Summary
Corporation tax is a nationwide 15% tax on the profits of UG, GmbH, AG and other legal entities, applied to both distributed and undistributed profits. A solidarity surcharge and, typically, trade tax also apply. German-resident corporations are taxed on worldwide income, while non-resident corporations are taxed on German-source income. Taxable income starts from the commercial accounts and is adjusted for items like hidden profit distributions, interest limitation and participation income. Losses can be carried back (limited) and carried forward (with caps) to reduce future tax.
Contents
What is corporation tax?
Corporation tax in Germany is a tax on the income of certain legal entities including corporations, foundations and associations. Like trade tax, corporation tax is a business tax and is supplemented by other types of taxes that entrepreneurs pay on their income from business activities.
What is the acronym for corporation tax in Germany?
In most cases, corporation tax 💬Körperschaftsteuer is simply abbreviated as KSt. In the past, KöSt was also commonly used as an abbreviation.
Who has to pay corporation tax in Germany?
Who has to pay corporation tax is regulated by the Corporation Tax Act, which is closely based on the Income Tax Act. The following are subject to corporation tax:
- Corporations / incorporated companies such as the AG, GmbH & the UG (haftungsbeschränkt)
- Cooperatives incl. European cooperatives
- Mutual insurance and pension fund associations
- Other legal entities under private law
- Associations, institutions, foundations & other special-purpose assets under private law without legal capacity
- Legal entities under public law with businesses of a commercial nature
Limitation and exemption from corporation tax
In principle, corporate entities in Germany are subject to corporation tax. However, the Corporate Income Tax Act (KStG) differentiates between several forms of tax liability:
- Unlimited corporation tax liability: applies to all worldwide income (§ 1 KStG).
- Limited corporation tax liability: applies only to income earned in Germany (§ 2 KStG).
- Exemption from corporation tax: applies to specific legal forms or purposes (§ 5 KStG).
Legal entities whose registered office or place of management is located in Germany are subject to unlimited corporation tax liability, meaning all of their global income is taxable in Germany. Foreign corporations whose registered office or management is outside Germany are subject only to limited tax liability, and must pay corporation tax solely on their domestic income.
Certain organisations are exempt from corporation tax, including non-profit corporations, entities with charitable or religious purposes, professional associations, and political parties, provided they meet the legal requirements under § 5 KStG.
When is a corporation liable for corporation tax?
Corporations such as GmbHs are liable for corporation tax even before they are entered in the commercial register. In the period between the application for the commercial register by the notary and the company’s registration, every corporation has the status: in formation 💬in Gründung . The pre-corporation is treated as a single entity with the resulting corporation. As a result, the liability for corporation tax begins with the formation of the pre-corporation, i.e. from the notarisation.
What is the corporate tax rate?
The corporation tax rate is 15% nationwide and is calculated on distributed and undistributed profits. The tax base is the profit made by the company or corporation during the financial year.
Since corporations have to prepare a balance sheet including a profit and loss account, the profit shown in the balance sheet is the basis for calculating the corporate tax. However, the taxable income may differ from this.
How is taxable income calculated?
The calculating corporation tax is based on the commercial balance sheet. From this, the corporation tax is determined by means of various tax adjustments.
Tip: It’s enough to record the differences between (profit under commercial law and profit under tax law outside the commercial balance sheet. It is not necessary to prepare a separate tax balance sheet.
What are hidden distributions?
Income must not be artificially influenced by hidden contributions. Any hidden capital movement distorts the tax base. For example, if a shareholder concludes contracts with his GmbH that secure an excessive director’s salary or the payment of excessive rent, this is a hidden profit distribution.
The reverse is also true: if a managing director waives her salary or repays a loan she has granted to the GmbH, the latter has received hidden contributions. In both cases, the tax office interprets the cash movements as hidden and taxes them retroactively.
Income from share holdings
Dividends and gains from the sale of shares in other companies are only taxed at a flat rate of 5%. Dividends from free-float holdings (less than 10%) are exempt.
Interest expenses
The deduction of interest expenses is limited by the interest cap–this limits the deductability of interest expense as a business expense.
Transfer of shares
When shares in a corporation are transferred, any tax loss carry-forwards are lost either proportionally (transfer of more than 25% of the shares within five years) or completely (transfer of more than 50% of the shares).
What is the partial income procedure?
The partial income procedure 💬Teileinkünfteverfahren (TEV) concerns the taxation of income from shareholdings in corporations in Germany. Shareholders can opt for the TEV as an alternative to regular taxation through capital gains tax. This is how the partial income system works:
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Shareholders of a corporation pay tax on 60% of their profit distributions at their personal income tax rate. 40% of the profits are tax-free. Whether the choice of the TEV results in tax savings must be assessed on a case-by-case basis, as a change in taxation method is only possible by application.
Corporation tax allowance
Yes, but with restrictions. Certain agricultural cooperatives and associations can claim an allowance of €15,000. Associations that don’t distribute profits can claim an allowance of €5,000. However, this cannot be higher than the corporation’s profit, and the allowance deduction cannot result in a loss.
How do losses affect corporation tax?
