What is the tax liability of an incorporated company in Germany? In this article, you will learn what taxes shareholders of limited liability companies, including non-profit corporations, should expect.
How are incorporated companies taxed?
Your tax liability as a shareholder of an incorporated company is naturally different from a partnership or a sole proprietorship. The amount of taxation and which types taxes you have to pay depends on many factors. Some taxation applies to all commercial enterprises, while others are unique to limited liability companies.
As a limited liability company, the separation principle (Trennungsprinzip) treats the company as a distinct entity that exists apart from the individual entrepreneur. Thus, the taxes a company incurs do not apply to the individual entrepreneur.
If you make the leap to entrepreneurship with an incorporated company, the following types of taxes, among others, apply:
|Tax type||Abbreviation||Tax rate||What is taxed?|
|Corporate income tax (Körperschaftsteuer)||KSt||15%||Revenue of the company|
|Trade tax |
|GewSt||Varies according to the municipality||Income from commercial operations (Gewerbebetrieb)|
|Capital gains tax |
|KapESt||25%||Capital income of the shareholders|
|Value-added tax |
|USt||Generally 19%, but some product groups are subject to the reduced VAT rate of 7%||All goods and services of a company|
|Wage tax |
|LSt||Depending on the tax class (Steuerklasse)||Income from employment|
Corporate income tax (Körperschaftsteuer)
Legal entities such as incorporated companies do not pay income tax, but corporate income tax. The corporate income tax rate throughout Germany is 15% of a company’s net profit.
Trade tax (Gewerbesteuer)
All businesses earning income from commercial activities are subject to trade tax (Gewerbesteuer). Local municipalities administer the trade tax, including determining the assessment rate for their respective jurisdictions.
Capital gains tax (Kapitalertragsteuer)
Capital gains tax (Kapitalertragsteuer) is an income tax on capital income, specially the distribution of profits by the shareholder. At least a quarter of any transfer of assets from the company to the shareholders is payable to the tax office. In other words, the capital gains tax is 25% (plus the solidarity surcharge and the church tax).
Value-added tax (Umsatzsteuer) for corporations
The government levies a value-added tax (Umsatzsteuer, or USt for short) on all goods and services exchanged for payment. The rate of VAT is generally 19%, but specific product categories are subject to the lower rate of 7%.
Wage/payroll tax (Lohnsteuer)
The wage tax (Lohnsteuer) does not concern the corporation as such, but its employees (if any). Wage tax applies to income from employment and, therefore, does not affect the shareholders. However, if a shareholder becomes an employee (eg managing director) of the company, he or she must pay wage tax.
Corporate taxes per legal form
How is a GmbH taxed?
As a rule, the GmbH is subject to all the taxes mentioned above. If the company owns real estate (Grundvermögen), the real estate tax (Grundsteuer) applies. (This is calculated using the unit value of the property, weighted by the tax rate.) On the upside, you may deduct the company’s formation costs if you meet certain conditions.
How is a UG taxed?
The Unternehmergesellschaft (UG) is subject to the same taxes as a GmbH, as it also comes under the GmbH law. However, shareholders in a UG should bear in mind that not only is corporate income tax on profits and trade tax on trade income payable, but the company is also obliged to set aside reserves. Thus, once tax deductions and losses carryforward, 25% of the profits go into reserves.
How is a AG taxed?
The taxation of an AG is basically identical to that of a GmbH and UG, with the exception that AG withholds 25% of the dividends if profit distributions are to be paid out to shareholders on which capital gains tax is applicable.
Get a bookkeeper who specialise in startups
Book a fixed price package online with us
How is a holding company taxed?
Many entrepreneurs decide to establish a holding company because of the tax advantages. This is because tax benefits can be used when transferring profits from subsidiaries to the parent company and also when selling subsidiaries.
For example, the profits of the subsidiaries can be transferred to the parent company easily and with tax advantages. Moreover, entrepreneurs with a holding company can avoid double taxation, which would be unavoidable with the ownership of several companies without a holding structure.
You can read more about optimising taxes using holding structures here.
How is a non-profit company taxed?
If your company has been classified as a non-profit organisation by the tax office, you can benefit from numerous tax breaks. Although a company is liable for corporate income tax in principle, if it is pursuing a not-for-profit purpose and has a corresponding legal form such as the gGmbH or gUG it is exempt. The same applies to trade tax. Non-profit companies can also save on VAT and on property tax.
Special tax concessions for asset managers companies (Vermögensverwaltungsgesellschaften)
Exceptions to trade tax apply to so-called real estate limited liability companies (Immobilien-GmbHs) or asset management companies (Vermögensverwaltungsgesellschaften). If you do not intend to engage in commercial activities and indicate the asset management in the company name and business purpose, corporations can be exempted from trade tax upon application.
Learn more about asset-managing companies and where they can be helpful.
What happens if taxes are not paid correctly?
If the tax office suspects that you have not paid your company’s taxes properly, it may audit you. (However, expect additional external audits at regular intervals especially when your company grows to a certain size.) During this audit, a tax auditor examines your bookkeeping as well as all other tax-relevant documentation.
The Master list of all Accounting articles can be found here.