Authors: Nicole Kunas, Peter Lennartz, Andreas Funke & Tobias Spath, https://start-up-initiative.ey.com/
Tax registration in Germany
There is no need for an approval from the tax authorities for opening a business in Germany. Tax registration is required at the corporate income tax authority of the district in which the startup is situated. The tax registration number is valid for corporate income tax, trade tax and the preliminary and annual VAT filings.
Together with the tax registration, it is possible to apply for a VAT Identification Number which will be issued by the Federal Central Tax Office. After receiving the tax registration number, it is also possible to file a separate application for the VAT Identification Number directly with the Federal Central Tax Office. This number is used for EU intra-community transactions.
Moreover, local municipalities generally require a registration of commercial activities at the trade office of the respective municipal administration. The trade registration is typically connected to receiving a trade tax number. As soon as the startup begins to have salaried employees, an application with the social security authorities for a so-called ‘Betriebsnummer’ is required, so that the startup can comply with the wage tax and social security filing obligations.
Taxes on corporate income and gains
- German right to taxation:
Startups in Germany are mainly established as corporations in the legal form of a GmbH (similar to a UK or US private limited company). Corporations with a corporate seat or place of management in Germany are liable to corporate income tax as tax residents on their worldwide income unless otherwise provided in tax treaties. Non-resident corporations, having neither a seat nor a place of management in Germany, are liable to corporate income tax only on income generated inside Germany with a German income source (e.g. through a permanent establishment, such as a fixed place of business – often an office from which German operations are carried out)
- Corporate and trade tax:
The corporate income tax rate in Germany, which is applicable on the taxable income of the enterprise, is 15 %. A 5.5% solidarity surcharge thereon is imposed on corporate income tax. The taxable income of corporations is based on the annual financial statements prepared under the German generally accepted accounting principles (GAAP), subject to numerous adjustments for tax purposes, such as non-deductible treatment of specific business expenses or the application of tax exemption rules for certain types of income.
Furthermore, municipalities impose a trade tax on income. For purposes of this tax, the taxable income for the corporate income tax is subject to certain further adjustments, such as add-backs for financing costs. Consequently, the taxable income and trade tax income regularly differ from the annual business profit in the financial statements. The effective trade tax rate is freely set by each municipality and amounts to 14% on average. The law sets a trade tax floor at 7%. Therefore, the combined average tax rate for corporations (including corporate income tax, solidarity surcharge and trade tax) is flat and ranges from approximately 23% to 33%. If a company operates in several municipalities, the trade tax base is allocated according to the payroll paid at each site, so that various municipality multipliers can be taken into account.
Typical income adjustments for tax purposes are the following:
- Acquired goodwill must be capitalized for tax purposes and may be amortized over 15 years (generally 10 years for local GAAP purpose). Intangibles acquired individually must also be capitalized for tax purposes and may be amortized over their useful lives (normally between 5 and 10 years).
- A company’s own research and development as well as setup and formation expenses may not be capitalized for tax purposes but must be expensed. Provisions for expected losses from pending contracts may not be recognized for tax purposes. Future benefits arising in connection with the fulfilment of an obligation must be offset against costs resulting from the obligation.
- Non-interest-bearing debt must be discounted at an annual rate of 5.5% if the remaining term exceeds 12 months. Market rates do not apply.
After the income for tax purposes has been determined, certain adjustments need to be made to calculate the taxable income. Major adjustments as non-deductible expenses include:
- Income taxes (corporate income tax, solidarity surcharge and trade tax) and any interest expense paid with respect to these taxes
- Thirty percent of business meal expenses
- Gifts to non-employees exceeding EUR 35 per person per year and input value-added tax (VAT) regarding such expenses
- Administration and tax filings:
For fiscal years from 2018 onwards, annual corporate income tax and trade tax returns must be filed by 31 July of the year following the tax year. The deadline is extended until 28/29 February of the second year following the tax year if a licensed tax advisor prepares the returns. Prepayments of corporate income tax as well as trade tax with respect to the estimated tax liability are made in quarterly instalments and are usually determined by the tax amount due for the previous year. Tax accounting generally needs to be done by qualified personnel and within the German territory. Exceptions apply for auxiliary accounting tasks and for electronic accounting activities. A permit needs to be obtained from the tax authorities before shifting tax accounting activities into a foreign jurisdiction. Penalties may apply in case of non-compliance.
