Profit Taxation in Germany

Profit Taxation in Germany A brief introduction for corporate investors as of April 2013 Profit Taxation in Germany Imprint Publisher: Luther Rechtsanwaltsgesellschaft mbH Anna-Schneider-Steig 22, 50678 Cologne, Germany Telephone +49 221 9937 0, Facsimile +49 221 9937 110 [email protected] Editor: Nicole Fröhlich, Telephone +49 69 27229 24830 [email protected] Art Direction: VISCHER&BERNET GmbH Agentur für Marketing und Werbung, Mittelstraße 11 / 1 70180 Stuttgart, Telefon +49 711 23960 0, Telefax +49 711 23960 49, [email protected] Copyright: These texts are protected by copyright. You may make use of the information contained herein with our written consent, if you do so accurately and cite us as the source. Please contact the editors in this regard. Disclaimer Although every effort has been made to offer current and correct information, this publication has been prepared to give general guidance only. It cannot substitute individual legal and/or tax advice. This publication is distributed with the understanding that Luther, the editors and authors cannot be held responsible for the results of any actions taken on the basis of information contained herein or omitted, nor for any errors or omissions in this regard. 2 Contents 6. Loss utilization 6.1. Minimum Taxation 1. Tax rates 6.2. Anti-loss trafficking rules (“change-of-ownership rules”) 1.1. German-based corporations 6.3. No Restructuring Escape 1.2. Partnerships 6.4. Intra-Group Escape 1.3. Branches 6.5. Hidden Reserve-Escape page 4 pages 10 & 11 2. Taxable income 7. Tax neutral reorganisations pages 4 & 5 page 12 3. Tax group for CIT and 8. Step-up and goodwill TT purposes amortization page 6 page 12 4. Participation exemption 9. Withholding taxes 4.1. Dividends 9.1. Dividends to foreign shareholders 4.2. Capital gains 9.2. Interest page 7 9.3. Royalties 9.4. Strict substance requirements pages 13 & 14 5. Interest deduction limitation (“interest barrier”) 10. Inter company Transactions 5.1. Interest rate limitations page 15 5.2. Overview interest barrier 5.3. Basic rule: Deduction up to 30 % of the tax EBITDA 11. Transfer taxes 5.4. Interest carry-forward 5.5. Exemption 1: EUR 3m-threshold 11.1. VAT 5.6. Exemption 2: Entity does not belong 11.2. Stamp taxes to a group (“group clause”) 11.3. Real estate transfer tax 5.7. Exemption 3: Equity test page 16 (“escape clause”) 5.8. EBITDA Carry-Forward pages 8 & 9 12. Annex: Withholding tax rates for selected countries page 17 3 Profit Taxation in Germany 1. Tax rates 2. Taxable income 1.1. German-based corporations Taxable income of corporations for CIT purposes is calculated based on the commercial balance sheet under German GAAP German-based corporations are subject to federal corporate with numerous adjustments. income tax (CIT, Körperschaftsteuer) and – basically – also to trade tax, a profit tax levied by the municipalities (TT, Gewerbesteuer). Taxable income for purposes of trade tax is derived from taxable income for CIT purposes with further add-backs and The same rates apply to both current income and capital gains. deductions. A 95 % participation exemption applies to dividends and capital gains from the sale of shares (see section 4.). A simplified scheme of the calculation of taxable income for a corporation is shown below. Average tax rateas are shown in the following table: Simplified scheme of calculation of the taxable profit for CIT: Corporate income tax (Körperschaftsteuer) 15 % Profit according to German GAAP Solidarity surcharge (Solidaritätszuschlag) 0 . 8 2 5 % + adjustments for certain write-downs, 15.825 % various kinds of provisions etc. Trade tax (Gewerbesteuer) approx. + interest expenses being non-deductible under deduction between 8 % limitation rules (“interest barrier”) Levied by municipalities at rates and 17 % depending on location of the business + various non-deductible expenses amongst others: income taxes including trade tax; gifts, guest houses, yachts; 30 % Combined profit tax rate approx. of entertainment expenses; 50 % of remuneration to mem- between 23 % bers of the supervisory board and 33 % - 95 % of dividend income (see section 4 below) CIT and TT are not deductible for tax purposes. - 95 % of capital gains from the disposal of shares in corporations (see section 4 below) 1.2. Partnerships + transfer pricing adjustments = Taxable income for CIT purposes Partnerships themselves are subject to trade tax but not subject to CIT. For CIT purposes a partnership is to a large extent tax transparent. CIT is levied from the partners on their profit share. The CIT rate for corporate partners is shown in section 1.1. 1.3. Branches German branches of foreign corporations are subject to CIT and trade tax like German-based corporations are. Tax rates are those shown in section 1.1. German double tax treaties assign the taxation right to Germany if a permanent establishment (PE) is constituted. 