Germany - Corporate Taxation - (Last Reviewed: 15 July 2022)

Corporate Taxation
Germany
Author
Andreas Perdelwitz
IBFD Headquarters, Amsterdam, Netherlands

IBFD Tax Technical Editor

Filip Krajcuska

Latest Information
This chapter is based on information available up to 15 July 2022. Please find below the main changes made to
this chapter up to that date:
Loss carry-back period increased to 2 years.
Deadlines for submitting corporate income tax returns extended.

Abbreviations, Terms and References

Abbreviations
Abbreviation English definition German definition
AG Stock company Aktiengesellschaft

AktG Stock Company Law Aktiengesetz

AO General Tax Code Abgabenordnung

AStG Foreign Tax Law Aussensteuergesetz

ATAD Anti-Tax Avoidance Directive -

BFH Federal Tax Court Bundesfinanzhof

BGB Civil Code Bürgerliches Gesetzbuch

BGBl. I Federal Law Gazette; official collection Bundesgesetzblatt Teil I

of statutes passed by the parliament,
Part I
BStBl. Federal Tax Gazette; official collection Bundessteuerblatt
of statutes, decrees, letters, etc. (Part
I) and the decisions of theBFHthat
are provided for the publication in
theBStBl.(Part II)
CFC Controlled foreign company -

DrittelbG One-Third Participation Law Drittelbeteiligungsgesetz

ECJ Court of Justice of the European Union -

EEA European Economic Area (EU Member Europäischer Wirtschaftsraum

States and Iceland, Liechtenstein and
Norway)

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EEC/EC/EU European Economic Community/ -

European Communities/European Union
EEIG European Economic Interest Grouping Europäische Wirtschaftliche
Interessenvereinigung
EStDV Income Tax Implementation Ordinance Einkommensteuer-Durchführungsverord
nung
EStG Income Tax Law Einkommensteuergesetz

EStR Income Tax Regulations Einkommensteuer-Richtlinien

FGO Law on Fiscal Court Procedures Finanzgerichtsordnung

GAAR General anti-avoidance rule -

GewStDV Business Tax Implementation Ordinance Gewerbesteuergesetz-Durchführungsve

rordnung
GewStG Business Tax Law Gewerbesteuergesetz

GewStR Business Tax Regulations Gewerbesteuerrichtlinien

GmbH Limited liability company Gesellschaft mit beschränkter Haftung

GmbHG Limited Liability Company Law Gesetz betreffend die Gesellschaften mit
beschränkter Haftung
GrEStG Law on Real Estate Transfer Tax Grunderwerbsteuergesetz

HGB Commercial Code Handelsgesetzbuch

KG Limited partnership Kommanditgesellschaft

KGaA Partnership limited by shares Kommanditgesellschaft auf Aktien

KStDV Corporate Income Tax Implementation Körperschaftsteuer-Durchführungsveror

Ordinance dnung
KStG Corporate Income Tax Law Körperschaftsteuergesetz

KStR Corporate Income Tax Regulations Körperschaftsteuer-Richtlinien

MitbestG Co-determination Law Mitbestimmungsgesetz

OHG General partnership Offene Handelsgesellschaft

R&D Research and development -

RGBl. Reich Law Gazette, 1871-1945, now Reichsgesetzblatt

BGBl.
SCE European Cooperative Society Societas Cooperativa Europaea

SE European Company Societas Europaea

SolZG Solidarity Surcharge Law Solidaritätszuschlaggesetz

StAbwG Law on combatting tax avoidance and Gesetz zur Abwehr von
unfair tax competition Steuervermeidung und unfairem
Steuerwettbewerb
StVergAbG Tax Privilege Reduction Law Steuervergünstigungsabbaugesetz
– Gesetz zum Abbau von
Steuervergünstigungen und
Ausnahmeregelungen

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Germany - Corporate Taxation - (Last Reviewed: 15 July 2022)

UmwG Reorganization Law Umwandlungsgesetz

UmwStG Reorganization Tax Law Umwandlungssteuergesetz

UStAE VAT Application Decree Umsatzsteuer-Anwendungserlass

UStDV VAT Implementation Ordinance Umsatzsteuer-Durchführungsverordnung

UStG VAT Act 2005, as amended Umsatzsteuergesetz

UStRG 2008 Corporate Tax Reform Law 2008 Unternehmenssteuerreformgesetz 2008

VersStG Law on Insurance Tax Versicherungsteuergesetz

References
Laws
* Business Tax Law: Gewerbesteuergesetz, version of 15 October 2002, BGBl. I 2002 at 4167, last amended 19 June 2022,
BGBl. I 2022 at 911
* Civil Code: Bürgerliches Gesetzbuch, version of 2 January 2002, BGBl. I 2002 at 42, 2909 and BGBl. I 2003 at 738, last
amended 24 June 2022, BGBl. I 2022 at 959
* Co-determination Law: Mitbestimmungsgesetz of 4 May 1976, BGBl. I 1976 at 1153, last amended 7 August 2021, BGBl. I
2015 at 3311
* Commercial Code: Handelsgesetzbuch of 10 May 1897, RGBl. at 219, last amended 15 July 2022, BGBl. I 2022 at 1146
* Corporate Income Tax Law: Körperschaftsteuergesetz, version of 15 October 2002, BGBl. I 2002 at 4144, last amended 25
June 2021, BGBl. I 2021 at 2056
* Corporate Tax Reform Law 2008: Unternehmenssteuerreformgesetz 2008, of 14 August 2007, BGBl. I 2007 at 1912
* Development Area Law: Fördergebietsgesetz – Gesetz über Sonderabschreibungen und Abzugsbeträge im Fördergebiet,
version of 23 September 1993, BGBl. I 1993 at 1654 and BGBl. I 1995 at 428, last amended 29 October 2001, BGBl. I 2001
at 2785
* Foreign Tax Law: Aussensteuergesetz of 8 September 1972, BGBl. I 1972 at 1713, last amended 25 June 2021, BGBl. I
2021 at 2035
* General Tax Code: Abgabenordnung, version of 1 October 2002, BGBl. I 2002 at 3866 and BGBl. I 2003 at 61, last
amended 12 July 2022, BGBl. I 2022 at 1142
* Income Tax Law 2002: Einkommensteuergesetz 2002, version of 19 October 2002, BGBl. I 2002 at 4210 and BGBl. I 2003
at 179, last amended 19 June 2022, BGBl. I 2022 at 911
* Investment Grant Law 1996: Investitionszulagengesetz 1996, version of 22 January 1996, BGBl. I 1996 at 60, last amended
19 December 1998, BGBl. I 1998 at 3779
* Investment Grant Law 1999: Investitionszulagengesetz 1999, version of 11 October 2002, BGBl. I 2002 at 4034, last
amended 21 September 2004, BGBl. I 2004 at 3601
* Investment Grant Law 2005: Investitionszulagengesetz 2005, version of 17 March 2004, BGBl. I 2004 at 438, last amended
30 September 2005, BGBl. I 2005 at 2961
* Investment Grant Law 2007: Investitionszulagengesetz 2007, version of 23 February 2007, BGBl. I 2007 at 282, last
amended 7 December 2008, BGBl. I 2008 at 2350
* Investment Grant Law 2010: Investitionszulagengesetz 2010, version of 7 December 2008, BGBl. I 2008 at 2350, last
amended 22 December 2009, BGBl. I 2009 at 3950
* Investment Tax Law: Investmentsteuergesetz of 19 July 2016, BGBl. I 2016 at 1730, last amended 25 June 2021, BGBl. I
2021 at 2050

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* Law on combatting tax avoidance and unfair tax competition: Gesetz zur Abwehr von Steuervermeidung und unfairem
Steuerwettbewerb of 25 June 2021, BGBl. I 2021 at 2056
* Law on Development of Company Taxation: Unternehmenssteuerfortentwicklungsgesetz – Gesetz zur Fortentwicklung des
Unternehmenssteuerrechts of 20 December 2001, BGBl. I 2001 at 3858
* Law on Fiscal Court Procedures: Finanzgerichtsordnung, version of 28 March 2001, BGBl. I 2001 at 442 and 2262 and
BGBl. I 2002 at 679, last amended 5 October 2021, BGBl. I 2021 at 4607
* Law on Insurance Tax: Versicherungsteuergesetz, version of 10 January 1996, BGBl. I 1996 at 22, last amended 27 April
2021, BGBl. I 2021 at 874
* Law on Real Estate Transfer Tax: Grunderwerbsteuergesetz, version of 26 February 1997, BGBl. I 1997 at 418, 1804, last
amended 25 June 2021, BGBl. I 2021 at 2056
* Law on Solidarity Surcharge: Solidaritätszuschlaggesetz 1995, version of 15 October 2002, BGBl. I 2002 at 4130, last
amended 1 December 2021, BGBl. I 2021 at 5162
* Limited Liability Company Law: Gesetz betreffend die Gesellschaften mit beschränkter Haftung, version of 20 May 1898,
RGBl. 1898 at 846, last amended 15 July 2022, BGBl. I 2022 at 1146
* One-Third Participation Law: Drittelbeteiligungsgesetz of 18 May 2004, BGBl. I 2004 at 974, last amended 7 August 2021,
BGBl. I 2015 at 3311
* Reorganization Law: Umwandlungsgesetz of 28 October 1994, BGBl. I 1994 at 3210, and BGBl. I 1995 at 428, last
amended 10 August 2021, BGBl. I 2021 at 3436
* Reorganization Tax Law: Umwandlungssteuergesetz of 7 December 2006, BGBl. I 2006 at 2782, last amended 25 June
2021, BGBl. I 2021 at 2050
* Stock Company Law: Aktiengesetz of 6 September 1965, BGBl. I 1965 at 1089, last amended 10 August 2021, BGBl. I
2021 at 3436
* Tax Privilege Reduction Law: Gesetz zum Abbau von Steuervergünstigungen und Ausnahmeregelungen of 16 May 2003,
BGBl. I 2003 at 660 and 738
* Tax Reduction Law: Steuersenkungsgesetz – Gesetz zur Senkung der Steuersätze und zur Reform der
Unternehmensbesteuerung of 23 October 2000, BGBl. I 2000 at 1433
* Valuation Law: Bewertungsgesetz, version of 1 February 1991, BGBl. I 1991 at 230, last amended 12 October 2021, BGBl.
I 2021 at 4831
* VAT Act 2005, as amended: Umsatzsteuergesetz 2005, version of 21 February 2005, BGBl. I 2005 at 386, last amended 21
December 2021, BGBl. I 2021 at 5250
* Works Council Law: Betriebsverfassungsgesetz of 25 September 2001, BGBl. I 2001 at 2518, last amended 10 December
2021, BGBl. I 2021 at 5162
Ordinances
* Business Tax Ordinance: Gewerbesteuer-Durchführungsverordnung, version of 15 October 2002, BGBl. I 2002 at 4180, last
amended 12 May 2021, BGBl. I 2021 at 990
* Corporate Income Tax Ordinance: Körperschaftsteuer-Durchführungsverordnung, version of 22 February 1996, BGBl. I
1996 at 365, last amended 1 April 2015, BGBl. I 2015 at 434
* Income Tax Ordinance: Einkommensteuer-Durchführungsverordnung, version of 10 May 2000, BGBl. I 2000 at 717, last
amended 2 June 2021, BGBl. I 2021 at 1259
* Ordinance on the Application of the Arm's Length Principle to Permanent Establishments:
Betriebsstättengewinnaufteilungsverordnung, version of 13 October 2014, BGBl. I 2014 at 1603, last amended 12 May
2021, BGBl. I 2021 at 990
* Ordinance on the Combat of Evasion: Steuerhinterziehungsbekämpfungsverordnung, version of 18 September 2009, BGBl.
I 2009 at 3046

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* Ordinance on the Transfer of Functions: Funktionsverlagerungsverordnung, version of 26 June 2013, BGBl. I 2013 at 1809
* Transfer Pricing Documentation Ordinance: Verordnung zu Art, Inhalt und Umfang von Aufzeichnungen im Sinne des § 90
Abs. 3 der Abgabenordnung: Ordinance of 13 November 2003, BGBl. I 2003 at 739, last amended 12 July 2017, BGBl. I
2017 at 2367
* VAT Implementation Ordinance: Umsatzsteuer-Durchführungsverordnung, version of 21 February 2005, BGBl. I 2005 at
434, last amended 21 December 2020, BGBl. I 2020 at 3096
Decrees and regulations
* Administrative guidelines on income allocation between internationally related enterprises: Grundsätze für die Prüfung der
Einkunftsabgrenzung bei international verbundenen Unternehmen: Decree of 23 February 1983, BStBl. I 1983 at 218
* Administrative guidelines on cost allocation between internationally related enterprises: Grundsätze für die Prüfung der
Einkunftsabgrenzung durch Umlageverträge zwischen international verbundenen Unternehmen: Decree of 30 December
1999, BStBl. I 1999 at 1122
* Administrative guidelines on cost allocation between internationally related enterprises: Grundsätze für die Prüfung der
Einkunftsabgrenzung durch Umlageverträge zwischen international verbundenen Unternehmen: Decree of 5 July 2018,
BStBl. I 2018 at 743
* Administrative guidelines on relocations of functions: Verwaltungsgrundsätze Funktionsverlagerung: Decree of 13 October
2010
* Administrative guidelines on transfer pricing documentation: Grundsätze für die Prüfung der Einkunftsabgrenzung
zwischen nahe stehenden Personen mit grenzüberschreitenden Geschäfts-beziehungen in Bezug auf Ermittlungs- und
Mitwirkungspflichten, Berichtigungen sowie auf Verständigungs- und EU-Schiedsverfahren: Decree of 12 April 2005, BStBl.
I 2005 at 570
* Business Tax Regulations: Gewerbesteuer-Richtlinien 2009 of 20 April 2010, BStBl. I 2010 special edition No. 1 at 2
* Corporate Income Tax Regulations: Körperschaftsteuer-Richtlinien 2004 of 13 December 2004, BStBl. I 2004 special edition
No. 2
* Income Tax Regulations: Einkommensteuer-Richtlinien 2008 of 16 December 2005, BStBl. I 2005 special edition No. 1, last
amended 18 December 2008, BStBl. I 2008 at 1017
* PE Guidelines: Grundsätze der Verwaltung für die Prüfung der Aufteilung der Einkünfte bei Betriebsstätten international
tätiger Unternehmen, Decree of 24 December 1999, BStBl. I 1999 at 1076
* Reorganization Decree: Umwandlungssteuergesetz; Zweifels- und Auslegungsfragen of 25 March 1998, BStBl. I 1998 at
268 and BStBl. I 2001 at 543
* Reorganization Letter: Schreiben betr. Zweifelsfragen zu den Änderungen durch das Steuersenkungsgesetz und das
Gesetz zur Fortentwicklung des Unternehmenssteuerrechts of 16 December 2003, BStBl. I 2003 at 786
* Thin Capitalization Decree (1): Decree of 15 December 1994, BStBl. 1995 I at 25
* Thin Capitalization Decree (2): Decree of 15 July 2004, BStBl. I 2004 at 593
* VAT Application Decree: Umsatzsteuer-Anwendungserlass 2010 of 1 October 2010, BStBl. I 2010 at 846, last amended 2
June 2022, BStBl. I 2022 at 926

1. Corporate Income Tax

1.1. Introduction
Sections 1.and 2. discuss the taxation of domestic income of resident companies. The taxation of foreign income of resident
companies is discussed in section 7.2., and the taxation of non-resident companies in section 7.3.

1.1.1. Geographical jurisdiction

The German Constitution and federal laws apply in the territory of the Federal Republic of Germany. This includes the territory
belonging to Germany in accordance with the United Nations Convention on the Law of the Sea. After the German reunification

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on 3 October 1990, the Federal Republic includes 11 old West German federal states and five new East German federal states
(the territory of the former German Democratic Republic).

1.1.2. Statutory framework

Taxable income is determined on the basis of the Commercial Code (Handelsgesetzbuch, HGB), Income Tax Law
(Einkommensteuergesetz, EStG) and Corporate Income Tax Law (Körperschaftsteuergesetz, KStG). The Commercial
Code lays down the accounting principles (section 238 et seq. of the HGB), which are also followed by the Income Tax Law
unless specific tax rules provide for a different treatment (section 5(1) of the EStG). The profit determined on the basis of the
Commercial Code and Income Tax Law is used as the basis for corporate income tax purposes (section 8(1) of the KStG). The
Corporate Income Tax Law then prescribes certain adjustments (e.g. add-back of non-deductible expenses) for determining
taxable income. The Income Tax Law and Corporate Income Tax Law are complemented by Implementation Ordinances
(Durchführungsverordnung, DV), which provide some guidance on the application of the laws.
The tax authorities have issued ample regulations (Richtlinien) on the Income Tax Law and Corporate Income Tax Law
indicating their understanding of the law. The same purpose is served by the ordinances or decrees (Erlasse) issued by the
tax authorities. They deal with common or special problems relating to the application of law. Neither the regulations nor the
ordinances or decrees have the force of law; they only bind the tax authorities. A taxpayer who deviates from the regulations,
ordinances or decrees, however, must generally do so through court proceedings.