- Dividends and capital gains:
Dividends and capital gains (from sales of corporate shares) received by resident corporations and branches of non-resident corporations from their German and foreign corporate subsidiaries are generally exempt from tax. 5% of such dividends and capital gains will be treated as non-deductible business expenses (i.e. taxation of dividends received at an effective tax rate of 1.5%). Certain requirements have to be fulfilled to be eligible for the tax exemption. Capital losses from sales of shares or write-downs on shares are not deductible.
Setup and formation
The possibility to use setup or formation expenses before the original business activity of the enterprise begins depends on the legal form of the enterprise. As long as the startup is run by a single person or a partnership, initial expenses would be deductible from the initiator’s personal income tax base. If the startup is established in the legal form of a corporation (for example a limited liability company), it is authorized to claim similar expenses incurred after the notarial certification of the statute. No transfer of earlier expenses (i.e. from a pre- incorporation phase) is possible
- Tax losses:
Tax losses incurred within the original business activity may generally be carried forward without time limitation. Once profits arise, only 60% of annual taxable profits in excess of EUR 1 million can be offset by loss carry forwards under the restrictions of the so-called minimum taxation. As a result, 40% of the portion of profit exceeding EUR 1 million is subject to tax at regular rates, as the rules apply for both corporate income tax purposes and trade tax purposes. For corporate income tax purposes, an optional loss carry back is permitted for one year up to the maximum amount of EUR 1 million.
Under the German loss-trafficking rule, tax loss carry forwards as well as current-year losses (for corporate income tax and trade tax) are forfeited entirely if, within a five-year period, more than 50% of the shares are transferred. Exceptions to the loss-trafficking rule may apply under specific conditions for group restructurings and to the extent sufficient taxable built-in gains are available, as well as in case the business is continued in a similar manner after the transfer (subject to various conditions). Loss carry forwards and current losses of a loss-making company are also forfeited in the course of a merger, change of legal form and liquidation of the company.
- Transfer pricing:
German tax law contains a set of rules that allows the adjustment of inter-company transfer prices. All of the rules are based on the application of the arms-length principle. Germany has implemented the Authorized Organization for Economic Co-operation and Development (OECD) Approach (AOA). Specific documentation rules apply for transfer-pricing purposes. Transfer pricing documentations need to be prepared if de-minimis thresholds are exceeded. On request of a tax auditor, the taxpayer is required to submit the transfer pricing documentation within 60 days (in the case of extraordinary business transactions, within 30 days). Non-compliance with these rules may result in a penalty.
Value added tax (VAT)
The German VAT law as well as the VAT laws of all other EU Member States is based on the European Union value-added tax system. The VAT laws within the EU are therefore fairly harmonized and based on the same common rules. A taxable person, for VAT purposes, is any business entity or individual that independently carries out any economic activity in any place in Germany.
VAT is payable on the following transactions:
- Generally, on all supplies of goods or services made in Germany by a taxable person
- On the intra-community acquisitions of goods from another EU member state by a taxable person in Germany
- On reverse-charge supplies, including supplies of services and supplies of goods with installation services (the recipient is the tax debtor)
- On self-supplies of goods and services by a taxable person
- On the importation of goods from outside the EU, regardless of the VAT status of the importer
- VAT rates:
The amount of tax payable will correspond to the rate applicable to the goods or services supplied. A standard rate of 19% generally applies to all supplies of goods or services, unless a specific provision allows a reduced rate or an exemption. A reduced rate of 7% applies, for example, to newspapers and books, cultural services or food. Additionally, special tax exemptions for certain transactions exist. Examples of supplies of goods and services which are exempt are financial transactions, insurance services, medical services or export supplies.
