particular the German value added tax (Umsatzsteuer) and import value added tax (Einfuhrumsatzsteuer).

Other important direct taxes include the energy tax (Energiesteuer), tobacco tax (Tabaksteuer), alcohol tax (Alkoholsteuer), insurance tax (Versicherungssteuer), energy tax (Energiesteuer), and coffee tax (Kaffeesteuer).

The main withholding taxes in Germany are:

• Capital gains tax. A total of 26.375% on dividends, capital gains from the sale of securities, or interest. The tax must be withheld by the company paying the dividend/interest at the time of distribution and declared to the competent tax office.
  Upon application, an exemption from the payment of capital gains tax may be granted under certain conditions. Such an exemption application may be granted for capital gains (e.g. dividends) received by a parent company that has neither its registered office nor its management in Germany, or by a permanent establishment of such a parent company located in another Member State of the European Union, from distributions made by a subsidiary. The application for exemption must be filed with the German Federal Central Tax Office (Bundeszentralamt für Steuern). It has to be noted, however, that it might currently take years for the German Federal Central Tax Office to confirm the exemption.
• Withholding tax for non-residents. The withholding tax for non-residents in Germany who earn income in Germany from, for example, the licensing of copyrights or industrial property rights, is generally 15% and must be withheld by the licensee. The tax becomes due at the time the income is received by the non-resident and must be withheld by the payer of the income and remitted to the competent tax office.
  Upon application, an exemption from the payment of this withholding tax may also be requested from the German Federal Central Tax Office.
• Income tax. For income from employment, income tax is withheld from wages provided that the wages are paid by an employer who: has a domicile, habitual residence, place of management, registered office, permanent establishment, or permanent representative in Germany (domestic employer); or commercially assigns an employee to a third party to perform work in Germany without being a domestic employer.
  Wage tax becomes due at the time the wages are paid to the employee and must be reported and remitted by the employer to the competent tax office as part of the (usually) monthly payroll tax return. The payroll tax paid is credited against the employee’s income tax liability.

General Anti-Avoidance Rule

In Germany, there are both special anti-avoidance provisions found in the respective individual laws and a general provision under section 42 of the German Fiscal Code (Abgabenordnung) that declares abusive arrangements invalid.

Under section 42(2) of the German Fiscal Code, an abuse of the law occurs when an inappropriate legal arrangement is chosen that results in a tax advantage for the corporation or a third party — one not provided for by law — compared to an appropriate arrangement. This does not apply if the corporation can demonstrate non-tax-related reasons for the chosen arrangement that are significant in light of the overall circumstances. The conditions under which an inappropriate arrangement exists can only be assessed on a case-by-case basis.

The following aspects are typically relevant here:

• “Legal arrangement” refers to actions taken by a corporation in which they utilise methods that are generally permitted by law to achieve their objectives (typically tax savings). The intention to save on taxes is not, in itself, objectionable. Rather, case law permits corporations to choose, from among several legally permissible courses of action, the one that is most advantageous for them from a tax perspective.
• “Abuse” refers to an “inappropriate legal arrangement” that results in a tax advantage not provided for by law. It is not possible to provide an exhaustive definition of what this entails. According to case law, an indication of an inappropriate arrangement is whether there is a “complicated or artificial arrangement” (Federal Fiscal Court, judgment of January 1, 2001, Ref. IV R 3/00). The assessment of whether an abuse exists — as with the other requirements for abuse in general — must always be determined on a case-by-case basis.
• A “tax advantage not provided for by law” is to be understood very broadly as encompassing the avoidance of burdensome tax advantages.

There is no abuse of tax planning if the corporation can demonstrate so-called “non-tax reasons” for their arrangement that are “significant” when viewed in the context of all circumstances. Whether such reasons exist is also subject to a case-by-case assessment.

Criminal tax law

It should be noted that in cases of abusive arrangements, the question always arises as to whether these are also to be treated as tax fraud.

Under section 370(1) of the German Fiscal Code, a person risks committing a tax fraud (if further conditions are fulfilled, in particular if the person acts intentionally), if they (among other things):

• provide the tax authorities or other authorities with incorrect or incomplete information regarding facts relevant to taxation; or
• fail to disclose tax-relevant facts to the tax authorities in violation of a duty, thereby evading taxes or obtaining unjustified tax advantages for oneself or another person.

Attempted tax fraud is also a criminal offence.

In particularly serious cases, the prison sentence ranges from six months to 10 years. A particularly serious case generally exists when the individual evades taxes on a large scale; case law typically assumes a tax amount of at least EUR 50,000 in such cases.

In cases of tax abuse, criminal tax investigation proceedings are frequently initiated in practice.

Tax disputes often arise for companies as a result of findings made during a tax audit that lead to the issuance of a tax assessment unfavourable to the company. In addition, tax disputes frequently arise after the filing of tax returns.

Disputes over tax refund claims are also common in practice, for example, when the corporation asserts tax refund claims and the tax authority offsets these claims.

Tax controversies are primarily governed by the German Fiscal Code (Abgabenordnung) and the German Fiscal Court Rules (Finanzgerichtsordnung). A fundamental distinction is made between the (extrajudicial) objection procedure (Einspruchsverfahren) and the court procedure.