1.1.3. Type of tax system

The main tax imposed on companies in Germany is the corporate income tax (Körperschaftsteuer). A solidarity surcharge (see
section 2.3.) is levied on the corporate income tax due by the company and on the withholding tax arising upon distribution. In
addition, the income of companies is also subject to the business tax on income (see section 2.2.).
For a long time Germany applied a full imputation system and different corporate tax rates for distributed and retained earnings.
According to the Tax Reduction Law (Steuersenkungsgesetz) of 23 October 2000, the full imputation system is abolished and a
single tax rate applies for distributed and retained earnings.
After the abolition of the imputation system, corporate income tax is no longer included in the taxable base of the shareholder,
and there is no imputation of the corporate income tax against the income tax payable by the shareholder.
The resulting double taxation of the distributed profits is mitigated by a reduction of the corporate income tax rate and by
amendments in the taxation of the shareholders. Essentially, dividends from qualifying shareholdings are exempt in the hands
of corporate shareholders and individual shareholders are only taxed on 60% of the dividends (see sections 6.1. and 6.1.2. for
changes in 2009).
Profits earned under the imputation system and distributed after the transitional period no longer give rise to any tax reductions
or increases. A transitional regime provides for a partial refund of corporate income tax to companies distributing profits derived
under the former system, and that had borne a corporate income tax burden of more than 30%. Accordingly, the corporate
income tax credit was determined for the last time for 31 December 2006. The determined amount was paid out in equal
instalments over 10 years from 2007 until 2017 (section 37(5) of the KStG).

1.1.4. Taxable persons

German Corporate Income Tax Law distinguishes between taxable persons subject to unlimited tax liability and those subject to
limited tax liability. Unlimited tax liability applies to German residents. They are subject to tax on their worldwide income, which
is total income whether from domestic or foreign sources. Limited tax liability applies to non-residents and certain German
public entities. Limited tax liability means that only specific German-source income of the taxpayer is subject to German tax.
The following entities are subject to unlimited tax liability (section 1 of the KStG):

- companies (Kapitalgesellschaften), i.e.:

- stock company (Aktiengesellschaft, AG);

- European Company (Societas Europaea, SE);
- limited liability company (Gesellschaft mit beschränkter Haftung, GmbH); and
- partnership limited by shares (Kommanditgesellschaft auf Aktien, KGaA);
- cooperatives (Erwerbs- und Wirtschaftsgenossenschaften), whether registered or unregistered;

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- European Cooperative Society (Societas Cooperativa Europaea, SCE);

- mutual insurance companies (Versicherungsvereine auf Gegenseitigkeit);
- other legal entities organized under private law, including associations and foundations with independent legal existence;
- associations, institutions, foundations and trusts without independent legal existence, and accumulations of property for a
specific purpose (Zweckvermögen) under certain circumstances; and
- commercial enterprises operated by public bodies (e.g. canteens, swimming pools).
Because of the wording “especially”, the list of entities in section 1 of the KStG is not exhaustive. Foreign incorporated
companies may be regarded as companies within the scope of the Corporate Income Tax Law (KStG), if they correspond to a
German company (comparison by type).
Some provisions of the Corporate Income Tax Law apply only to the companies (Kapitalgesellschaften); other corporate entities
which are or may be liable to corporate income tax may not come under these specific rules. An example of a regime that
applies only to the companies (including the SE) is the fiscal consolidation (Organschaft) (see section 8.2.).
For tax years starting from 1 January 2022, partnerships may opt to be treated as non-transparent and taxed as companies. If a
partnership opts to be taxed as such, the partners will correspondingly be taxed as shareholders (see section 11.2.).
The Corporate Income Tax Law sets out two types of taxpayers with limited tax liability (section 2 of the KStG):

- non-resident entities, i.e. companies, unincorporated associations and estates and trusts that have neither their legal seat
nor their place of management in Germany. They are taxable only on listed German-source income (see section 7.3.3.); and
- resident companies, unincorporated associations, and estates and trusts that are not subject to unlimited tax liability (see
above), such as public bodies. Their tax liability is restricted to domestic income that is subject to withholding tax, e.g.
dividends.
For the taxation of non-resident companies, see section 7.3.

1.1.5. Definition of residence

The determination of a company’s residence is of great importance as resident entities are subject to tax on their worldwide
(German-source and foreign-source) income, whereas non-resident entities are taxed only on their German-source income. For
the types of German-source income, see section 7.3.3.
Companies
Under the Corporate Income Tax Law, a company (AG, GmbH or KGaA) is resident in Germany if either its legal seat (Sitz) or
its place of management (Ort der Geschäftsleitung) is located in Germany (section 1 of the KStG). All entities organized under
German commercial law must have their legal seat in Germany. From 1 November 2008, these entities may choose to have
their place of management (Verwaltungssitz) outside Germany. Before 1 November 2008, both the legal seat and the place of
management of a company organized under German law had to be situated in Germany. The term “place of management” is
normally defined as the place where the persons who have final authority make their decisions concerning the management
of the business. For the decision of the Court of Justice of the European Union (ECJ) in Überseering BV, see Business and
Investment - Country Surveys.
Because either the legal seat or the place of management is sufficient to establish residence for tax purposes, a foreign
company is deemed resident in Germany for tax purposes if its place of management is in Germany (see section 7.3.1.).
For treaty purposes, companies are generally resident in the country in which their main place of management is located.
Other entities
Like companies, other entities subject to the German Corporate Income Tax Law (see section 1.1.4.) are resident in Germany if
they have either their legal seat or their place of management in Germany.

1.2. Taxable income

1.2.1. General
Resident companies are subject to corporate income tax on their worldwide income. Foreign-source income, such as income
from foreign permanent establishments, is usually excluded from the German taxable base under tax treaties. If a treaty does

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not exist or its provisions do not apply, unilateral relief provisions allow a foreign tax credit under certain conditions. For the
taxation of foreign-source income, see sections 7.2.1., 7.2.6. and 7.4.1.2.
The basic principles which determine the taxable income of companies are set out in the Income Tax Law (section 2 et seq. of
the EStG) and the Corporate Income Tax Law (section 7 et seq. of the KStG). All types of income realized by a company are
deemed business income, whether they stem from the actual business activities or from investments (dividends, interest, rental
income). Business income is subject to both the corporate income tax and the business tax (see section 2.2.).
Under both commercial and tax law, a company must keep its books on the accrual basis. The profits are determined using
the net worth comparison method (Betriebsvermögensvergleich). According to this method, profits are the difference between
net assets at the end of the previous year and net assets at the end of the current year (section 4(1) of the EStG). For tax
purposes, this net asset difference is reduced by capital contributions (because they are tax free) and increased by withdrawals
(because they must be financed out of taxed income).
The financial statements of a company must be drawn up on the basis of the generally accepted accounting principles of
commercial law. The commercial accounts are also binding for tax purposes unless specific tax rules provide otherwise (section
5 of the EStG). In practice, the commercial balance sheet and the tax balance sheet are identical in most cases. If there are
deviations, companies must prepare both a commercial balance sheet (Handelsbilanz) and a tax balance sheet (Steuerbilanz).
This can be done either by preparing two different sets of financial statements or simply by explaining the tax deviations in an
appendix to the corporate income tax return.
1.2.1.1. Capital gains
Capital gains are included in the ordinary income of companies and are subject to tax at the normal rates, if not exempt. For
details, see section 1.7. For the business tax treatment of capital gains, see section 2.2.
1.2.1.2. Long-term contracts
Germany applies the completed contract method. Based on a strict application of the prudence concept (section 252 of the
HGB), a profit is deemed to be realized only when the contract work is finished. On the other hand, a loss must be recorded as
soon as it is reasonably foreseeable. The loss is taken into account via a write-down of the work in progress. If the expected
loss exceeds the capitalized value of the work in progress, a provision for anticipated losses must be made in the commercial
accounts (see section 1.6.).
Only in exceptional cases may a profit be shown before the contract work is completely finished. The exceptions require that
the contract work be split into separate parts and that the customer accepts the separate parts as finished. For these separate
parts, the turnover is realized and the corresponding profit is recorded in the financial statements.

1.2.2. Taxable period

The tax year in Germany is the calendar year. A taxpayer may adopt a financial year that deviates from the calendar year if the
business is registered in the Commercial Register (Handelsregister), which is always the case for companies. A change in the
financial year from the calendar year to a deviating financial year is subject to the approval of the tax authorities. The switch to
the deviating financial year only becomes effective if it is registered in the Commercial Register prior to its commencement. If
this requirement is not met, the switch will become effective in the following year. Approval of the tax authorities is not required
if the deviating financial year is adopted at the commencement of the business. Approval is also not necessary if the taxpayer
changes from a deviating financial year to the calendar year.
The profit of a business is subject to tax in the year in which the financial year ends, i.e. the profit of a company whose financial
year ends on 31 January 2020 is subject to tax in the tax year 2020, although most of the profit was derived in 2019. As a
practical matter, this leads to postponement of the filing obligation.

1.2.3. Exempt income

The most important types of exempt income include:

- at the company level, capital contributions upon formation or capital increase, whether or not in return for shares, other
membership rights or simply in connection with an increase in the capital reserves;
- at the shareholder level, capital repayments from the company if they do not contain dividend distributions. They are
taxable, however, to the extent they exceed the book value of the shareholder’s investment, e.g. as a result of former
depreciation of the investment;

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- 95% of domestic and foreign dividends from qualifying shareholdings (see sections 6.1.3. and 7.2.1.3., respectively);
- 95% of capital gains derived from the sale of shares in a company (see section 1.7.5.); and
- investment grants for investments in the new federal states (see section 1.9.3.).

1.3. Valuation
The valuation of assets and liabilities is important because the profit is determined according to the net worth comparison
method (see section 1.2.1.). The valuation rules for commercial accounts are laid down in section 252 et seq. of the
Commercial Code. The tax valuation rules are found in section 6 of the Income Tax Law. The tax valuation rules should not
be confused with the valuation rules in the Valuation Law, which applies to the valuation of property for purposes of the real
estate transfer tax (see section 14.2.1.) and the inheritance and gift tax. The Valuation Law does not influence the financial
statements.
The following valuation methods are used in the financial statements:

- cost of acquisition or production (less accumulated depreciation for depreciable fixed assets);
- going-concern value;
- base stock value (for groups of tangible fixed assets, raw materials and accessories); and
- group valuation using the weighted average (for similar goods of the inventory, movable assets and liabilities).
The going-concern value (Teilwert), or fair market value, is defined as the amount a buyer of the entire business would allocate
from the total purchase price of the business to the single asset, on the assumption that the buyer continues the business.
For tax purposes, a write-down to the fair market value – for both fixed and current assets – is allowed only if the decrease
in value is presumed to be permanent (section 6(1) Nos. 1 and 2 of the EStG). When the value of the written-down asset
has again increased, a revaluation is compulsory up to the new fair market value, but not exceeding the initial acquisition or
manufacturing cost (section 6(1) Nos. 1 and 2 of the EStG).
The valuation of assets and liabilities is governed by six principles:

- the principle of identical balance sheets (the balance sheet at the beginning of the year must correspond to the balance
sheet at the end of the preceding year);
- the going-concern principle;
- the principle of separate valuation of assets and liabilities (no set-off);
- the prudence concept, meaning that unrealized profits must not be shown, but losses must be shown as soon as they are
reasonably foreseeable (the concept is very strictly applied in Germany);
- the accrual concept; and
- consistency.
The capitalization of an asset above acquisition cost is not allowed.
Unrealized net gains and losses on hedged transactions are accounted and excess losses on such valuation units may be
recognized for tax purposes on a contingent accruals basis.

1.3.1. Inventory
As part of current assets, inventory must be capitalized at the lower of acquisition or manufacturing cost or fair market value
(section 253(3) of the HGB). Concerning the commercial accounts, the write-down to the lower fair market value is mandatory.
For tax purposes, the write-down is deductible only if the decrease in value is presumed to be permanent. A revaluation is
obligatory upon a new increase in value (see section 1.3.).
Acquisition costs include incidental costs, such as import duties, freight and insurance. Manufacturing costs include direct
material costs, direct labour costs and specific costs for the production of the item concerned. For accounting purposes,
necessary indirect material and labour costs may be capitalized. For tax purposes, the capitalization of these costs is
mandatory. General administration overhead, certain social welfare costs, as well as interest (to the extent related to the

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production period), may be capitalized for accounting and tax purposes. Distribution costs may not be capitalized either for
accounting or for tax purposes.
For simplifying the inventory valuation, the following methods generally apply:

- order of use: LIFO (last in, first out), FIFO (first in, first out) and HIFO (highest in, first out) are allowed for accounting
purposes. For tax purposes, only LIFO is allowed (section 6(1) No. 2a of the EStG). The valuation method must not be
inconsistent with the actual order of use; for example, LIFO does not apply to inventory that must be quickly used (food,
flowers, etc.);
- base stock value: groups of fixed assets, raw materials and accessories may be valued at a fixed value if they are of
minor importance, if they are regularly replaced and if the base stock is generally constant. The base stock value must be
controlled by a stocktaking (i.e. drawing up a list of stock) after 3 years; and
- group valuation: groups of similar goods of the inventory may be valued as a group with a weighted average value; the
same applies for movable assets and liabilities.
1.3.2. Depreciable assets
Fixed depreciable assets include:

- tangible movable property, such as machinery or equipment;

- immovable property, such as buildings and installations capable of separate valuation; and
- (registered and unregistered) intangible rights, such as know-how, patents and copyrights.
Such assets are valued at cost less accumulated depreciation.
Special provisions (see also section 1.3.1.) apply with regard to the production costs of buildings. Their production costs also
include all costs of modernization and repairs which are carried out within the next 3 years following the acquisition of the
building if these costs exceed 15% of the acquisition cost without VAT (acquisition-related production costs; section 6(1) No. 1a
of the EStG).
In the commercial accounts, enterprises other than companies (e.g. partnerships) must write down assets to the fair market
value if this is presumed to be permanently lower (as prescribed by certain criteria in the law) than the acquisition cost less
regular depreciation. Before 2010, a write-down was also possible if the loss in value was not presumed to be permanent
(section 253 of the HGB). For tax purposes, the write-down is deductible only if the decrease in value is presumed to be
permanent, subject to a revaluation obligation if the value increases again (see section 1.3.).
For companies, the write-down to the lower fair market value is allowed only for financial assets (section 279 of the HGB), and
it is deductible for tax purposes only if the decrease in value is presumed to be permanent. For other assets, the write-down is
only allowed – and is then mandatory and deductible – if the loss in value is permanent. The revaluation obligation (see section
1.3.) applies here as well.
Goodwill is defined as the amount by which the value of the business exceeds the fair market value of its net assets. Goodwill
may only be shown in the balance sheet if it was acquired for consideration in connection with the purchase of a business or a
part of a business. Goodwill built up within a company cannot be capitalized either for accounting or for tax purposes (section
248(2) of the HGB; section 5(2) of the EStG). For tax purposes, goodwill is depreciated over a fixed period of 15 years on a
straight-line basis (section 7(1) of the EStG). For accounting purposes, goodwill is generally depreciated over the period of
time for which the goodwill is presumed to be used (section 253 of the HGB). Before 1 January 2010, goodwill was generally
depreciated over 4 years for accounting purposes.
In a business acquisition, not all intangibles may constitute goodwill. Some intangibles may be similar to goodwill and may be
capitalized separately. Such items could be non-competition clauses, know-how, etc. The distinction is important because these
items may have a considerably shorter depreciation period than goodwill proper.
For further details on depreciation, see section 1.5.