- Input VAT recovery:
A taxable person (entrepreneur) may recover input tax, which describes VAT charged on goods and services purchased by him/her for taxable business purposes i.e. used for taxable (output) services or supplies. However, exceptions to this rule do exist. A taxable person generally recovers input tax by deducting it from output tax, which is VAT charged on supplies made. Input VAT includes VAT charged on goods and services supplied in Germany, VAT paid on imports of goods, VAT self-assessed on the intra-community acquisition of goods (see the chapter on the EU), and VAT on purchases of goods and services taxed under the reverse-charge procedure. Input VAT may only be recovered if the entrepreneur is in possession of either a valid invoice which fulfils the very formal invoicing requirements or a customs document documenting any import VAT paid. Input tax may not be recovered on purchases of goods and services that are not used for business purposes (for example, goods acquired for private use). Input tax directly related to making exempt supplies is generally not recoverable, however, there are exceptions. If a German taxable person makes both exempt and taxable supplies, it may not recover input tax in full. If the amount of input tax recoverable in a monthly period exceeds the amount of output tax payable in that period, the taxable person has an input tax credit. The credit is generally refunded
- VAT filing obligations:
In general, preliminary VAT returns are filed quarterly (electronically), but monthly returns must be filed if the VAT payable for the preceding year exceeded EUR 7,500. Also, newly established taxable persons must file monthly VAT returns for the first and second year of registration. The preliminary VAT return must be submitted by the 10th day after the end of the filing period. The VAT authorities must receive payment in full by the same day. Because the regular filing deadline is relatively short, the VAT authorities allow a permanent one- month filing and payment extension on written applications. This filing extension by one month also requires a deposit payment equal to 1/11 of the preceding year’s VAT liability by the regular due date.
In all cases (monthly, quarterly or no preliminary returns), an annual VAT return must be submitted by 31 July of the year following the end of the VAT year. The deadline is extended until 28/29 February of the second year following the tax year if a licensed tax advisor prepares the returns.
Non-established businesses, which have no fixed establishment in Germany, are generally not required to register for German VAT if all of the business’ supplies are covered by the reverse-charge procedure (under which the recipient of the supply must self-assess VAT). The reverse-charge procedure does not apply to supplies of goods located in Germany (except supplies of installed goods) or to supplies of goods or services made to private persons.
- VAT invoicing and credit notes:
A German taxable person must generally provide VAT invoices for supplies made to other taxable persons and to legal entities, including exports and intra-community supplies. Invoices must be issued within six months. This obligation, generally, does not exist for supplies that are VAT-exempt. Invoices are not automatically required for supplies made to private persons. Invoices for intra-community supplies as well as services subject to reverse-charge and rendered by taxable individuals resident in the EU must be issued within 15 days following the month in which said supplies or services have been rendered. Taxable persons must retain invoices for 10 years. A VAT invoice is required to support a claim for input tax deduction or a refund under the EU refund schemes (see above and the chapter on the EU).
A VAT credit note may be used to reduce the VAT charged and reclaimed on a supply. It is also possible to cancel an incorrect invoice and issue a revised one. For intra-community supplies of goods and exports, the invoice must include the statement that the supply is VAT-free. In addition, the customer’s valid VAT Identification Number (issued by another EU Member State) must be mentioned in the invoice for all intra-community supplies of goods. Electronic invoicing in line with EU Directive 2010/45/EU is permitted.
- VAT and digital economy:
There are some specific rules relating to the taxation of the digital economy in Germany, for example, specific rules for the place of the digital service and the Mini One Stop Shop scheme (MOSS). Under the EU-wide MOSS regime, special rules apply to the place of supply for supplies of telecommunications, broadcasting and electronic services to non-VAT taxable customers. These services are generally taxed in the country where the consumer is established (exception applies if payments for such services did not exceed EUR 10,000 in the previous VAT year). EU taxable persons that supply electronic services have to charge VAT to non-taxable persons established anywhere in the EU using the local VAT rate of the customers country. EU suppliers are permitted to discharge their VAT obligations using a Mini One Stop Shop scheme, which enables them to fulfil their VAT obligations (VAT registration, reporting, and payment) in their home country, including for services provided in other member states where they are not established. Accordingly, EU suppliers are able to apply a simplification measure similar to the one that is in place for non-EU providers of electronic services.
Furthermore, as of 2019 operators of online trading platforms may be held (secondarily) liable for any VAT amounts not paid by traders selling via their online platforms.