Under certain conditions, corporations can offset their losses against their profits. For example, if you make a loss with your GmbH, the GmbH can use it as a loss carry-forward or loss carry-back. In this way, you can reduce your profits and thus your tax burden in another (later or earlier) tax period. Only 60% of losses can be deducted from a base/basic amount of one million euros (§ 10 EStG).
Are loss carryforwards & loss carrybacks treated differently?
If loss carryforwards and loss carrybacks coincide in the same assessment period, the loss carryforwards are deducted from the profit first and then the loss carrybacks. A loss carryback is limited to one year. This means that losses can only be carried back to the previous tax year. They are offset against profits in that period when they are claimed. Losses can be carried forward to future assessment periods for an unlimited period of time.
How much tax do companies have to pay in Germany?
Corporation tax is only one component of company taxation. The UG, GmbH and AG also pay trade tax and solidarity tax. This means that their profits are taxed at a total rate of just under 30%. Here is an example:
Total taxation of the profits of limited liability companies in Germany
| Tax type | Tax rate |
| Corporate income tax | 15% |
| Solidarity surcharge 5.5%
0.15 * 0.055 |
0.83% |
| Trade tax
Trade tax measurement amount 3,5% Average assessment rate 361% |
12.6% |
| Average tax rate | 28.43% |
How is corporation tax calculated in Germany?
Corporation tax is calculated on the pre-tax profit, possibly after deducting the salary of the director. The example in the next section illustrates this: If you have a taxable profit of €100,000, you will pay 15% corporation tax, i.e. €15,000.
Corporation tax vs. income tax: Which is more favourable?
15% corporation tax seems rather low. Especially when compared to the personal income tax that sole proprietors have to pay. In isolation, this is true. But taken as a whole, the tax burden of a sole proprietor is often lower than that of limited liability companies.
In the below example, the tax burden is calculated on a company profit of €100,000. The example uses an average business tax rate of 361% and an income tax rate of 32%.
| Tax type | GmbH | After taxes | Sole proprietor
|
After taxes |
| Profit before taxes and after salary | €100,000.00 | 100% | €100,000.00 | 100% |
| Corporate income tax 15% | – €15.000.00 | – 15% | – | – |
| Solidarity surcharge 5,5% | – €825.00 | – 0.83% | – | – |
| Trade income | ||||
| Trade income
|
€100.000.00 | – | €100,000.00 | – |
| After trade tax allowance | – | – | €75,500.00 | – |
| Tax rate * Assessment rate
(3,50 * 361%) |
– €12,640.00 | – 12.64% | – €9,543.20 | – 9.54% |
| Income tax | – | – | – €32,000.00 | – 32.00% |
| Solidarity surcharge | – | – | – €1,760.00 | – 1.76% |
| + Trade tax credit
(Taxable amount * 3.8) |
– | – | + €10,041.50 | + 10.04% |
| Effective income tax burden | – €23,718.50 | – 23.72% | ||
| Distributable profit | €71.535.00 | 71.54% | – | – |
| Capital gains tax 25% (profit distribution) | – €17,883.75 | – 17.88% | – | – |
| Solidarity surcharge 5.5% | – €701.04 | – 0.98% | – | |
| Profits after taxes | €53,000.21 | 53.00% | €66,738.30 | 66.74% |
Conclusion: Under certain circumstances, the tax burden of a sole proprietor can be lower than that of a GmbH for the same profit–even though the income tax is actually higher than the corporation tax. In principle, it is not possible to say which legal form is more favourable from a tax point of view, as the rates of trade tax, income tax and other factors must always be taken into account on a case-by-case basis.
Payment of corporation tax
Like personal income tax, corporation tax is paid in quarterly advance payments. These are due on 10 March, 10 June, 10 September and 10 December. After the end of the financial year, you submit your corporation tax return based on your annual financial statements.
Tax returns must now be filed electronically. If your advance payments were too high, you receive a refund; if they were too low, you must make an additional payment.
The filing deadline is 31 May of the following year. If you use a tax adviser, the deadline is usually extended to 31 December.
How to prepare the corporation tax return
The corporation tax return consists of a main form and several annexes. These forms cover your taxable income, adjustments from your annual accounts and any relevant additions or deductions. Your annual financial statements must always be submitted along with the return.
In simplified terms, preparing the return involves:
- Reporting your annual profit
- Making adjustments for non-deductible expenses and special tax rules
- Declaring any income with a foreign element
- Providing supporting information required in the annexes
The tax office uses this data to calculate the final corporation tax liability.
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How are corporation tax refunds handled?
If your actual profit is lower than expected, you may have overpaid corporation tax through your advance payments. In that case, the tax office issues a refund, which is transferred to the business bank account you have on file.
The refund amount is shown on the corporation tax assessment notice you receive after filing your return.
Takeaways
Expect an overall corporate burden of roughly ~30% when combining corporation tax, solidarity surcharge and local trade tax. Corporations make quarterly advance payments (10 Mar/Jun/Sep/Dec) and file an annual KSt return electronically. Liability begins already at notarisation of the pre-corporation. Optimise by managing loss utilisation, monitoring add-backs, and planning around share transfers that can forfeit loss carryforwards. For precise structuring and compliance, work with a qualified tax adviser.