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1.3.3. Non-depreciable assets

1.3.3.1. Land
Land is not depreciable. As an exception, it may be written down if the value has actually decreased (see section 1.5.3.). The
write-down is deductible if it is presumed to be permanent, subject to a revaluation obligation if the value increases again (see
section 1.3.).
1.3.3.2. Investments in companies
An investment in a company is treated as a fixed asset if it is deemed to serve the business on a permanent basis. In general,
an investment comprising more than 20% of the shares in a company is deemed to constitute a fixed asset (section 271(1) of
the HGB). In other cases, it constitutes a current asset.
Investments are capitalized at the acquisition cost, including incidental costs, such as notary fees.
A write-down of shares in resident or non-resident companies is not accepted for tax purposes. The write-down is denied
regardless of the level of participation, the holding period and whether the decrease is temporary or not (section 8b(3) of the
KStG). The basic principles of profit reductions which are not taken into consideration for the purposes of section 8b of the
KStG, including a write-down, are laid down in a decree of the Federal Ministry of Finance, issued on 28 April 2003 (BStBl.
2003 I, at 292).
For commercial accounting purposes, an investment can be written down. If the investment constitutes a fixed asset for the
company, it may be written down to its fair market value if the loss in value is not presumed to be permanent and it must be
written down if the loss is presumed to be permanent (sections 279 and 253 of the HGB). On the other hand, if the shares
are deemed to be current assets, they must be valued at the lower of acquisition cost or fair market value in the commercial
accounts, even if the loss in value is only temporary. For companies not listed on a stock exchange (i.e. their shares do not
have an objective market price), the fair market value on the balance sheet date must be reasonably estimated. If the fair
market value increases again after the securities were written down, they must be revalued upwards, but in no case higher than
the original acquisition cost.
1.3.3.3. Investments in partnerships
The treatment of investments in partnerships is completely different for accounting and for tax purposes.
For commercial accounting purposes, a partnership share is a fixed asset, regardless of the level of participation. Its treatment
is similar to the treatment of participations in companies, i.e. a partnership share is recorded at acquisition cost, including
incidental cost, and written down only if the fair market value has decreased permanently (see section 1.3.3.2.).
For tax accounting purposes, a partnership is transparent. The partners are deemed to participate directly in the assets and
liabilities of the partnership. An asset called “partnership share” does not exist for tax purposes. The valuation of a partnership
interest is therefore not an issue for tax purposes, and a write-down cannot occur. The results of the partnership are recorded
directly at the level of the partners (outside the balance sheet). If a partnership interest is sold, the capital gain is calculated as
the difference between the sales price and the capital account of the partner, which corresponds to his share in the net assets
of the partnership.

1.3.4. Debt claims and liabilities

Debt claims or accounts receivable can be current assets (e.g. trade credits) or fixed assets (long-term investments, such as
loan securities). They are normally valued at their nominal value. A loss in value is taken into account via a write-down of the
claim and not by creating a provision.
The write-down of a bad claim to its fair market value is mandatory if it represents a current asset. If the claim represents a
fixed asset, the write-down is mandatory only if the loss in value is presumed to be permanent. For temporary devaluations, a
write-down is optional.
The necessity to write down claims is usually determined separately for each claim. The write-down is only tax deductible if it
is presumed to be permanent. A lump-sum write-off, however, is allowed for the general risk which may be attached to certain
groups of receivables. The tax authorities generally accept a lump-sum write-off of 1% if this reasonably corresponds to the
actual loss of receivables.
Non-interest bearing claims must be discounted if their duration exceeds 1 year.

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Liabilities are valued at the nominal value at which they must be repaid. Due to the prudence concept, a liability may not be
recorded at a lower value, e.g. if the repayment becomes doubtful or if the exchange rate becomes more favourable for the
debtor (section 6(1) No. 3 of the EStG).
For foreign exchange liabilities, see section 1.3.5.

1.3.5. Foreign currency assets and liabilities

Although books in foreign currency may be kept during the financial year, the financial statements must be drawn up in euro
(section 244 of the HGB). Items kept in foreign currency (e.g. foreign currency claims and loans) must therefore be converted,
at the latest, on the balance sheet date.
Acquisitions of fixed assets in foreign currencies must generally be converted at the rate applicable on the date of acquisition.
Foreign cash on hand or on deposit, inventory, accounts receivable in foreign currency, etc. must be valued at their cost (at
historic exchange rates) or at the lower fair market value (determined according to the exchange rates on the balance sheet
date).
Accounts payable in foreign currencies must be valued at the cost of acquisition or at the higher fair market value (using the
exchange rate applicable on the balance sheet date). Due to the prudence concept, a valuation at less than acquisition cost –
in cases where the exchange rate becomes more favourable for the debtor – is disallowed.

1.4. Deductions
1.4.1. General principles
Business expenses (Betriebsausgaben) are broadly defined as expenses caused by the operation of the business (section
4(4) of the EStG). Most company expenses which are directly connected with taxable income are deductible. For non-
deductible expenses, see section 1.4.10. For non-deductible business expenses relating to transactions with entities resident in
jurisdictions listed on the EU list of non-cooperative jurisdictions for tax purposes (as per 1 January 2021), see section 10.6.6.

1.4.2. Employees’ remuneration

Remuneration to employees is deductible for the employer. This includes the salary itself, any benefits in kind as well as social
security contributions, including the portion borne by the employer (50% of the total contributions) (section 4(4) of the EStG).
If the employee is also a shareholder, the salary (including other benefits, such as profit-dependant payments, pension
provisions and benefits in kind) must be consistent with the remuneration that would be paid to an independent employee
(section 8(3) of the KStG). Any payment exceeding an arm’s length remuneration is treated as a non-deductible constructive
dividend (see section 6.1.5.).

1.4.3. Directors’ fees

Fees paid to a member of the management board for the management of the company are deductible. If he is also a
shareholder, the remuneration is deductible only to the extent it complies with the arm’s length principle (section 8(3) of the
KStG).
Stock companies (AG) and some limited liability companies (GmbH) also have a supervisory board. Only 50% of the fees
paid to a member of the supervisory board or any other person who is in charge of the supervision of the management, are
deductible (section 10 No. 4 of the KStG).

1.4.4. Dividends
Distributions, including hidden distributions, are not deductible (section 8(3) of the KStG). For the actual tax effect of hidden
distributions, see the example in section 6.1.5.

1.4.5. Interest
Interest on loans and other debts paid relating to the business are generally deductible (section 4(4) of the EStG). However, the
following limitations apply to the deduction of interest:

- interest on loans granted by shareholders or affiliated companies may be treated as a distribution to the extent the rate
charged exceeds the market rate for a similar loan (section 8(3) of the KStG). For determining the market rate, the interest
rate prevailing in the country of the currency used is authoritative; and

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- interest expenses may only be deducted up to 30% of earnings before interest, taxes, depreciation and amortization
(EBITDA) (see section 10.3.).
If loans are received at a discount, the discount must be shown for tax purposes as a prepaid expense and must be deducted
over the period for which the interest was fixed. For accounting purposes, there is a choice of showing the discount as a
prepaid expense or recording it as a full charge (section 250(3) of the HGB).

1.4.6. Royalties
Royalty payments for the use of patents, copyrights, secret formulas or processes, commercial or industrial know-how and
similar intangible property (whether or not protected) are generally deductible. Excessive royalty payments to shareholders or
their affiliates are treated as non-deductible constructive dividends (section 8(3) of the KStG).
With effect from 1 January 2018, royalties paid to a recipient which is directly or indirectly part of the same group or directly
or indirectly controlled by the same shareholder are not fully deductible if the income of the recipient is either not taxed or is
subject to a low tax rate due to the application of a preferential regime that does not comply with the Organisation for Economic
Co-operation and Development (OECD)’s work on harmful tax practices. For the purposes of this rule, the royalty income is
considered to be taxed at a low rate if the effective tax rate is below 25%.
For the purposes of determining the effective tax rate, any refunds or credits granted to the recipient must be taken into
account. Further, the low taxation must be caused by a preferential regime which does not comply with the OECD’s nexus
approach as set out in the Action 5 Final Report of the OECD’s BEPS Project. The nexus approach generally prohibits a
preferential treatment of income from intellectual property other than self-developed patents and copyrighted software.
Therefore, royalties remain fully deductible if the preferential regime requires a substantial activity in the state of the recipient.
The requirement of a substantial activity is assumed to be met when the recipient of the royalties incurs qualifying expenses in
relation to the intangible property.
If the limitation on the deductibility of royalty payments applies, the non-deductible part of the royalty payment is determined by
the following ratio: 25% – income tax burden as a %/25% (section 4j of the EStG).
The Ministry of Finance issued official guidance, of 5 January 2022 (IV C 2 -S 2144-g/20/10002:007, 2022/0000838), on the
application of section 4j of the EStG. The guidance provides for a non-exhaustive list of preferential regimes that do not comply
with the OECD’s nexus approach from the perspective of the German tax authorities. The guidance notes that most of the listed
regimes expire by the end of 2021. Some countries offering such regimes implemented new regimes that are compliant with the
OECD’s nexus approach, while other countries decided to simply end the offered regimes. The guidance, however, notes that
any grandfathering rules for non-compliant regimes until the end of 2021 are not relevant for the application of section 4j of the
EStG. For tax year 2018, section 4j of the EStG applies to any royalty income subject to low taxation based on any of the listed
regimes. Section III of the guidance provides for further regimes that potentially may not be compliant with the OECD’s nexus
approach but that are still under examination by the German tax authorities. This list of regimes is also non-exhaustive. Lastly,
the guidance stipulates that any tax assessments involving income from royalties from regimes listed in section III shall be done
only on a provisional basis subject to re-examination.

1.4.7. Service and management fees

Service and management fees are generally deductible provided they comply with the arm’s length test. Fees exceeding an
arm’s length compensation are treated as non-deductible constructive dividends (section 8(3) of the KStG).
The charge of the service and management fees via cost allocation contracts is normally possible.
For further details on transfer pricing, see section 10.2.

1.4.8. Research and development

Research and development (R&D) costs are deductible as normal business expenses, provided that they do not constitute a
hidden profit distribution (see section 6.1.5.) or are in conflict with the arm’s length principle.
For tax incentives for R&D costs, see section 1.9.5. For tax-free investment grants available, see section 1.9.3.

1.4.9. Other deductions

1.4.9.1. Donations
Donations for the furtherance of approved non-profit activities are deductible up to 20% of total income or, upon the company’s
choice, 0.4% of the total sum of turnover and salaries; a carry-forward is available (section 9(1) of the KStG). Donations made

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to non-profit organizations established in other EU Member States/EEA countries are also deductible, if (i) the Directive on
Administrative Cooperation (2011/16) (DAC) and the Recovery Directive (2010/24) are applicable between Germany and
the respective EU Member State/EEA country; and (ii) the donations would be deductible if made to a resident non-profit
organization; and (iii) the activities of the receiving non-resident organization benefit resident individuals or Germany’s general
reputation. Donations by companies to political parties are not deductible.
1.4.9.2. Entertainment costs
Only 70% of expenses for business meals are deductible. In addition, such expenses may be deducted only if the business
meal expenses are accounted for separately and detailed documentation is prepared showing the name of the participating
persons, specification of the meal and the date, place and purpose of the business meal (section 4(5) No. 2 of the EStG).
Business gifts to persons other than employees or regular agents are deductible if they do not exceed EUR 35 per year per
person (section 4(5) No. 1 of the EStG).
The above-mentioned expenses must be accounted for separately from the other business expenses (section 4(7) of the
EStG).
1.4.9.3. Miscellaneous
Apart from the business expenses discussed above, examples of deductible expenses are:

- expenses directly connected with the formation of a company provided the amount is specifically mentioned in the
company’s statutes;
- expenses incidental to the issuance of shares and similar membership rights;
- rents for premises used for business purposes;
- insurance premiums on business property, liability insurance premiums, etc.;
- R&D costs;
- casualty losses, marketing expenses, most litigation expenses;
- amounts transferred by insurance companies to actuarial reserves, within certain limits; and
- real estate tax (see section 5.3.), not to be confused with the real estate transfer tax (see section 14.2.1.), which is not
deductible.
1.4.10. Non-deductible expenses
The most important non-deductible expenses include:

(1) expenses relating directly to exempt income or capital gains (section 3c of the EStG);
(2) 5% of gross domestic and foreign dividends from qualifying shareholdings (see sections 6.1.3. and 7.2.1.3., respectively)
and of capital gains on shares in resident and non-resident companies (see sections 6.1.6.2. and 7.2.1.5., respectively),
representing expenses relating to such exempt dividends and gains;
(3) fines and other financial consequences arising from a criminal procedure;
(4) expenses for guest houses, 30% of expenses relating to business meals, expenses for the lease or use of hunting or
fishing rights, sailing or motor yachts, etc., and any other expenses which relate to the taxpayer’s private life and appear
unreasonable in a business context (section 4(5) of the EStG);
(5) interest expenses exceeding 30% of EBITDA (see section 10.3.); and
(6) the following taxes:

- corporate income tax;

- real estate transfer tax (see section 14.2.1.), which is to be capitalized as the acquisition cost of the immovable property
and depreciated accordingly;
- VAT on the non-deductible items listed in (4); and
- business tax (see section 2.2.).

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1.5. Depreciation and amortization

1.5.1. General principles
Depreciation is governed by the Commercial Code (sections 253 and 254 of the HGB) and the Income Tax Law (section 7 et
seq. of the EStG).
The depreciation period begins in the month in which the asset was purchased. To be tax deductible, the deductions for normal
and accelerated depreciation must be reflected in the commercial accounts. For movable fixed assets the potential depreciation
in the year of acquisition or production is reduced by one twelfth of the acquisition or production cost for each full month
preceding the month of acquisition or production.
Before 1 January 2008, the applicable depreciation methods were the straight-line, declining-balance and production methods,
as well as certain specific methods (output method, depletion method) for special categories of movable fixed assets (e.g.
mines) (section 7 of the EStG). A change in method was allowed only from the declining-balance method to the straight-line
method. A change in the other direction was disallowed. For business assets purchased or manufactured after 31 December
2007, the declining-balance method is no longer applicable.
However, in order to mitigate the economic impact of the COVID-19 pandemic, the declining-balance method has been
temporarily reintroduced for movable fixed assets acquired or produced from 1 January 2020 through 31 December 2022. The
annual rate of depreciation is limited to two and a half times the allowable straight-line rate with an overall maximum of 25%.
Specifically disallowed are depreciation based on gross profit, the replacement cost of assets and the lump-sum write-off of a
business.
For accelerated depreciation, see section 1.9.1.

1.5.2. Right to claim depreciation

German tax law distinguishes between legal and economic ownership. For tax and accounting purposes, assets are attributed
to the economic owner, even if he is not the legal owner (section 39(2) of the AO). The economic owner of an asset (in general,
the person who bears the economic risk and has the economic benefit of the asset) is entitled to the depreciation. Determining
the economic owner can be difficult when there is a leasing agreement or when a person has the usufruct of an asset.
1.5.2.1. Lease agreements
The tax authorities have issued decrees on determining the economic owner for (i) full amortization lease agreements of
movable and immovable assets and (ii) partial amortization lease agreements for movable and immovable assets.
1.5.2.1.1. Full amortization lease agreements
In full amortization lease agreements, the acquisition or production costs are recovered fully within the fixed basic lease period.
In agreements without a purchase option and without an option to extend the lease period, the leased asset is attributed to the
lessor if the basic lease period is between 40% and 90% of the useful life of the asset.
In agreements with a purchase option, the leased asset is attributed to the lessor if the basic lease period is between 40% and
90% of the useful life of the asset and the purchase price at the execution of the option is at least equal to the lesser of the
book value (applying the straight-line method of depreciation) or the fair market value of the leased asset.
In customized lease agreements, where the asset is specifically designed for the lessee’s use, the asset is attributed to the
lessee.
1.5.2.1.2. Partial amortization contracts
If less than the full acquisition or manufacturing costs are recovered during the basic lease period, attribution of the economic
ownership is less standardized and must be checked on the basis of each contract.
In general terms, the lessor qualifies as the economic owner of an asset only if the basic lease period covers at least 40% (but
not more than 90%) of the useful life of the asset. Other criteria may be that the lessor has full discretion to sell the asset and
that, if the sales proceeds exceed the remaining amortization, the lessor receives at least 25% of the excess.
1.5.2.1.3. Consequences of the asset attribution
If, according to the above definition of leasing contracts, the asset is attributed to the lessor, he must capitalize the leased asset
at its purchase or manufacturing costs. Depreciation depends on the useful life of the leased asset. For the lessor, leasing

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payments are business income. For the lessee, leasing payments are business expenses if the assets are used for business
purposes.
If the leased asset is attributed to the lessee, the lessor must capitalize a purchase price claim amounting to the total purchase
or manufacturing costs. This means that the economic ownership is transferred to the lessee and the lessor realizes a capital
gain from the sale of the asset. The leasing payments are divided into (a) interest and cost share and (b) a share for repaying
the purchase price claim. The interest and cost share are taxable business income for the lessor, whereas the portion for
repaying the purchase price has no effect on the result.
The lessee must capitalize the acquisition costs and will show a liability towards the lessor. The interest and cost portion of the
leasing payments are business expenses for the lessee provided the asset is used for business purposes.
1.5.2.2. Usufruct
If the owner of an asset sells the right to use the asset, the purchaser acquires an intangible asset which may be depreciated
over the period for which the usufruct was agreed upon (Zuwendungsniessbrauch). The income derived from the asset
is attributed to the purchaser. The purchaser does not benefit from the depreciation of the asset concerned. The right to
depreciate the asset remains with the owner. The income derived by the owner from the usufruct may be spread over the
usufruct period for a maximum period of 10 years.
If the owner transfers an asset but keeps the right to use the asset and to derive income from it (Vorbehaltsniessbrauch), the
income is attributed to him, and he continues to be entitled to depreciation. The new owner of the asset is generally not entitled
to any deduction or depreciation as he does not derive income from the asset.