4 sheet of the new partner. Reason for this is that the direct acquisi- Simplified scheme of calculation tion of a partnership share is treated like an asset deal. The sup- of the taxable profit for trade tax purposes plementary balance sheet only belongs to this partner. Taxable income for CIT purposes Special purpose balance sheets are generated in case special purpose assets or liabilities exist. Special purpose assets / liabili- + 25 % of all interest expenses ties are those which belong to a partner, however, which serve (as far as deductible under interest barrier) the purpose of the partnership or strengthen the interest of the partner in the partnership. Examples are assets which are let + add-back of the deemed interest component comprised in by the partner to the partnership or a debt which is used by the (amongst others): partner in order to finance his participation in the partnership. Special purpose balance sheets only belong to the respective lease payments for movable assets (add-back: 5 %) lease payments for immovable assets (add-back: 12.5 %) partner. Income / expense with relation to such special purpose royalties (add-back: 6.25 %) assets / liabilities are considered in the income calculation at the level of the partnership and affect the partnership’s income for - (allowance up to EUR 25k) trade tax purposes. For corporate income tax purposes, such income and expense is allocated to the partner to whom the - 1.2 % of a special tax value of real property special purpose balance sheet belongs. + dividends from foreign passive corporations Income calculation of branches is subject to specific rules on the allocation of profits between PE and the headquarter. + dividends from all corporations with a shareholding of <15 % = Taxable income for TT purposes Determination of taxable income of a partnership is subject to a complex set of specific rules as a consequence of the tax trans- parency concept. In a first step, the taxable income is assessed at the level of the partnership. In a second step, the income is allocated to the partners in accordance with their participation in the partnership and subject to CIT at partners level. Trade tax, on the other hand, is paid by the partnership itself. As partnerships are tax transparent, their overall balance sheet not only comprehends the commercial balance sheet and the additional tax balance sheet adaptions (as a tax balance sheet for a corporation would). Instead, there are special purpose balance sheets and supplementary balance sheets which are part of the overall tax balance sheet of the partnership. Supplementary balance sheets and special purpose balance sheets are prepared for each partner, however, they belong to the sphere of the partnership. Supplementary balance sheets result from the acquisition of a partnership or the entry of a new partner into a partnership. In case the acquisition price was higher than the acquired (portion of the) equity of the partnership, acquired hidden reserves are stepped up in the supplementary balance 5 Profit Taxation in Germany 3. Tax group for CIT and TT purposes A tax group allows profit and loss pooling for CIT and TT purposes. Prerequisite for implementing a CIT and TT group is that the head of the tax group owns the majority of the voting rights in the members of the tax group. Only corporations can be members of a tax group. Head of a tax group can be corporations and also partnerships (however, in case of partnerships only if they have an operating business). A profit & loss absorption agreement needs to be concluded and entered into the commercial register at the latest during the year in which the agreement shall become valid for the first time. All profits made as well as all losses suffered have to be transferred to or need to be compensated by the head of the tax group. The amount of these profits / losses is based on the local GAAP balance sheets. In order to be valid for tax purposes, the profit & loss absorption agreement needs to be maintained for at least 5 calendar years unless an extraordinary reason for termination is given, e.g. the sale of a group company which is a subsidiary in the tax group. Taxes or tax loss carry-forwards are not assessed at the level of the group companies but only at the level of the head of the tax group. Tax loss carry-forwards of the group companies result- ing from losses of years prior to joining the tax group cannot be used during the existence of the tax group. Tax loss carry- forwards of the head of the tax group from years prior to the tax group can be utilized during the existence of the tax group. 6 4. Participation exemption 4.1. Dividends Dividends received by a corporation are exempt from CIT, if a 10 % minimum participation is fulfilled, but 5 % of the dividends are deemed non-deductible business expenses.

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