Corporate taxation 
in Baden-Württemberg

Corporate income tax (Körperschaftsteuer) is levied as a flat nationwide tax at a rate of 15 percent of the taxable corporate income. Taxable income (i.e. annual business profits) forms the tax base for corporate income tax. Under German commercial law, corporate companies' annual profits are calculated and recorded in the annual financial statement. This also forms the basis for determining taxable income. However, German tax law provides different accounting options and income correction rules, meaning that the taxable income usually differs from the annual profit determined in the financial statement under commercial law.

 

Solidarity Surcharge 

The solidarity surcharge (Solidaritätszuschlag) is a fixed and flat nationwide component of company taxation. It is added to the corporate income tax and set at a rate of 5.5 percent of the corporate income tax rate (and not 5.5 percent of income). Taken together, the corporate income tax and solidarity surcharge amount to a total taxable rate of 15.8 percent.

Even though trade tax (Gewerbesteuer) is regulated by federal law, it is a municipal tax. The rules for determining the taxable income (business profits plus certain statutory additions and allowances) are the same throughout Germany. Moreover, the trade tax rate is the same for all businesses within one municipality. However, the tax rate applicable in a municipality is individually determined by each municipality. The individual trade tax rate of a specific site is therefore the decisive factor for the overall corporate tax burden. The minimum trade tax rate must be at least seven percent. There is no statutory ceiling of the trade tax rate, but the German average trade tax rate is slightly above 14 percent (2023). As a rule, the trade tax rate tends to be higher in urban than in rural areas. The solidarity surcharge is not levied on trade tax.

 

Calculating Trade Tax 

The individual trade tax amount depends on two factors:

•  the multiplier (Hebesatz) stipulated individually by every municipality
• the tax base rate of 3.5 percent (across Germany). 

The taxable income is multiplied with the tax base rate resulting in the so-called tax base amount. This tax base amount is then multiplied by the applicable municipal multiplier. The multiplier is set by each municipality. On average, it is slightly above 400 percent, but may not total less than 200 percent. There is no upper limit for the municipal multiplier.

 

Model Calculation – Trade Tax 

• A GmbH with an annual taxable income of EUR 1,000,000 is based in city A.
• City A has stipulated a municipal multiplier of 400 percent.
• The tax base amount for the GmbH is 3.5 percent of its annual taxable earnings or EUR 35,000.
• The EUR 35,000 is multiplied by the municipal multiplier of 400 percent, resulting in a total trade tax amount for the GmbH of EUR 140,000

Germany provides an extensive network of double taxation agreements to ensure that double taxation in international business relations is ruled out. If a German subsidiary pays out dividends to a foreign parent corporation, generally a withholding tax (Kapitalertragsteuer) of 25 percent plus solidarity surchage is due.

In the case of an existing double taxation agreement (DTA) with a foreign country, the withholding tax is usually levied at a significantly lower rate, e.g. 15, 10 or 5 percent. Withholding tax still paid in Germany can be credited against existing foreign tax obligations or the parent company has been exempted from dividend-payable tax in the respective DTA state. Different rules may apply for dividend payments by partnerships.

 

• The double taxation agreement with the USA, for example, even allows a reduction of dividend taxation to zero percent where certain requirements are fulfilled. Moreover, EU law, under certain conditions, allows tax-free transfer of dividends between all EU member states.

Value-added tax (VAT) is a tax on the exchange of goods and services. Companies are generally obliged to add value added tax to the prices of their goods or services and to invoice their customers accordingly.

In specific business-to-business transactions, the business client has to transfer the VAT to the tax authority – so-called reverse charge procedure (applicable for example to certain types of construction work carried out by subcontractors). The reverse charge procedure is also generally applicable for intra-community supplies, i.e. the sale of goods or services from an entrepreneur in one EU member state to a commercial customer in another EU member state. In general, the commercial customer has to pay VAT in his or her EU member state in cases of intra-community acquisitions.

 

VAT Rate 

The 19 percent VAT rate in Germany is below the European average. A reduced rate of seven percent applies to certain consumer goods and everyday services (such as food, newspapers, local public transport, and hotel stays). Some services (such as bank and health services or community work) are completely VAT exempt. Value-added tax which is collected has to be paid to the responsible tax office on a monthly, quarterly or annual basis. The exact time frame depends on the company’s level of turnover.

 

Input VAT 

Deduction Companies themselves regularly pay VAT when they purchase goods or services. The taxes collected and paid can be balanced out in the VAT return as input VAT deduction (Vorsteuerabzug). For companies, value-added tax represents a transitory item only.