1.5.3. Immovable property

Land is not depreciable. As an exception, however, the value of land may be written down to the fair market value if, for unusual
reasons (e.g. pollution), the fair market value has gone permanently below the acquisition cost.
For buildings, the straight-line method applies generally. Before 1 January 2008, the declining-balance method could be used
under certain circumstances. The depreciation base is the acquisition or manufacturing cost, including accessory costs, such
as notary fees and the real estate transfer tax.
The annual straight-line depreciation rate for buildings completed after 31 December 1924 is 2% (corresponding to a useful
life of 50 years); for buildings completed before 1 January 1925, the rate is 2.5% (corresponding to a useful life of 40 years)
(section 7(4) of the EStG). For buildings belonging to a business and not used for living accommodation, the rate is 4% (useful
life of 25 years), provided the application for the construction permit was made after 31 March 1985. The 4% rate was reduced
to 3% from 2001 (useful life of 33 years). If the actual life of the building can be shown to be shorter than the assumed 50, 40 or
25/33 years, higher depreciation rates may be applied.
The declining-balance method was permitted at changing rates for several decades to stimulate the construction industry.
Application of the declining-balance method was only permitted if the taxpayer (a) had purchased the building at the latest in
the year of completion or (b) had constructed the building himself.
For buildings that constitute a business asset and are not used for living accommodation, the declining-balance method is
no longer available if the application for the construction permit was made after 31 December 1993. If the application for the
construction permit was made after 31 March 1985 and before 1 January 1994, the declining-balance rates are:

- 10% for the first 4 years;

- 5% for the following 3 years; and
- 2.5% for the remaining 18 years.
For buildings used for living accommodation, the declining-balance method is no longer available if the application for the
construction permit was made after 31 December 2005, or if the acquisition occurred after that date. If the application for the
construction permit was made before 1 January 1995 or if the building was purchased before that date, the declining-balance
rates are:

- 5% for the first 8 years;

- 2.5% for the following 6 years; and
- 1.25% for the remaining 36 years.

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If the application for the construction permit was made after 28 February 1989 and before 1 January 1996 or if the building was
purchased within that period, the declining-balance rates are:

- 7% for the first 4 years;

- 5% for the following 6 years;
- 2% for the following 6 years; and
- 1.25% for the remaining 24 years.
The two latter regulations overlapped in their application until 31 December 1994 for buildings that constitute a business asset
and are used for living accommodation. The taxpayer may choose which rates to use.
If the application for the construction permit was made after 31 December 1995 or if the acquisition occurred after that date, the
declining-balance rates are:

- 5% for the first 8 years;

- 2.5% for the following 6 years; and
- 1.25% for the remaining 36 years.
If the application for the construction permit was made after 31 December 2003 and before 1 January 2006, or if the acquisition
occurred after 31 December 2003 and before 1 January 2006, the declining-balance rates are:

- 4% for the first 10 years;

- 2.5% for the following 8 years; and
- 1.25% for the remaining 32 years.
For additional depreciation regarding newly constructed rental houses, see section 1.9.4.

1.5.4. Plant, machinery and equipment

For plant, machinery and equipment, both the straight-line and declining-balance methods were applicable if the plant did
not constitute immovable property. The declining-balance rate was limited to three times the allowable straight-line rate, with
a maximum of 30%, if the respective assets were acquired or manufactured before 1 January 2001. For assets acquired or
manufactured after 31 December 2000 until 31 December 2005, the declining-balance rate was limited to the double of the
allowable straight-line rate, with a maximum of 20%. For assets acquired or manufactured after 31 December 2005 but before
1 January 2008, the declining-balance rate of depreciation was again raised to three times the allowable straight-line rate, with
a maximum of 30%. For plant, machinery and equipment purchased or manufactured after 31 December 2007, the declining-
balance method is no longer applicable (section 7(1) of the EStG). For movable fixed assets acquired or produced from 1
January 2009 until 31 December 2010, the declining balance method was temporarily reintroduced. For this period, the annual
rate of depreciation was limited to two and a half times the allowable straight-line rate with a maximum of 25%. If economically
justified, movable assets may also be depreciated using other methods, e.g. the depletion or output methods.
The depreciation base is the cost, including accessory costs incurred to make the asset ready for use (e.g. transportation,
installation).
The rates for movable fixed assets are set out in the official recommended tables (AfA-Tabellen; edited in Steuertabellen
(C.H. Beck-Verlag)) published by the Federal Ministry of Finance. The rates were completely revised in 2000 for fixed assets
acquired or produced after 31 December 2000 (published on 15 December 2000, BStBl. I 2000 at 1532, adjusted BStBl. I 2001
at 838 and 860). Inter alia, the following straight-line rates are applicable from 1 January 2001:

- 6% to 10% for machinery;

- 12.5% for office equipment;
- 8% to 10% for office furniture;
- 33.3% for computers (until 2021); and
- 11% to 16% for cars, trucks, etc.

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The Ministry of Finance published official guidance in the form of a letter of 26 February 2021 (IV C 3-S 2190/21/10002:013),
regarding the depreciation period for computer equipment and software. With effect from 1 January 2021, computer hardware
and standard business software may be depreciated over a period of 1 year. This allows taxpayers to write off computer
equipment and software in the year of acquisition instead of over their depreciable lifetime. Previously, taxpayers could
only depreciate such items over a period of 3 years. The guidance notes that the term “computer hardware” encompasses
computers, desktop computers, notebooks, desktop-thin-clients, workstations, docking stations, small-scale-servers, external
power adapters and peripherals.
The other tables are classified by branch of industry and commerce, but may be deviated from in individual cases, if
reasonable.

1.5.5. Trademarks and patents

Intangible assets may only be depreciated using the straight-line method (section 7(1) of the EStG); the declining-balance and
other methods are disallowed. Intangible assets are depreciated over their useful life. The depreciation base of trademarks and
patents is the acquisition cost.
Trademarks are regarded as non-depreciable by the Federal Tax Court if they are constantly used in the business for an
undetermined period. The tax authorities, however, allow a regular depreciation period of 15 years.
Capitalization and subsequent depreciation of non-purchased, self-made intangibles as fixed assets (e.g. software) are not
allowed for tax purposes (section 5(2) of the EStG). However, for accounting purposes, such intangibles may be capitalized and
depreciated except for trademarks, print titles, publishing rights or similar intangibles (section 248(2) of the HGB).

1.5.6. Goodwill
Goodwill may only be capitalized if it was acquired. The depreciation is based on the acquisition cost. Goodwill may only be
depreciated using the straight-line method.
For tax purposes, a fixed depreciation period of 15 years applies (section 7(1) of the EStG). For accounting purposes, goodwill
is generally depreciated over the period of time for which the goodwill is presumed to be used (section 253 of the HGB).

1.5.7. Other assets

Movable assets which are capable of individual use and depreciation, the net cost of which does not exceed EUR 800 (EUR
410 before 1 January 2018) each (excluding VAT), may be depreciated in the year of acquisition (section 6(2) of the EStG). An
asset is not regarded as capable of individual use if, based on its purpose, it may only be used together with other fixed assets
and if the assets are adapted to each other from a technical standpoint, for example separate shelves of a bookcase. Separate
records must be kept for such assets if their value is less than EUR 250 (EUR 150 before 1 January 2018) each (excluding
VAT), unless the assets’ value is apparent from the bookkeeping.
Alternatively, movable business assets, which may be used individually, with a value between EUR 250 (EUR 150 before 1
January 2018) and EUR 1,000, may be depreciated on a pool basis under the straight-line method at 20% per year over 5
years. If single assets from the pool are sold or put out of use, the book value of the pool may not be changed (section 6(2a)
of the EStG). Under this alternative, qualifying assets with a value of less than EUR 250 (EUR 150 before 1 January 2018)
(excluding VAT) may be depreciated in the year of acquisition. Before 2010, depreciation on a pool basis was mandatory.
The taxpayer must opt for one of the above alternatives per tax year.

1.5.8. Cessation of use, transfer or disposal of assets

Revaluation of an asset up to the fair market is compulsory if the asset was written down in addition to the regular depreciation
and if the value increases again. The revaluation is limited to the historic acquisition cost less regular depreciation.
The disposal of a depreciated asset leads to a capital gain equal to the difference between the disposal value and the
(depreciated) book value of the asset. Depreciation is recaptured to that extent. The capital gain is treated as regular income
and taxed at the regular tax rates (see section 1.7.).

1.5.9. Unutilized depreciation or amortization allowances

Not applicable.

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1.6. Reserves and provisions

The balance sheet of a company may show the following categories of reserves (Rücklagen):

(1) capital reserves (Kapitalrücklagen) created by capital contributions by shareholders or by a capital surplus on an increase in
share capital;
(2) profit reserves (Gewinnrücklagen) created by attributing current profits or retained earnings to the reserves, including:

- legal reserves (applies to stock companies, see Business and Investment - Country Surveys);
- reserves for own shares;
- reserves provided for by the articles of association; and
- other reserves.
Reserves are generally created out of taxed profits. In addition, tax law allows the creation of tax-free reserves for deferring
capital gains (see section 1.6.2.) and as tax incentives (see section 1.9.2.).
Provisions (Rückstellungen) are created to provide for liabilities which are still uncertain as to whether or not they will arise and,
if so, what the amount of the liability will be. Provisions reduce taxable income on their creation and increase taxable income on
their dissolution. A provision must be dissolved as soon as it is no longer justified.
As a general rule, provisions are mandatory for tax purposes if the provision is mandatory for accounting purposes. To the
extent the provision contains non-deductible expenses, it is added back for tax purposes off-balance sheet (e.g. provisions for
corporate income tax, which is a non-deductible expense).
The following provisions are mandatory for accounting purposes (section 249(1) of the HGB):

- contingent liabilities (e.g. pension liabilities (see section 1.6.3.), litigation risks, taxes (see section 1.4.9.);
- provisions for anticipated losses;
- for maintenance or repair work caused in the financial year if the maintenance is carried out in the first 3 months of the
following financial year; and
- guarantees.
Apart from the provisions for anticipated losses (schwebende Geschäfte), the above accounting provisions are deductible for
tax purposes, with the following restrictions (section 6(1) No. 3a of the EStG):

- based on past experience, the provisions must be realistic and close to the presumable amount of the charge;
- possible advantages from an engagement must be taken into account for the valuation of the provision unless the
advantages already give rise to the creation of a claim;
- provisions for charges which lead to the acquisition or manufacturing costs of an asset are disallowed;
- provisions with a term of 12 months or more must be discounted at an interest rate of 5.5%, unless the provision relates to
interest-bearing liabilities or payments on account; and
- provisions for non-cash obligations may not exceed direct costs and an adequate share of the necessary indirect costs.
Provisions for anticipated losses are disallowed for tax purposes (section 5(4a) of the EStG).

1.6.1. Bad and doubtful debts

If a receivable becomes bad or doubtful, the loss in value resulting therefrom must be taken into account by a write-down of
the receivable to the fair market value. Thus, the loss in value is taken into account by the valuation of the asset and not by the
creation of a provision (see section 1.3.4.).

1.6.2. Replacement of assets

Tax-free reserves can be created for the replacement of certain assets to defer the capital gain realized on the disposal of the
asset or to achieve a tax exemption of an insurance indemnity for the loss of an asset.

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If capital gains arise from the voluntary disposal of an asset, the deferral is governed by the Income Tax Law (section 6b of the
EStG). The provision covers capital gains arising from the sale of land and buildings, and of the produce of agricultural and
forestry enterprises. A 6-year holding period prior to the sale is required.
The capital gain is not taxed but deducted from the acquisition costs of replacement assets. The following assets qualify as
replacement assets:

- land if the gain arises from the sale of land;

- agricultural and forestry produce if the gain arises from the sale of agricultural and forestry produce or land;
- buildings if the gain arises from the sale of land, agricultural and forestry produce or buildings; and
- ships operated in inland waterways if acquired after 31 December 2005.
The asset may be purchased in the financial year in which the capital gain arose or in the previous financial year. If a qualifying
replacement asset has not yet been purchased at the time of sale, the allowable deduction may be carried forward as a tax-
free reserve for the following 4 financial years (6 years for buildings whose construction began before the end of the fourth year
following the creation of the reserve). In order to mitigate the economic impact of the COVID-19 pandemic, the reinvestment
periods for replacing assets have been extended by 1 year for tax-free reinvestment reserves that would have to be dissolved
in 2022.
Future depreciation of the replacement asset is based on acquisition cost less the amount of untaxed capital gain.
If replacement assets are not acquired within the required periods, the tax-free reserve must be dissolved. In addition, the
company’s income is increased by 6% of the dissolved amount for each year during which the tax-free reserve existed.
The deferral of taxation of the capital gains is possible only if the replacement assets form part of the assets of a permanent
establishment of the taxpayer located in Germany. If the same replacement assets form part of the assets of a permanent
establishment located abroad, the capital gains resulting from the sale of the replaced assets are subject to immediate taxation.
However, if the replacement assets form part of the assets of a permanent establishment situated in an EU Member State/EEA
country, the taxation of the capital gains may be spread over 5 consecutive years. Upon request of the taxpayer, the tax due
may be paid in 5 equal instalments. If such a replacement asset would be transferred outside the European Union during the 5-
year period, it would result in immediate taxation of the remaining amount. With effect from 29 March 2019, Germany enacted
legislation according to which, for the purposes of the aforementioned rule, the event of Brexit would not constitute a harmful
event for the purposes of the 5-year period and, therefore, would not result in immediate taxation of any remaining amount.
The tax on indemnity payments may be deferred if an asset is disposed of involuntarily, or destroyed. Qualifying assets are
fixed and current assets which are either destroyed by causes beyond the taxpayer’s control (fire, storm, flood) or sold pursuant
to an administrative order. The replacement asset must have the same or a similar economic function as the asset destroyed or
sold.
The indemnity for the loss of an asset constitutes taxable income, but it can be neutralized by deducting it from the acquisition
cost of a qualifying replacement asset or – if the asset was not replaced by the end of the financial year – by creating a reserve.
The reserve is set off against the acquisition cost of a replacement asset in the following year or is dissolved and then taxed if a
replacement asset is not acquired. For immovable property, the replacement period is extended to 2 years.

1.6.3. Other reserves and provisions

1.6.3.1. Pension provisions
Provisions for pension payments are recognized for tax purposes provided they are supported by actuarial computations
based on a formal and binding pension plan (section 6a of the EStG). The pension rights of individual employees are taken
into account in the year of entry into the plan provided the employee has reached the age of 28 in that year. The provision is
progressively built up until the retirement date, using an interest rate of 6%. The provision increases each year by the difference
between its fair market value as at the end of the preceding year and its fair market value at the end of the current financial
year. The fair market value basically corresponds to the discounted value of future pension payments, taking into account the
remaining life expectancy of the employees, the probability of their reaching retirement age, the probability of invalidity, etc.
The increase in the provision results in a tax-deductible expense. Once the employee receives pension payments, the provision
decreases and therefore leads to taxable income. The pension payments, however, are tax deductible.
Companies may also conclude an insurance contract for covering pension payments. The insurance premiums are tax
deductible. The claim against the insurance company, however, must be capitalized, which leads to taxable income.

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Special care should be taken in connection with the pension agreement of an employee (e.g. managing director) who is also a
shareholder. If the agreement does not comply with the arm’s length standard, the tax authorities may assume a constructive
dividend and deny a deduction for the pension provision/pension premiums.
1.6.3.2. Environmental risk provisions
The requirements for the tax recognition of a provision for environmental risks are strict. There must be an obligation toward
a third party, and the third party or responsible public office must be aware of the environmental risk. If the obligation is based
on a specific law, a provision for the environmental risk is accepted for tax purposes only if the law specifically prescribes the
actions to be taken within a certain period and provides that a violation of the law will be punished.
Exceptions apply for certain industries, e.g. a provision may be set up for the obligation to remove a nuclear power station from
the start of operation to the prospected time of its removal. If the time of removal is not fixed, the provision must be built up over
25 years and discounted at a 5.5% interest rate (section 6(1) No. 3a of the EStG).
1.6.3.3. Provision for breach of copyrights, patents, etc.
If an entity has breached a copyright, patent or other similar right, it may set up a tax-deductible provision for all expected costs
(including damages) provided the owner has already claimed damages or is seriously expected to do so. If the anticipated
claim does not materialize, the provision must be dissolved, at the latest, by the end of the third year following the year of its
creation (section 5(3) of the EStG).
1.6.3.4. Provision for jubilee bonus payments to employees
A tax-deductible provision may be set up for accrued bonuses to employees when they reach a certain number of years of
service (section 5(4) of the EStG). A tax deduction is allowed only if:

- the employment has lasted for at least 10 years;

- the bonus payment requires at least 15 years of service; and
- the bonus agreement was made in writing.
As the actual conditions for bonus payments are often more favourable for employees, a provision might be necessary for
accounting purposes even if the requirements for tax deductibility are not fulfilled. Tax and commercial accounts therefore often
deviate in this respect.