Objection proceedings

Tax disputes typically arise when the competent tax office issues a tax assessment imposing a liability or revokes a tax assessment granting a benefit. After the tax assessment imposing a liability is issued, the corporation has one month (from the date of notification of the tax assessment) to file an objection to it. The objection is valid if the tax assessment is unlawful, that is, it violates tax laws and the corporation’s rights.

The tax office reviews the objection as part of the appeal process; during this process, the corporation has the opportunity to exchange arguments with the tax office regarding the validity of the tax assessment. However, if the objection process was preceded by a tax audit, it is unlikely that the tax office will change the position it took during the audit in the subsequent objection process.

The tax office must then decide whether:

• the objection is upheld and the contested note is revoked;
• the objection is not upheld and a decision on the objection is issued; or
• the contested assessment is partially upheld and is partially revoked or amended.

In the second and third cases mentioned above, the corporation must then challenge an objection decision that is unfavourable to him through legal action. The tax office’s objection decision is, as a general rule, a prerequisite for the admissibility of a lawsuit against the contested tax assessment.

The objection process has no specific, legally prescribed duration and is free of procedural costs. It usually takes several months, and sometimes years, for a decision to be reached on an objection. If the tax office has not decided on the objection within six months without providing a sufficient reason, an action for failure to act may be considered. In the context of the action for failure to act, the competent tax court may stay the proceedings until the expiration of a period it sets, which may be extended; if the extrajudicial remedy is granted within this period or the requested administrative act is issued within this period, the main proceedings are to be considered settled.

Lawsuit

If the tax office issues a decision on an objection, the corporation has one month from the date of notification of the tax assessment to file a lawsuit against it. During the lawsuit proceedings, the tax court then reviews whether the contested tax assessment (in the form of the decision on the objection) was issued lawfully.

If the corporation or the tax administration loses before the tax court, an appeal may be filed with the Federal Fiscal Court, provided that the tax court has granted leave to appeal, which rarely occurs. The Federal Fiscal Court must then rule on the appeal. Against a decision of the Federal Fiscal Court, only a constitutional complaint may be filed; however, constitutional complaints are accepted for decision by the Federal Constitutional Court only in rare cases.

If the tax court does not grant leave to appeal, the corporation or the tax authorities must file a petition for leave to appeal with the Federal Fiscal Court, requesting that the appeal be granted. The petition for leave to appeal will be successful only if:

• the case is of fundamental importance;
• the development of the law or the safeguarding of uniform case law requires a decision by the Federal Fiscal Court; or
• a procedural fault is asserted and exists on which the decision may be based.

Only if the appeal is granted will the Federal Fiscal Court conduct a further review of the first-instance judgment.

Unlike the objection proceedings, the litigation proceedings (in all instances) are subject to costs, although the corporation is only required to bear costs if it loses the case. However, upon filing the lawsuit, the corporation must advance court costs, which are determined based on the amount of the tax in dispute. If the corporation loses the case, they must bear the court costs; beyond that, the tax office cannot demand reimbursement of costs.

In particular: the tax office’s offsetting

If the corporation has claims for a tax refund against the tax office, the tax office will check before making any payment whether there are any outstanding tax claims against the corporation and, if so, declare a set-off against these claims.

If the tax office’s set-off was unjustified, the corporation must first request a so-called settlement assessment note (Abrechnungsbescheid). If the tax office maintains its position, the declared set-off will be confirmed as valid in the settlement notice. The corporation must then file an objection to the settlement notice to enforce their rights and, if necessary, initiate a lawsuit against the settlement notice within the applicable deadlines.

Interim legal protection

When taxes are assessed against a corporation in a tax assessment notice, the corporation is generally required to pay the taxes within one month of the notice being issued.

If no payment is made, the tax office may enforce collection of the tax. Since filing an objection does not have suspensive effect, the corporation can only prevent enforcement of the tax by filing a motion for a stay of enforcement; it should be noted, however, that interest is due on the tax upon enforcement. The tax office will grant a stay of enforcement only if there are serious doubts as to the legality of the contested tax assessment or if enforcement would result in an unreasonable hardship for the corporation that is not justified by overriding public interests.

If the tax office rejects the application for a stay of enforcement, the corporation may file an application for a stay of enforcement with the tax court and, on appeal, with the Federal Fiscal Court. Here, too, a stay of enforcement is granted if there are serious doubts as to the legality of the contested tax assessment or if enforcement would result in undue hardship for the corporation that is not justified by overriding public interests.

Proceedings for interim relief are also subject to (reduced) costs if the corporation’s application is denied. As with the lawsuit proceedings, court costs are incurred; here too, the tax office has no claim to reimbursement of costs if it prevails.

In practice, there are no alternative methods for resolving tax disputes other than the objection procedure or proceedings before the tax court.

Theoretically, mediation is also possible before the tax court. However, there are currently no known cases in which mediation has been conducted.

In practice, an agreement is sometimes reached regarding an unclear factual situation that can no longer be clarified, in the form of a factual understanding (Tatsächliche Verständigung). In this respect, the factual understanding constitutes an agreement between the tax office and the corporation.

In addition, every effort should be made to find solutions to the tax controversy through discussions with the relevant tax office or tax auditor.