1.7. Capital gains

1.7.1. General
Capital gains realized by a company are taxable as ordinary income for corporate income tax purposes (unless exempt, see
section 1.7.5.). The normal tax rates apply. For business tax, see section 2.2.

1.7.2. Capital assets

There is no distinction in German tax law between the treatment of capital gains realized from the sale of a capital asset and
capital gains realized from the sale of a non-capital asset. Both are taxed at the normal rates.

1.7.3. Realization
A capital gain is realized on the disposal or revaluation of an asset in the balance sheet. Revaluation is compulsory if the value
of an asset has increased again after a write-down. The revaluation is limited to the acquisition or manufacturing cost less
regular depreciation (section 6(1) Nos. 1 and 2 of the EStG).
A disposal is assumed when the beneficial owner (not necessarily the legal owner) of the asset changes, i.e. when the benefits
and charges relating to the asset are transferred to another person. This covers not only the sale of an asset for cash, but also
an exchange of assets, including a contribution of assets, for shares. In the latter case, taxation of the capital gain is usually
deferred according to the rules of the Reorganization Tax Law (see sections 1.7.6. and 9.).

1.7.4. Computation of capital gains and losses

The capital gain or loss is calculated as the difference between the sales price and book value of the asset. The gain is
reduced, and the loss increased, by the costs relating to the sale.

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1.7.5. Exempt capital gains

After the implementation of the Tax Reduction Law (see section 1.1.3.), capital gains from the sale of shares in resident
or non-resident companies are, in principle, exempt (section 8b(2) of the KStG) regardless of the level of shareholding or
a holding period. However, a lump sum of 5% of the gains is added back to taxable income representing non-deductible
business expenses (section 8b(3) of the KStG). On the other hand, actual expenses directly linked to (exempt) capital gains are
deductible (section 3c(1) of the EStG). Capital losses are not deductible (section 8b(3) of the KStG).
Capital gains are determined as the difference between the alienation proceeds less the alienation costs and the book value
upon the alienation. To the extent that a capital gain pertains to a former write-down (see section 1.3.3.2.), the exemption is
rejected and the corresponding part of the gain is regarded as taxable income. If the shares have been received in exchange
for the contribution of a business and if this contribution benefited from tax relief provisions (see section 9.), the required
minimum holding period is 7 years. The same applies to capital gains realized from the capital decrease or the liquidation of the
company.
The capital gains exemption also applies for business tax purposes. The add-back rule discussed in section 2.2. does not
concern capital gains.
The exemption does not apply to short-term capital gains realized by banks and financial institutions from the sale of their
commercial portfolio (section 8b(7) of the KStG).
The basic principles of section 8b of the KStG are explained in a decree of the Federal Ministry of Finance, issued on 28 April
2003 (BStBl. 2003 I, at 292).
For foreign-source share gains, see section 7.2.1.5.

1.7.6. Deferment of tax on capital gains

Note that cases of merger and other reorganization will be discussed only in section 9.
The Reorganization Tax Law provides for the deferral of capital gains arising from:

- the contribution of an entire business or a business division in exchange for shares or partnership interests;
- mergers;
- divisions; and
- conversions of companies into partnerships, and vice versa.
For details, see section 9.
In addition, relief provisions apply if a partner leases an asset to his partnership for use. In this case, the asset constitutes the
partnership’s “deemed business property” (Sonderbetriebsvermögen) and does not belong to the “common business property”.
The asset does not appear in the partnership’s balance sheet, but in an additional tax balance sheet. The transfer from one
common business property to another common business property of the partner or to his deemed business property or vice
versa, as well as the transfer between two deemed business properties of the same taxable partner, do not give rise to a
taxable capital gain (section 6(5) of the EStG).
To avoid abuse, however, transfers of assets between a partnership and its partners, as well as between the deemed business
properties of different partners of the same partnership, are taxable under certain circumstances. If the transferred asset is sold
or withdrawn within 3 years from the filing of the tax return, the capital gain is taxed based on the fair market value of the asset
at the time of the transfer. An exemption applies if the hidden reserves arisen before the transfer are attributed to the transferor
by a supplementary balance sheet. A 7-year holding period without the above-mentioned relief is applicable if the partner is a
company. According to former legislation, the transfer between a partnership and its partners was treated as a taxable event
regardless of any holding periods.
For the replacement of assets, see section 1.6.2.

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1.8. Losses
1.8.1. Ordinary losses
Under the net worth comparison method, a net operating loss is defined as the excess of net assets at the beginning of the
financial year over net assets at the end of the financial year. For tax purposes, the loss is reduced by non-deductible expenses
and increased by tax-free income.
Net operating losses of up to EUR 1 million may be carried back for 2 years prior to the year in which the losses have been
incurred Before 1 January 2022, the carry-back period was 1 year. Any remaining losses may be carried forward infinitely.
However, the loss carry-forward is limited to EUR 1 million of net income in a given year without restriction. Any remaining loss
can only be set off against up to 60% of the net income exceeding this limit (section 10d of the EStG).
In order to mitigate the economic impact of the COVID-19 pandemic, the maximum amount for a loss carry-back has been
increased to EUR 10 million for the tax years 2020, 2021 and 2022. Previously, the maximum amount for a loss carry-back was
capped at EUR 5 million for the tax years 2020, 2021 and 2022.
The loss carry-back is optional.
For purposes of the business tax (see section 2.2.), losses may only be carried forward. Otherwise, the rules discussed also
apply for the business tax.
To prevent the sale of a loss carry-forward, the taxpayer who uses the loss must be legally and economically the taxpayer who
suffered it. More specifically, a loss carry-forward is disallowed completely if, within 5 years, more than 50% of the capital or
participation, membership or voting rights in a company are transferred directly or indirectly to a purchaser or a person related
to the purchaser, or a comparable state of affairs ensues. In order to prevent tax avoidance schemes, the purchase of shares
by a group of purchasers with common interest is treated as a purchase by a single purchaser or person associated with the
purchaser (section 8c of the KStG). Previously, in addition to the rule on the entire loss forfeiture, a loss carry-forward was
disallowed pro rata for transfers of shares or voting rights between 25% and 50% within 5 years. In December 2018, this rule
was abolished with retroactive effect from 1 January 2008.
In a decision of 29 March 2017 (2 BvL 6/11, published on 12 May 2017), the Federal Constitutional Court
(Bundesverfassungsgericht) had held that the denial of offsetting previous years’ losses in the case of a change in ownership
violates the German Constitution, in particular the principle of equality in the specification of the ability-to-pay principle and the
principle of consistency in taxation. The decision, however, only concerned the part of the loss forfeiture rule that provided that
the loss carry-forward is disallowed pro rata for transfers of shares or voting rights between 25% and 50% within 5 years. The
Court had held that the legislator must amend the relevant existing provision, retroactively with effect from the period between 1
January 2008 and 31 December 2015, in accordance with the constitutional principles by 31 December 2018.
In a decision of 29 August 2017 (2 K 245/17), the Financial Court of Hamburg considered also the rule on the entire loss
forfeiture if, within 5 years, more than 50% of the capital or participation, membership or voting rights in a company are
transferred directly or indirectly to a purchaser or a person related to the purchaser, to be incompatible with the German
Constitution and submitted the case to the Federal Constitutional Court for review.
The forfeiture of loss carry-forward does not apply if the transfer of shares takes place in the course of a reorganization plan
in order to rescue a loss-making company (reorganization clause). This exception requires that the purchaser’s intention is to
remove or prevent the insolvency or over-indebtedness of the loss-making company while maintaining its structural integrity.
The structural integrity of the company is deemed to be preserved if:

- (i) an agreement with the works council of the loss-making company regarding the preservation of jobs is concluded, and (ii)
the sum of salaries in the subsequent 5 years after the change in ownership is not lower than 400% of the average sum of
salaries paid in the preceding 5 years; or
- the purchaser makes significant capital contributions or agrees to debt relief measures within the 12 months following the
change in ownership. The contribution must be equal to at least 25% of the value of the business assets as shown on the
tax balance sheet at the end of the preceding business year.
With effect from 1 May 2010, the application of the reorganization clause was suspended by the Ministry of Finance by way of
an official decree (IV C 2 – S 2745-a/08/10005:002). The decree was published in response to a formal investigation under the
Treaty on the Functioning of the EU State aid rules initiated by the European Commission. On 24 February 2010, the European
Commission announced that it had started a formal investigation regarding the reorganization clause of section 8c(1a) of the
KStG (case number NN 5/2010). On 26 January 2011, the European Commission decided that the reorganization clause

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constitutes State aid and ordered Germany to recover any aid granted this way. The European Commission considered that the
reorganization clause constitutes State aid as the measure appears to be selective by differentiating between ailing companies
and healthy companies. Both companies could be loss-making, but healthy companies are not eligible for the carry-forward
of such losses under the reorganization clause. The European Commission's decision was challenged by affected taxpayers.
One of the challenges was subject to the decision of the General Court of the European Union in Heitkamp BauHolding v.
European Commission (Case T-287/11). In its decision of 26 February 2016, the General Court confirmed the initial decision of
the European Commission. However, the ECJ, in its decision of 28 June 2018 in Dirk Andres (faillite Heitkamp BauHolding) v.
European Commission (Case C-203/16 P), annulled the decision of the Commission and the decisive points of the operative
part of the judgment of the General Court. The ECJ found that the Commission erred in defining the right system of reference,
which was chosen too narrowly, and led the Commission to the conclusion that the restructuring clause above was selective in
nature. In December 2018, the suspension of the reorganization clause was repealed.
A corporate group exemption is available for transfers taking place after 31 December 2009. Accordingly, loss forfeiture does
not apply if after a direct or indirect transfer of shares in the loss-making company, the same person or company owns directly
or indirectly 100% of the loss-making company.
In the case of harmful transactions taking place after 31 December 2009, loss forfeiture only occurs to the extent that existing
losses exceed the hidden reserves of the loss-making company, which are taxable in Germany. The hidden reserves are
determined by comparing the company’s equity with the fair value of the shares, which generally equals the purchase price. If
less than 50% of shares or voting rights are transferred, the hidden reserves are determined on a pro rata basis.
In December 2016, another exception to the loss forfeiture rule was introduced for transfers taking place after 31 December
2015 (section 8d of the KStG). The exception applies to such transfers, in cases where the loss-making company’s business
operations are continued unchanged from the time of incorporation, or at least during the 3 fiscal years prior to the change
in ownership. If the conditions are met, taxpayers may avoid application of the change-in-ownership rules and subsequent
forfeiture of loss carry-forward by filing a respective application with the tax authorities. This exception is not available for
losses carried forward if such losses resulted from a period before a previous temporary or final discontinuation of business
operations or if the company was a controlling parent of a group of companies under the group taxation regime or a partner in a
partnership during the 3 fiscal years prior to the change in ownership.
The forfeiture of loss carry-forward applies if, in subsequent years, one of the following events occurs:

- a temporary or final discontinuation of the business operations;

- a change to the purpose of the business operations;
- takeover of an additional business operation;
- participation as a partner in a partnership;
- becoming a controlling parent of a group of companies under the group taxation regime; or
- assets being transferred to the loss-making company and recorded below fair market value for tax purposes.
A change of a company’s business operations is assumed if a company’s purpose in its articles of association is changed
or if the actual economic purpose of the business operations is changed. In order to determine whether or not the business
operations have been changed or new business operations have been added, the following criteria are taken into account:

- type of services and/or goods supplied or produced;

- customer and supplier base;
- key market areas; and
- qualification of employees.
The Ministry of Finance published official guidance in the form of a letter of 18 March 2021 (IV C 2-S 2745-b/19/10002:002), on
the application of section 8d of the KStG.
Before 1 January 2008, a loss carry-forward was disallowed if more than 50% of a company’s shares were sold and the
company continued or restarted its business mainly with new assets unless the introduction of new assets served to rehabilitate
the loss-making business and the company continued the business for 5 years in the same scope (section 8(4) of the KStG;
previous wording).

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The replacement rules on loss carry-forward (section 8c of the KStG) apply to any transfers made after 31 December 2007.
The old rules continue to apply if the 5-year period has started before 1 January 2008 and if the loss of economic identity took
place before 1 January 2013 (section 34 of the KStG).
The Ministry of Finance published official guidance in the form of a letter of 28 November 2017 (IV C 2 – S 2745-
a/09/10002:004), on the application of the amended section 8c of the KStG.
A carry-over of losses is not permitted when a company is converted into a partnership and vice versa.
Losses incurred by a foreign permanent establishment are generally not deductible from German taxable income (see section
7.2.2.).
The deduction of losses is disallowed if the loss results from the disposal of shares in a foreign company (section 8b(3) of the
KStG). The same applies to losses arising from the dissolution or capital reduction of the foreign company.
Only under certain circumstances may losses incurred by a foreign subsidiary be taken into account by writing down the
investment to the fair market value (see section 7.2.2.).
The basic principles of loss consideration with respect to the application of section 8b of the KStG are laid down in a decree of
the Federal Ministry of Finance, issued on 28 April 2003 (BStBl. 2003 I, at 292).

1.8.2. Capital losses

Losses suffered on the disposal of business assets constitute ordinary losses, which are normally deductible as other business
expenses. For restrictions regarding the sale of shares in resident and non-resident companies, see sections 1.7.5. and 7.2.2.
Capital losses arising from the sale of shares in resident companies (as already applicable on the sale of shares in non-resident
companies, see section 7.2.2.) are not deductible.
This does not apply to short-term losses realized by banks and financial institutions from the sale of their commercial portfolio
(section 8b(7) of the KStG).
The basic principles of loss consideration with respect to the application of section 8b of the KStG are laid down in a decree of
the Federal Ministry of Finance, issued on 28 April 2003 (BStBl. 2003 I, at 292).

1.9. Incentives
1.9.1. Accelerated depreciation
In addition to regular depreciation, certain businesses and certain regions benefit from accelerated depreciation. Accelerated
depreciation may be combined with the straight-line and the output methods of depreciation and with write-downs to the fair
market value.
Accelerated depreciation of the cost of movable fixed assets is available to enterprises that (section 7g(1) No. 1 of the EStG):

- use the net worth comparison method (see section 1.2.); and
- have a taxable income not exceeding EUR 200,000.
These criteria were introduced with retroactive effect from 1 January 2020 by the Annual Tax Act 2020 of 21 December 2020.
Previously, accelerated depreciation of the cost of movable fixed assets was available to enterprises that:

- earn business income or income from independent services and use the net worth comparison method (see section 1.2.),
provided that the net assets of the business do not exceed EUR 235,000;
- earn income from agriculture or forestry, provided that the net assets of the business do not exceed EUR 125,000; or
- use the net income method, provided that their taxable income does not exceed EUR 100,000.
The rate of accelerated depreciation is 20% and may be claimed during the first 5 years in addition to regular depreciation
(section 7g(5) of the EStG). In addition, the taxpayer must use the asset almost exclusively for business purposes within
a domestic permanent establishment or rent it out, at least until the end of the year following the year of acquisition or
manufacture (section 7g(6) of the EStG).
For newly acquired electric utility vehicles, purchased between 1 January 2020 and 31 December 2030, an additional
depreciation of 50% of the acquisition cost is available in the year of acquisition.

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1.9.2. Investment deduction

Section 7g of the EStG provides for an investment deduction. Qualifying taxpayers may deduct up to 50% of the business
assets prior to the acquisition or manufacture. With retroactive effect from 1 January 2020, the previously applicable deduction
of 40% of the business assets was increased to 50% by the Annual Tax Act 2020 of 21 December 2020.
The investment deduction is available to enterprises that (section 7g(1) of the EStG):

- use the net worth comparison method (see section 1.2.); and
- have a taxable income not exceeding EUR 200,000.
These criteria were introduced with retroactive effect from 1 January 2020 by the Annual Tax Act 2020 of 21 December 2020.
Previously, the investment deduction was available to enterprises that:

- earn business income or income from independent services and use the net worth comparison method (see section 1.2.),
provided that the net assets of the business do not exceed EUR 235,000;
- earn income from agriculture or forestry, provided that the net assets of the business do not exceed EUR 125,000; or
- use the net income method, provided that their taxable income does not exceed EUR 100,000.
In addition, the taxpayer must intend to acquire or manufacture the asset for which the deduction is claimed within 3 years
following the tax year for which the deduction is claimed and use the asset almost exclusively for business purposes within
a domestic permanent establishment or rent it out, at least until the end of the year following the year of acquisition or
manufacture. To claim the deduction, the taxpayer must also supply documentation concerning the function and prospective
acquisition or production costs to the relevant tax authority (section 7g(1) of the EStG).
In the year of acquisition or manufacture, 50% of the acquisition or production costs must be added to taxable income,
however, only up to the previous deduction actually claimed. If the previous deduction was higher than 50% of the actual costs,
only 50% of the actual costs must be added back. At the same time, however, the book value of the asset, i.e. the base for
future depreciation, may be reduced by 50% of the actual costs, up to the amount of the add-back (section 7g(2) of the EStG).
In the case the asset is not acquired or manufactured within the required time, the previously claimed deduction must be added
back to the taxable income of the tax year for which the deduction was claimed (section 7g(3) of the EStG). The same applies
if the asset is not used almost exclusively for business purposes within a domestic permanent establishment and is not rented
out at least until the end of the year following the year of acquisition or manufacture. In this case, all applied consequences of
the initial deduction must be corrected (section 7g(4) of the EStG).
To mitigate the impact of the COVID-19 pandemic, the reinvestment period of 3 years has been extended by 2 years, for
taxpayers who claimed an investment deduction in 2018, but did not yet acquire or manufacture new assets and otherwise
would be forced to add back the amount of the previously taken investment deduction in 2022.

1.9.3. Investment credit

From 24 January 2005, the Investment Grant Law 2005 (Investitionszulagengesetz 2005) governs the tax-free investment
grants available to persons making qualifying investments in the five new federal states, including Berlin. The law continues
the tax benefits which were previously given by the Development Area Law (Fördergebietsgesetz), the Investment Grant Law
1996 and the Investment Grant Law 1999. Until 2007, the investment processes had to be started after 24 March 2004 and
before 1 January 2007 and finished after 31 December 2004 and before 1 January 2007 (investment processes finished before
1 January 2005 could only qualify for investment grants under the old Investment Grant Law 1999). The Investment Grant
Law 2007 extended the investment grant until 31 December 2009, for investment processes started from 21 July 2006 to 31
December 2009 and finished before 1 January 2010 (or after 31 December 2009, if part of the investment expenses have
accrued before 1 January 2010). The Investment Grant Law 2010 extended the investment grant until 31 December 2013, for
investment processes started from 1 January 2010 to 31 December 2013 and finished before 1 January 2014.
The grants are restricted to first-time investments in new depreciable assets, including new buildings (unlike under the
Investment Grant Law 1999, modernization costs of old buildings no longer qualify), which remain in the five new federal
states for at least 5 years. The assets must belong to a production facility or certain service businesses, such as marketing,
engineering, R&D and data processing. Taxable persons, subject to certain conditions, may replace a movable asset benefiting
from an investment grant by an equivalent movable asset before the end of the 5-year period without having to repay the
investment grant.

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The tax-free investment grant is between 12.5% and 25% of the acquisition cost, depending on the size of business, the type of
investment (movable or immovable asset) and the location of the permanent establishment.
Applications for investment grants can be made within a 4-year period starting with the expiry of the calendar year in which the
investment ended, prepayments were made or manufacturing cost incurred.

1.9.4. Regional and other incentives

For newly constructed rental houses, based on building permissions granted between 1 September 2019 and 31 December
2021, a temporary additional depreciation of 5% of the acquisition or production cost is available in addition to the regular
straight-line depreciation. The additional depreciation is only available if the acquisition or production costs do not exceed EUR
3,000 per square metre and the rental property is rented out in the year of acquisition or production and subsequent 9 years.
The depreciation basis is the acquisition or production cost with a maximum limit of EUR 2,000 per square metre.
The renovation and maintenance costs of buildings located in areas declared development areas, and buildings declared
monuments, may be depreciated at a rate of up to 9% for the first 8 years and up to 7% in the following 4 years (sections 7h
and 7i of the EStG).
Accelerated depreciation was granted for investments in the five new federal states (the former German Democratic Republic)
according to the Development Area Law (Fördergebietsgesetz). This incentive is no longer available for new investments, but
existing investments continue to benefit from it until the end of the applicable depreciation period.

1.9.5. Research and development credit

With effect from 1 January 2020, a tax credit for qualifying R&D expenses is available to resident and non-resident taxpayers
with domestic-sourced business income who are not tax exempt, regardless of their actual size or business activity, provided
that they carry on qualifying activities. Qualifying activities are basic research, applied research and experimental development
activities, which comprise creative and systematic work undertaken in order to increase the stock of knowledge – including
knowledge of humankind, culture and society – and to devise new applications of available knowledge. The tax credit is also
available for expenses incurred for third-party professionals who perform the qualifying R&D services, provided the contract
research company is resident in an EU Member State or in an EEA country, which allows an adequate exchange of information
with Germany.
Qualifying expenses are the costs of personnel engaged in the qualifying activities or the fees paid (60%) to an independent
contract research company, with a maximum of EUR 2 million in a given financial year. The tax credit amounts to 25% of the
assessment basis. A total maximum of EUR 15 million per project for which qualifying expenses are incurred applies.
In order to mitigate the economic impact of the COVID-19 pandemic, the maximum amount of EUR 2 million as assessment
basis has been increased to EUR 4 million for the period between 1 July 2020 and 31 December 2025.

1.10. Rates
1.10.1. Income
The rate of corporate income tax for both retained and distributed profits is 15%, increased to 15.825% by the 5.5% solidarity
surcharge (section 23(1) of the KStG).

1.10.2. Capital gains

Companies are taxed at the regular corporate income tax rate on their capital gains, unless an exemption applies (see section
1.7.5.).

1.10.3. Withholding taxes

1.10.3.1. Dividends
A 25% withholding tax (Kapitalertragsteuer) is imposed on dividends, other profit distributions, including hidden distributions
and non-deductible jouissance rights (see section 7.3.4.1.), as well as on payments derived from a liquidation if the payments
are not deemed to be repayment of capital (section 43a(1) No. 1 of the EStG). This withholding tax rate furthermore applies
to income from the alienation of the dividend certificate (Dividendenschein) without an alienation of the respective underlying
share. The rate is increased to 26.375% by the 5.5% solidarity surcharge (see section 2.3.).
A 25% (increased to 26.375% by the 5.5% solidarity surcharge) withholding tax continues to be imposed on interest from
convertible loans, deductible jouissance rights (see section 7.3.4.2.), profit-sharing bonds and participating loans and on

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income from the participation of a silent partner in a trade or business, paid by a resident entity to a resident shareholder or
silent partner (section 43a(1) No. 2 of the EStG).
The withholding tax is creditable against the corporate income tax assessed on the resident recipient company.
For payments to non-resident companies, see section 7.3.4.1.
1.10.3.2. Interest
Withholding tax is imposed on interest paid by banks, interest paid on certain bonds to residents and interest from anonymous
over-the-counter transactions. The rate is 25%, increased to 26.375% by the 5.5% solidarity surcharge (see section 2.3.).
The withholding tax is creditable against the corporate income tax assessed on the resident recipient company.
For interest from convertible loans and profit-sharing bonds, see section 1.10.3.1. For payments to non-resident companies,
see section 7.3.4.2.
1.10.3.3. Royalties
There is no withholding tax on royalties paid to residents.
For payments to non-resident companies, see section 7.3.4.3.
1.10.3.4. Other income
There is no withholding tax on other payments to resident companies.

1.11. Administration
1.11.1. Tax returns
Corporate income tax returns must be filed once a year with the tax office of the district in which the company has its place of
management. For tax years beginning on or after 1 January 2018, the filing date for the annual corporate income tax return is
31 July of the calendar year following the tax year concerned. The tax authorities may extend this period until 30 September
for taxpayers that are represented by a tax adviser. Further extensions are available, subject to conditions, until the end of
February of the second subsequent year (e.g. 28 February 2021 for tax year 2019). Previously, the general deadline was 31
May of the calendar year following the tax year concerned. Due to the COVID-19 pandemic, the deadline for submitting tax
returns for tax year 2019 prepared by a tax adviser or accountant was initially extended to 31 March 2021; subsequently, the
deadline for tax returns for tax year 2019 has been extended until 31 August 2021. For the same reason, the deadline for
submitting tax returns for tax year 2020 has been set at 31 October 2022.
In light of the ongoing COVID-19 pandemic, the deadlines for submitting tax returns in general and tax returns prepared with
the help of tax advisers or accountants have been further extended for the tax years 2020 to 2024. With effect from 23 June
2022, the general deadline for submitting tax returns for tax year 2020 was 31 October 2021, for tax year 2021 it is 31 October
2022, for tax year 2022 it is 30 September 2023 and for tax year 2023 it is 31 August 2024. Accordingly, the deadline for
submitting tax returns prepared by a tax adviser or accountant for tax year 2020 is 31 August 2022, for tax year 2021 it is 31
August 2023, for tax year 2022 it is 31 July 2024, for tax year 2023 it is 31 May 2025 and for tax year 2024 it is 30 April 2026.
The tax return must be accompanied by the financial statements.
For the requirements regarding withholding tax, see section 1.11.9.

1.11.2. Assessment
The tax office issues a tax assessment for each tax year. If the taxpayer has not fulfilled his obligation to file tax returns, the
tax office may issue an estimated assessment, which the taxpayer can appeal by filing an adjusted tax return. The estimated
assessment does not exempt the taxpayer from the obligation to file a correct return.
Apart from the regular yearly tax assessments, the tax authorities issue tax assessments for advance payments of tax (see
section 1.11.4.).

1.11.3. Appeals against assessment

Appeals against assessments must be filed within 1 month after the assessment was received. It is generally assumed that
the taxpayer receives the assessment 3 days after it was sent out by the tax authorities (1 month for non-residents). The

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filing period cannot be extended unless the reason for missing the deadline was beyond the control of the taxpayer or his
representative.
An appeal filed after the deadline is automatically rejected. In this case, the taxpayer can apply for a correction of the
assessment based on other provisions of the General Tax Code. For example, in the case of business income, tax
assessments are generally issued with the reservation that they can be reviewed after a tax audit. This provision allows the
tax assessment to be changed at any time (by the tax authorities and by the taxpayer) until an audit was terminated and
corrected assessments are issued. In addition, there are provisions for changing an assessment after the appeal deadline if the
assessment contains a mistake in calculation or if there is a new fact which changes the assessment.
If the taxpayer filed an appeal against the assessment, the tax office either issues a corrected assessment or rejects the
appeal. If the appeal is rejected, the taxpayer has the possibility of starting proceedings at the tax court of first instance
(Finanzgericht) within 1 month after he received the appeal decision of the tax office. If the court decides against the taxpayer,
he may start proceedings at the Federal Tax Court (Bundesfinanzhof), which is the tax court of last instance. The decisions of
the Federal Tax Court, however, may be taken to the Federal Constitutional Court (Bundesverfassungsgericht) on constitutional
grounds.
If the taxpayer has filed an appeal against an assessment, the assessed tax payment may be postponed provided there is
substantial doubt on the correctness of the assessment. If the assessment proves to be correct, interest at the rate of 6% per
year is levied for the time of postponement.
If the tax authorities need further information or documentation before they decide the appeal, they can fix a deadline for the
taxpayer to provide the documentation. No information or documentation handed in after this deadline is taken into account
(section 364b of the AO). In addition, the tax court of first instance can set a deadline for providing further information and can
disregard any information provided after that deadline (section 79b of the FGO).

1.11.4. Payment of tax and refunds

Payment of tax is generally due 1 month after the assessment is received. Late payment results in a penalty of 1% for each
month or fraction thereof while the delay continues.
If the tax credits exceed the company’s tax liability, the excess is refunded.
The tax authorities generally assess advance payments based on prior year assessments. The advance payments are due
in quarterly instalments on 10 March, 10 June, 10 September and 10 December. The payments may be adjusted at any time
if better information is available on the estimated tax liability until the final assessment is made. If a company requests a
reduction of the advance payments, it must demonstrate (by budgets, interim financial statements, etc.) that its anticipated
taxable income has declined or is declining. On 19 March 2020, the Ministry of Finance issued official guidance stating that the
requirements to demonstrate that the anticipated income has declined or is declining shall be considered met if the requesting
taxpayers can prove to be directly affected by the COVID-19 pandemic and the emergency measures taken by the government.

1.11.5. Late payment interest and penalties

Interest on additional outstanding taxes, excess payments and refunds of tax is due at the rate of 0.15% (with effect from
1 January 2019; before: 0.5%) per month (1.8% per year) (sections 233a and 238 of the AO). The interest starts to run 15
months after the end of the year for which the tax is due, e.g. for the 2019 corporate income tax, interest is due if additional
payments or refunds are made after 31 March 2021.
Interest at the rate of 0.5% per month (6% per year) is due from the taxpayer if:

- payment of tax was postponed due to an appeal and the appeal is rejected (section 237 of the AO);
- payment of tax was postponed because the payment would cause extreme hardship for the taxpayer (section 234 of the
AO); or
- taxes were reduced fraudulently; interest is due from the date on which the tax was reduced (section 235 of the AO).
Previously, the interest rate incurred on additional outstanding taxes was 0.5% per month. In a decision of 25 April 2018 (IX
B 21/18), the Federal Financial Court (Bundesfinanzhof) expressed doubts as to the compatibility of the interest of 0.5% per
month for outstanding taxes with the Constitution because it does not reflect the market interest rate for periods after 1 April
2015. In response to this development, the Ministry of Finance issued official guidance providing that decisions concerning late
payment interest relating to tax obligations starting on or after 1 April 2015 shall be suspended upon request of taxpayers who
appealed against an underlying decision. Further, in its decision (1 BvR 2237/14, 1 BvR 2422/17) of 8 July 2021, the Federal

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Constitutional Court found that late payment interest levied at a rate of 0.5% per month (6% per year) on excess payments
and refunds of tax relating to interest periods from 1 January 2014 is unconstitutional. The Court held that the current rules
contained in sections 233a and 238 of the AO continue to apply for interest periods up to and including 2018, but the rules are
inapplicable for interest periods beginning in 2019. Therefore, the legislature is obliged to amend the rules on late payment
interest with retroactive effect from 1 January 2019 in order to comply with the German Constitution by 31 July 2022. Per
legislative change effective 22 July 2022, the legislature amended the rules on late payment interest on additional outstanding
taxes, on excess payments and refunds of tax by reducing the applicable rate from 0.5% to 0.15% per month with retroactive
effect from 1 January 2019.
If a tax return was filed after the deadline (see section 1.11.1.), the tax authorities may levy a penalty of 10% of the tax
assessed, with a maximum of EUR 25,000. If the taxpayer does not file a tax return, despite reminders from the tax authorities,
the tax authorities may impose a penalty up to EUR 25,000. If the taxpayer still does not file a return, the tax authorities may
issue a notice of an estimated tax assessment.
If an assessed tax payment is settled after the deadline, a penalty of 1% per month arises until the tax is paid.
On 19 March 2020, the Ministry of Finance issued official guidance stating that enforcement measures and late payment
penalties will be waived until 31 December 2020 if the debtor of a pending tax payment is directly affected by the COVID-19
pandemic. These measures were initially prolonged until 31 March 2021; subsequently, these measures have been prolonged
until 30 June 2022, if the penalties related to late payments in the period between 1 January 2021 and 31 March 2022.
In addition, the following criminal penalties may arise:

(1) a fine of up to EUR 1.8 million or imprisonment for up to 5 years – for tax fraud through incomplete or incorrect returns or by
failing to inform the tax authorities of relevant facts in violation a specific duty;
(2) imprisonment for 6 months to 10 years – for serious tax fraud (either in amount or in recurrence) and tax fraud through
forged documents or through inducing an official to abuse his position; and
(3) a fine up to EUR 50,000 – for negligence leading to a reduction of tax as in (1).
1.11.6. Statute of limitations
The regular period for the statute of limitations is 4 years, starting at the end of the year in which the tax return for the
respective tax year was filed, at the latest, 3 years after the respective tax year. After this period, tax assessments may no
longer be changed. The period is extended to 15 years (10 years before 2021) for negligent tax fraud and for wilful tax fraud.
The running of the 4-year period is stopped by certain events, the most important one being the start of an audit.

1.11.7. Rulings
The tax authorities issue an advance ruling only if it is applied for before the transaction took place. In principle, a taxpayer is
entitled to a ruling on the basis of precisely described facts if the tax treatment of the facts would affect his business decisions
for the future. The advance ruling becomes ineffective if there is a change in the tax law on which it is based.
The ruling is binding on the taxpayer and the competent tax authorities. The fee for the ruling depends on the value for the
taxpayer (Gegenstandswert) (section 89(4) of the AO). The value is determined by comparing the tax consequences of the
scenario based on the facts described by the taxpayer and following his legal opinion with the tax consequences of the same
scenario under the application of the tax authorities’ legal opinion. The value as determined is applied to the official table in the
Court Fees Act. If the value cannot be determined at all, not even by assessment, a time fee with a minimum of EUR 50 per
half hour of handling time is charged (section 89(4), (5) and (6) of the AO). With effect from 5 November 2011, no fee is levied if
the value for the taxpayer is below EUR 10,000 or the handling time is less than 2 hours.
An exception is the binding answer following a tax audit, where the tax authorities may issue a ruling on a past transaction if
this is relevant for the taxpayer in the future.
In transfer pricing matters, the tax authorities are reluctant to enter into advance pricing agreements. They do not strictly refuse
to issue rulings on transfer pricing, but they issue them only exceptionally.
Special rulings exist for the withholding tax on wages (see section 1.11.9.4.). Either the employer or employee may apply for
the ruling. An employer may find it useful to get a ruling in doubtful cases because he can be held liable for the wage tax of an
employee if the employee does not settle his liability. If the employer applies for a ruling and acts according to it, he can avoid
being held responsible for the tax liability of an employee.

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1.11.8. Tax audit/examination

A tax audit of all medium-sized and large companies and unincorporated businesses is made periodically by the audit
department of the local tax office. In general, each financial year of a company is audited, and an audit usually covers 3 years.
Tax audits must begin before expiration of the statute of limitations for revising assessments (see section 1.11.6.).
The taxpayer is obliged to provide the auditors with the documents relevant to the tax assessment and to give explanations, if
necessary. With regard to international transactions, the taxpayer has an extended obligation for documentation; for example,
with respect to transfer pricing issues, he might be required to provide documentation from abroad to a certain extent (see
section 10.2.).
The taxpayer must grant the tax authorities access to his electronic data system (section 147(6) of the AO).
The auditors explain their findings in a final meeting and present their opinion on the legal interpretation of the facts. After the
audit, they issue a report which is forwarded to the local tax office. In general, the tax office follows the suggestions of the tax
auditors for amending the assessments and will issue new tax assessment notices.
The taxpayer may request a binding answer on the future tax treatment of a transaction that was examined during the audit
provided it is relevant to the taxpayer’s future actions.

1.11.9. Withholding obligations

1.11.9.1. Dividends, interest and royalties
Withholding obligations arise for:

- payers of dividends to resident or non-resident shareholders;

- payers of royalties to non-residents; and
- banks and issuers of certain bonds if the recipient of the interest is a resident.
Withholding tax arises when the creditor receives the payment. For royalties and interest, this is the date of actual payment. In
the case of dividends, it is assumed that the creditor receives the payment on the date mentioned as the distribution date in the
shareholders’ decision to distribute dividends. If the shareholders’ decision does not mention a payment date, the payment date
is deemed to be the day after the shareholders’ decision.
Withholding tax on dividends must be transferred to the tax authorities with a special return at the time of the accrual of the
dividends to the recipient (i.e. the date of payment determined by the distributing company). Withholding tax on interest must be
declared and transferred by the tenth day of the month following the month of payment. For royalties, withholding tax must be
declared and transferred by the tenth day of the month which follows the quarter in which the payment was made.
A non-resident company has an obligation to withhold tax on German-source royalties if they are paid to other non-residents.
Royalties are German-source if the underlying right is registered in a German register or if it belongs to a German business
(see section 7.3.4.3.).
Non-residents must also withhold tax on interest paid to residents on certain bonds and on other interest payments if the
payment is made by the German branch of a non-resident bank (section 43(1) No. 7 of the EStG). If the interest payments from
non-residents are made to other non-residents, withholding tax arises only on anonymous over-the-counter transactions.
Regarding withholding tax rates, see sections 1.10.3. (payments to residents) and 7.3.4. (payments to non-residents).
1.11.9.2. Subcontract payments
With regard to subcontractors, it must be decided whether they act as an independent person or whether they may be regarded
as an employee of a business. If a subcontractor is an employee, the employer must withhold wage tax and social security
contributions at source. The criteria for determining whether a subcontractor is an employee include (i) the question to what
extent he is obliged to follow the directives of the business and (ii) to what extent he carries an entrepreneurial risk.
1.11.9.3. Fees for technical and other services
There is no withholding tax for fees paid to resident companies or individuals for technical and other services.

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1.11.9.4. Other
1.11.9.4.1. Withholding tax on salaries
General
Resident employers are required to withhold the income tax of their employees from the salary (pay-as-you-earn system). For
these purposes, the employee must present a wage tax card (Lohnsteuerkarte) when he starts work and then at the beginning
of each year. The wage tax card contains necessary information, such as the employee’s family situation and his deductible
expenses.
Wage tax withholding occurs by way of an electronic data exchange procedure. In particular, interim wage tax returns generally
must be filed electronically. There are official tables indicating the wage tax to be withheld (Lohnsteuertabellen). The tables
include the standard deduction that an employee can claim so that, if there is no other income or expense to be taken into
account, the actual income tax payable by the employee generally corresponds with the wage tax withheld by the employer. If
the wage tax and the employee’s total income tax do not correspond, he must file an income tax return.
The wage tax must be transferred to the local tax office responsible for the employer by the tenth day of the month following the
salary payment.
It is important to note that the employer is liable for any deficiency of withholding tax on the salary if the amount withheld is
incorrect. Employers are regularly subject to wage tax audits. In practice, additional wage tax arises mainly from benefits in
kind which have not been correctly identified as taxable salary. As in many cases it might either not be possible or not seen as
opportune to charge the additional income tax to the employee, the wrong calculation of the wage tax amount is an actual cost
for the employer. The cost can be significant, depending on the number of employees concerned. It must be taken into account
that the wage tax taken over by the employer represents taxable income to the employee, and thus the actual wage tax may
exceed 100% of the benefit in kind.
A non-resident company is regarded as a domestic employer if it has either a permanent establishment or a permanent agent
in Germany. The definition in domestic law (see section 7.1.2.1.) is relevant for the terms “permanent establishment” and
“permanent agent”, even in treaty cases, because treaties do not extend to withholding obligations on salaries.
Thus, a foreign company may be obligated to withhold income tax from its employees, even if the foreign company is not
subject to German corporate income tax (because its activity does not constitute a permanent establishment under the treaty).
This could, for example, be the case if a foreign company maintained a warehouse in Germany. According to domestic law, a
warehouse is a permanent establishment, which gives rise to the withholding obligation in connection with German employees,
whereas in most tax treaties, warehouses are excluded from the definition of permanent establishment. In this case, the foreign
company is not subject to German income tax (because it does not have a permanent establishment for treaty purposes), but
it is required to withhold income tax from its employees and also social security contributions (because it is deemed to have a
permanent establishment for domestic purposes).
Secondment
An employer has the obligation to withhold income tax from the salary of an employee who is subject to German income tax.
German employees who are seconded to a non-treaty country are generally no longer subject to German income tax because
the work must be carried out or used in Germany, which is generally not the case if an employee works abroad (section 49(1)
No. 4 of the EStG). As an exception, German income tax can arise if an employee transfers know-how to Germany which he
acquired abroad (market analysis, research results) because this could be regarded as German use of the activity.
If an employee is seconded to a treaty country and if the treaty follows the OECD Model Convention (which is the case with
most of Germany’s treaties), German income tax is due on a foreign activity if:

- the employee does not stay more than 183 days in the treaty country; and
- the salary is not charged to an entity (including a permanent establishment) in the treaty country.
In contrast, if the employee stays more than 183 days in the treaty country or if the salary is charged to an entity or a
permanent establishment of the treaty country, the right to tax the income is allocated to the foreign treaty country, so that the
withholding of German tax is no longer required.
If an employee is seconded from a non-treaty country to Germany, German income tax is due during the time the employee
works in Germany (section 49(1) No. 4 of the EStG).
If an employee is seconded from a treaty country to Germany, German tax is due if:

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- the employee stays more than 183 days in Germany; or

- the salary is charged to a German entity (including a permanent establishment).
A German resident enterprise to which an employee is seconded from abroad and which must economically bear the
employee’s wages is treated as a domestic employer, which means that it is obliged to withhold the income tax due (section
38(1) of the EStG).
1.11.9.4.2. Withholding tax on construction work
A withholding tax of 15% is levied on any consideration (including VAT) paid for construction work (section 48 of the EStG).
Construction work includes all supplies of goods and services in connection with the construction, maintenance, improvement
or demolition of a building. The German customer must withhold the tax from any payments he makes to a resident or non-
resident supplier.
No withholding tax applies if:

(1) the supplier has provided the payer with an exemption certificate;
(2) the total consideration per year does not exceed EUR 15,000 where the German customer only carries out VAT-exempt
rental services (section 4, No. 12, sentence 1 of the UStG); or
(3) the total consideration per year does not exceed EUR 5,000 in all other cases.
When a non-resident supplier applies for an exemption certificate (see (1)), he must designate a German tax representative
and present a certificate proving his registration for tax purposes in his country.
Where a tax treaty precludes the withholding tax, the non-resident supplier may apply for a refund of the tax.
The tax withheld may be offset against the supplier’s wage tax and corporate income tax liability.

2. Other Taxes on Income

2.1. Local income tax
The only local income tax in Germany is the business tax, discussed in section 2.2.

2.2. Business tax on income

After the corporate income tax, the business tax (Gewerbesteuer) is the most important income tax levied on companies.
The business tax is a local tax, and the rates therefore depend on the municipality in which the business is located. The
effective business tax rate depends on the municipal coefficient, which varies from municipality to municipality (see below). The
business tax is neither deductible from its own base, nor for corporate income tax purposes.
The business tax is due on any business carried on in Germany, whether by a resident or non-resident. A business is deemed
to be carried on in Germany if the taxpayer has a permanent establishment in Germany (see section 7.1.2.) or on a ship listed
on a German ship register (section 1 of the GewStG). Exemptions from business tax generally apply to the same entities that
are also exempt from corporate income tax (see section 11.5.). In addition, there is a special provision which, as a practical
matter, provides a business tax exemption for companies engaged exclusively in the management of their own immovable
property (section 9 No. 1 of the GewStG). Certain conditions, however, must be fulfilled, e.g. the property must not be used for
the commercial purposes of a shareholder.
The business tax takes over the taxable base computed for corporate income tax purposes (section 7 of the GewStG) and
adjusts it by certain add-backs (section 8 of the GewStG) and deductions (section 9 of the GewStG). As the business tax
focuses on German business, foreign-source income is to a large extent disregarded for business tax purposes. See also
sections 7.2.3. and 7.3.6.
The most important add-backs are:

(1) one fourth of all interest payments for debts including expenses from unusual business discounts (section 8 No. 1(a) of the
GewStG);
(2) one fourth of annuities and other long-term obligations (section 8 No. 1(b) of the GewStG);

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(3) one fourth of participations in silent partnerships (section 8 No. 1(c) of the GewStG);
(4) one fourth of 20% of rent and lease payments for movable property assets, leading to an effective add-back of 5% (section
8 No. 1(d) of the GewStG);
(5) one fourth of 50% of payments for rent and lease payments for immovable property, leading to an effective add-back of
12.5% (section 8 No. 1(e) of the GewStG);
(6) one fourth of 25% of royalties for the temporary licence of rights, leading to an effective add-back of 6.25% (section 8 No.
1(f) of the GewStG);
(7) dividends and similar income, which is exempt according to section 8b(1) of the KStG (see section 6.1.3.), as long as
the 5% amount is not added back for income tax purposes according to section 8b(5) of the KStG (see section 7.2.1.3.).
Furthermore, it is required that the conditions of the business tax affiliation privilege pursuant to section 9 No. 2a or No. 7 of
the GewStG (see below under deductions) are not fulfilled (section 8 No. 5 of the GewStG);
(8) losses from German or foreign partnerships (section 8 No. 8 of the GewStG); and
(9) depreciation of shares if the depreciation is due to the distribution of dividends that have not been subject to business tax
(see below) or to the transfer of profits within a group (see section 8.1.) (section 8 No. 10 of the GewStG). The same applies
to losses caused by the sale of the shares, the dissolution of the company or a capital reduction.
For the above-listed items (1) to (6), an allowance of EUR 200,000 is available.
The most important deductions are:

- 1.2% of the fiscal value of immovable property (section 9 No. 1 of the GewStG);
- profits from German or foreign partnerships (section 9 No. 2 of the GewStG);
- dividends from German companies if the taxpayer held at least 15% of the share capital at the beginning of the financial
year concerned (section 9 No. 2a of the GewStG);
- income from foreign permanent establishments (section 9 No. 3 of the GewStG) (see sections 7.1.2.1. and 7.1.2.2.);
- dividends from non-resident companies if the taxpayer held at least 15% of the share capital at the beginning of the financial
year concerned (section 9 No. 7 of the GewStG); before 2020, section 9 No. 7 of the GewStG required in addition to the
shareholding of at least 15% from the beginning of the financial year concerned, that the distributed profits stem from
active business activities of the distributing company. Section 9 No. 7 of the GewStG was amended in response to the ECJ
decision in EV v. Finanzamt Lippstadt (Case C-685/16); and
- dividends from a non-resident company if a tax treaty provides for an exemption. The exemption applies if the investment
comprises at least 15% of the shares, regardless of the minimum holding provided in the treaty (section 9 No. 8 of the
GewStG).
The taxable base of the business tax so determined is first subject to a federal basic rate (Messzahl) of 3.5% and then to a
municipal coefficient (Hebesatz), which generally varies from 300% to 490%, depending on the municipality. The coefficient
is 200%, unless the municipality has fixed a higher coefficient. In 2009, the municipal coefficient was 410% for Berlin, 460%
for Frankfurt am Main, 470% for Hamburg and 490% for Munich. At an average municipal coefficient of 400%, the effective
business tax rate amounts to 14%.
The business tax is typically assessed on current business income. Capital gains from the liquidation or sale of a business or
business division are generally not within the scope of the business tax. This rule does not apply to companies, however. They
are fully subject to business tax on their capital gains from the liquidation or sale of a business or business division. The only
exemption from business tax which also applies to companies is the exemption of the capital gain from the sale of a partnership
interest.
The business tax can be assessed on a consolidated basis if a subsidiary is financially integrated in its controlling parent and
has concluded a profit-and-loss pooling agreement (see section 8.2.).

2.3. Other
Both resident and non-resident companies are subject to a solidarity surcharge of 5.5%.

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The assessment base for the solidarity surcharge is the total corporate income tax due by the taxpayer after deducting tax
credits.
If non-residents who benefit from a tax treaty are subject to a solidarity surcharge, the total tax including the surcharge may not
exceed the maximum treaty rate that Germany is allowed to charge (see section 7.3.6.).

3. Tax Calculation Example

This simulation tool allows you to fill out your own figures to calculate the corporate income tax for a profitable resident
company obtaining source income and extraterritorial income in a given year.

Tax year 2022 calculation example for Germany

Business income/loss as per profit and loss statement in EUR 5,000,000

Currency converter
Add-backs (+)
Depreciation/amortization 0
Non-trading expenses 300,000
Expenses connected with exempt income 200,000
Non-deductible interest (thin cap., etc.) 0
Applicable transfer pricing adjustments 0
Deemed income (e.g. balancing charges)* 0
General provisions 0
Disallowed accrued but unpaid obligations 0
Operation of anti-avoidance rules 0
Specific exclusions: 0
- Entertainment expenses 20,000
- Disallowed management expenses/technical fees 0
- Legal fees 0
- Bribes/fines 0
- Non-deductible gifts 0
- Non-deductible taxes 100,000
- Other 0
Total add-backs 620,000

Deductions (-)
Exempt income -600,000
Depreciation/amortization 0
Deemed expenses (e.g. balancing charges, notional interest)* 0
Applicable transfer pricing adjustments 0
Taxable income not relatable to the current tax year 0
Tax reliefs granted by way of deduction (exports, R&D) 0
Other 0
Total -600,000

Adjustments
Applicable loss relief -20,000
Applicable group relief 0
Applicable charges on income* 0
Inflationary adjustment* 0
Other 0

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Total adjustments -20,000

Taxable income 5,000,000

Applicable rate
Tax due 15.0% 750,000

Tax credits
Advance payments -500,000
Tax withheld -200,000
Applicable foreign tax credit 0
Incentives 0
Total credits -700,000

Tax payable 50,000

Alternative minimum income tax* 0

Surcharge 5.5% 41,250

Municipal business tax

Taxable income for corporate tax purposes 5,000,000
Add-backs (+) 100,000
Deductions (-) -100,000
Taxable income 5,000,000
Federal basic rate 3.5% 175,000
Municipal coefficient 400.0% 700,000
Municipal tax due 700,000

Total tax due 791,250

Effective tax rate 29.83%

* Not applicable.
Disclaimer: This tax calculation example is solely developed and maintained by IBFD research specialists. IBFD makes no
representation nor gives any warranty (either express or implied) as to the completeness or accuracy of this tax calculation
example. IBFD will not be liable for any direct or consequential damages arising from the use of the information contained in
this tax calculation example.
Please note that the Print, PDF, Excel and Favourites functionality only exports the presented tax calculation example, so not
the figures you filled in yourself.

4. Taxes on Payroll
4.1. Payroll tax
Germany does not levy taxes on payroll.
For the obligation of employers to withhold the employees’ income tax from the salary, see section 1.11.9.4.

4.2. Social security contributions

General
Social security contributions are generally borne 50% by the employer and 50% by the employee. The employer must withhold
the employee’s part from the salary and transfer it together with the employer’s part to the health care institution, which then
distributes the relevant amounts to the other social security institutions. The contributions depend on the employee’s salary up

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to certain maximum levels. The limitations are lower in the five new federal states (the former German Democratic Republic) in
order to take into account the lower level of salaries.
In 2022, the rates (including both the employee’s and the employer’s parts) are:
Type of insurance Rate Maximum salary Maximum contribution
(%) (EUR/month)[1] (EUR/month)[1]

Pension insurance (Rentenversicherung) 18.6 7,050 (6,750) 1,311 (1,256)

Unemployment insurance (Arbeitslosenversicherung) 2.4[2] 7,050 (6,750) 169 (162)
Health insurance (Krankenversicherung) 14.6[3] 4,837.50 706
Disability and old-age insurance (Pflegeversicherung) 3.05[4] 4,837.50 148

1 The maximum in parentheses applies if the employee is resident in one of the five new federal states.
2 Before 1 January 2020, the rate was 2.5%.
3 With effect from 1 January 2015, the rate is 14.6%. For both employees and employers the rate is 7.3%. Compulsory health
insurance funds are allowed to levy additional contribution charges which are equally shared by the employee and the employer.
Before 1 January 2019, such additional charges were payable only by the employee. The average additional contribution charge
for 2022 is 1.23%.
4 Before 1 January 2019, the rate was 2.55%. The employee rate is increased by an additional 0.35% (0.25% before 1 January
2022) for childless employees who are older than 23 (resulting in an employee rate of 1.775% instead of 1.525%).

As mentioned above, 50% of these contributions is withheld from the employee’s salary; the other half is borne by the
employer.
Employees whose salary exceeds the maximum for health insurance and disability insurance purposes can leave the public
health and disability insurance and be insured by a private insurance company. Contributions then may vary significantly from
those mentioned above. The employer again bears 50% of the cost, but his part may not exceed the amount he would have
paid to the public health and disability insurance.
For employees with a monthly salary not exceeding EUR 450, the employer must pay a lump-sum contribution of 15% to the
pension insurance, a lump-sum contribution of 13% to the health insurance (if the employee already pays contributions to
the statutory health insurance), and 2% in respect of a solidarity surcharge and church tax, if any. Unemployment insurance
contributions are not due.
Short-term employments (e.g. students’ summer jobs) are exempt from social security contributions if the employment does not
exceed 2 months/50 working days per calendar year.
Employers are also required to provide accident insurance for their employees (Berufsgenossenschaft). If the company
provides an unfunded pension scheme, the rights of employees must be insured with a special insurance institution
(Pensionssicherungsverein) against the employer’s bankruptcy. The cost of these insurance policies, which varies from industry
to industry, must be borne by the employer.

Secondment cases
Germany’s social security system applies to all employees who exercise their activity and are paid in Germany. It also applies
to employees who work abroad if they are seconded by their employer for a limited period of time.
For employees who are seconded to another EEA country (EU Member States, Iceland, Liechtenstein and Norway) or
Switzerland, a double levy of social security contributions is avoided by EU Regulations (see section 7.4.5.). An employee can
apply for an exemption from social security contributions in the other EEA country for 12 months. An extension for another
12 months is possible. In addition, if it is in the employee’s interest, an exceptional exemption for a period of 5 years may be
applied for. In such cases, the German employer continues to withhold German social security contributions.
The same provisions also apply to employees who are seconded from another EEA country or Switzerland to Germany. They
may be exempt from German social security contributions during their temporary activity in Germany. In such cases, there are
no withholding obligations as regards German contributions.
Employees who are seconded to Germany for a limited period and continue to be paid by their non-resident employer are
not subject to German social security contributions. An obligation to withhold social security contributions therefore does not
generally arise for non-resident employers.

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Outside the area of application of the EU Regulations, double charge of social security contributions is avoided by bilateral
agreements (see section 7.4.5.).

5. Taxes on Capital
5.1. Net worth tax
Germany abolished the net worth tax (Vermögensteuer) effective 1 January 1997.

5.2. Business tax on capital

Germany abolished the business tax on capital effective 1 January 1998.

5.3. Real estate tax

The real estate tax is a local recurrent tax on immovable property, including buildings, whether used in agriculture and forestry,
in a business or for private purposes. Exemptions apply for immovable property used by public entities and immovable property
used for benevolent, charitable or religious purposes or for schools, universities, etc.
The real estate tax is assessed annually, on 1 January of each calendar year, based on the fiscal value of the immovable
property. The fiscal value is normally determined as a multiple of the average rent which could be obtained for a comparable
property. The fiscal value is usually lower than the actual value.
The fiscal value is multiplied by a federal basic rate (Steuermesszahl), which is 0.35% for companies (section 15 of the Real
Estate Tax Law). The result is then multiplied by a municipal coefficient (Hebesatz), which ranges from 280% to 810% and
brings the effective rate to between 0.98% and 2.84% of the fiscal value. The average rate is around 1.9%.
The real estate tax is paid in four instalments – on 15 February, 15 May, 15 August and 15 November.
The real estate tax is a deductible expense.
In a decision of 10 April 2018 (1 BvL 11/14, 1 BvL 12/14, 1 BvL 1/15, 1 BvR 639/11, 1 BvR 889/12), the Federal Constitutional
Court ruled that the use of outdated fiscal values for real estate tax purposes is unconstitutional. The Court held that the
continuous usage of fiscal values established in 1964 or earlier for the annual assessment of the real estate tax results in
unequal treatment in the evaluation process of real estate which is not sufficiently justifiable and therefore infringes the principle
of equality.
The fiscal value of immovable property is determined based on the Valuation Law. The Valuation Law provides that the fiscal
value shall be updated every 6 years. However, in practice the historical fiscal values have not been updated until today. From
1974 onwards, the 1964 data for fiscal values were used in West Germany (the old federal states) for purposes of the real
estate tax. In East Germany (the five new federal states), the data of 1935 is partly being used for fiscal values relating to real
estate.
The Court held that the legislator must amend the existing rules in accordance with the constitutional principles by 31
December 2019. Until then, the present rules remain applicable. After the enactment of new rules, the existing provisions
may still be applied for a period of 5 years, but no longer than until 31 December 2024 in order to ensure legislative coverage
during the implementation process of the new rules. In December 2019, new rules were enacted which mainly take effect
on 1 January 2025. The basic features of the real estate tax regime remain unchanged. However, new fiscal values shall be
determined by 1 January 2022.

6. Shareholders and Directors of Resident Companies

6.1. Shareholders
6.1.1. Dividends in general
The term “dividends” is not defined in the domestic law. Generally, a dividend is a distribution of profits made by a company to
its shareholders. Stock dividends issued as a result of a capital increase out of retained earnings are exempt in the hands of
the shareholder. However, a subsequent repayment of the new capital is taxed as dividend income. Income from jouissance
rights is treated as dividends, provided the owner participates in the liquidation surplus of the company (non-deductible

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jouissance rights). If the owner does not so participate, the income from jouissance rights (deductible jouissance rights) is
treated as interest.
Apart from corporate income tax charge, dividends are also subject to business tax if attributable to a German business.
A special affiliation privilege applies for business tax purposes, however, if at least 15% of the shares were held since the
beginning of the tax year (see section 2.2.).

6.1.2. Individual shareholders

With effect from 1 January 2009, the half-income regime no longer applies to private investors. All dividends accruing after
31 December 2008 are subject to a final flat withholding tax at a rate of 25%, increased to an effective rate of 26.375% by the
solidarity surcharge. With effect from that date, economically connected expenses related to the dividends, such as financing or
depot fees, are no longer deductible.
Concerning business income of natural persons from investments in shares, the half-income regime is replaced by a partial-
income system with effect from 1 January 2009. Accordingly, with effect from that date, 60% of the dividends are taxable,
and 40%, exempt. Correspondingly, only 60% of the economically connected expenses are deductible. With effect from tax
year 2014, the exemption may only be applied where the dividends were not deducted when determining the profits of the
distributing company.
Taxable income does not include the corporate income tax paid at the level of the distributing company, but it includes 60% of
the withholding tax and 60% of the solidarity surcharge on withholding tax. Corporate income tax is not creditable. However,
100% of the withholding tax and solidarity surcharge paid on the withholding tax are creditable against the shareholders’
personal income tax liability (even though only 60% of withholding tax and solidarity surcharge have been included in the
taxable income). Only 60% of the expenses related to the dividends are deductible (section 3c(2) of the EStG).
Under the half-income system, resident individual shareholders were taxed only on 50% of the dividend received, regardless of
whether the dividend constituted private investment income or business income.
The dividend is taxed as capital investment income if the investment belongs to the individual’s private property (section 20 of
the EStG). The dividend is business income if it is attributable to a business of the individual. The determination of the taxable
income is similar in both cases, but capital investment income benefits from an allowance of EUR 801 (double for jointly taxed
married couples).
Repayments of capital contributions are not taxable. They reduce the acquisition cost of the shares, which has an impact on a
subsequent gain when the shares are sold or when the company is liquidated.
Non-resident individual shareholders are subject to German income tax within their limited tax liability (sections 1(4), 49(1)
No. 5a of the EStG). The tax is levied by way of a withholding tax (see section 7.3.4.). The withholding tax represents a full
settlement of the German tax liability of the non-resident; no tax return is required.
If the dividends are received through a permanent establishment of the individual shareholder, 60% of the dividends are taxed
at the normal income tax rates.

6.1.3. Substantial corporate shareholders

After the abolition of the imputation system, dividends were, in principle, exempt at the level of corporate shareholders (section
8b(1) of the KStG). However, with effect from 1 March 2013, the exemption is limited to qualifying direct shareholdings of at
least 10% in the capital of the paying company. Correspondingly, dividends are no longer exempt if the shareholding at the
beginning of the calendar year amounts to less than 10% of the capital of the paying company (section 8b(4) of the KStG).
The exemption also applies to similar earnings derived from a participation in a company, as well as to the income derived
from the alienation of the dividend certificate (Dividendenschein) without an alienation of the respective underlying share. With
effect from tax year 2014, in order to apply the exemption, it is further required that the dividends were not deducted when
determining the profits of the distributing company.
The exemption is not full because a lump sum of 5% of the dividends is added back to taxable income representing non-
deductible business expenses (section 8b(5) of the KStG). On the other hand, actual expenses directly linked to (exempt)
dividends are now deductible. Previously, such expenses were not deductible (section 3c(1) of the EStG).
The basic principles of the taxation of dividends according to section 8b of the KStG are laid down in a decree of the Federal
Ministry of Finance, issued on 28 April 2003 (BStBl. 2003 I, at 292).

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Repayments of capital contributions are not taxable at the shareholder level to the extent they do not exceed the tax book
value of the shares. Any excess repayment is taxable income for the shareholder. This situation can occur if the shares were
previously depreciated. Taxation of excess repayments represents a recapture of the depreciation.
Dividends derived by non-resident substantial corporate shareholders are subject to withholding tax (see section 7.3.4.1.).
The treaty withholding rate is generally lower for substantial investors than for portfolio investors (see section 7.4.1.5.). The
withholding tax represents a full settlement of the German tax liability of the non-resident shareholder; no tax return is required.
For details, see section 7.3.3.3.
If the dividends are attributable to a German permanent establishment of the non-resident shareholder, the rules described in
section 6.1.3. are applicable; the Corporate Income Tax Law does not make a distinction between the receipt of the dividends
by a permanent establishment or by a resident corporate shareholder.
For foreign-source dividends derived by resident companies, see section 7.2.1.3.

6.1.4. Portfolio corporate shareholders

With effect from 1 March 2013, dividends derived by corporate shareholders from portfolio participations of less than 10% in the
capital of the paying company are treated as taxable income and taxed at the regular corporate income tax rate (section 8b(4)
of the KStG).
Before that date, there was no distinction between a substantial and a portfolio investment regarding the taxation of dividends
at the level of a resident corporate shareholder (see section 6.1.3.).
For non-resident shareholders, a difference can arise between portfolio and substantial investors located in a treaty country
regarding the reduction of withholding tax. The treaty withholding rate is generally lower for substantial investors than for
portfolio investors (see section 7.4.1.5.).

6.1.5. Hidden profit distribution

If an excessive payment to a shareholder is characterized as a constructive dividend, the amount classified as a constructive
dividend is added back to the taxable income and taxed at the regular corporate income tax rate.

6.1.6. Capital gains

6.1.6.1. Individual shareholders
Capital gains from the sale of privately held shares are subject to a final flat withholding tax at a rate of 25%, increased to
an effective rate of 26.375% by the solidarity surcharge. Economically connected expenses related to the dividends are not
deductible.
Capital gains realized by a resident individual from the sale of shares in resident companies are taxable as business income if
they arise from:

- shares held as business assets (section 15 of the EStG); or

- shares in a company in which the shareholder owns (or owned at any time within the preceding 5 years), directly or
indirectly, a substantial interest (a gain on a substantial interest, Veräusserungsgewinn) (section 17 of the EStG).
“Substantial interest” means a holding of at least 1% of the company’s share capital.
In all these cases, the gains are treated under the partial-income system, which means that only 60% of the gains constitute
taxable income, irrespective of the degree of participation, the holding period or the activity of the company (section 3 No. 40a
and No. 40c of the EStG). Only 60% of the expenses related to the shares are deductible.
In the case of a gain on a substantial interest, an allowance of EUR 9,060 is granted if the capital gain on 100% of the shares
does not exceed EUR 36,100; the allowance is phased out and disappears completely when the capital gain exceeds EUR
45,160. Any exceeding capital gain is taxable at the normal individual tax rates.
Almost all of Germany’s treaties allocate the right to tax capital gains from the sale of shares in a German company by a
resident of the other state to the seller’s state of residence. In these cases, Germany usually exempts the capital gain from
German taxation.
6.1.6.2. Substantial corporate shareholders
There is no distinction between substantial and portfolio interests for either corporate income tax or business tax purposes.

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Under the current regime, capital gains realized by resident corporate shareholders from the sale of shares in a resident
company are exempt, provided that the gains do not arise from an earlier depreciation of the shares that has been deducted for
tax purposes (section 8b(2) of the KStG). If the gains arise from an earlier depreciation of the shares, they are fully taxable at
the normal corporate income tax rate.
A lump sum of 5% of the gains is added back to taxable income representing non-deductible business expenses (section 8b(3)
of the KStG). On the other hand, actual expenses directly linked to (exempt) capital gains are now deductible. Previously, such
expenses were not deductible (section 3c(1) of the EStG). Capital losses are not deductible (section 8b(3) of the KStG).
The capital gains exemption is granted regardless of the level of participation. The exemption also applies to repayments of
capital stemming from a liquidation or a capital decrease, to balance sheet gains arisen from a revaluation adjustment of the
participation and to non-recurring gains derived from the alienation of a shareholding which was granted on the basis of a tax-
relieved contribution of a business. To the extent that a capital gain pertains to a former write-down (see section 1.3.3.2.), the
exemption is rejected and the corresponding part of the gain is regarded as taxable income.
There is a minimum holding period of 7 years for the exemption if the shares have been received in exchange for a tax-relieved
business contribution against shares (see section 9.).
The capital gains exemption does not apply to short-term capital gains realized by banks and financial institutions from the sale
of their commercial portfolio (section 8b(7) of the KStG).
The basic principles of the capital gains taxation according to section 8b of the KStG are laid down in a decree of the Federal
Ministry of Finance, issued on 28 April 2003 (BStBl. 2003 I, at 292).
Capital gains on shares in a resident company derived by a non-resident corporate shareholder or a permanent establishment
of a non-resident are also exempt under the same conditions as for resident shareholders (see above) (section 8b(2) of the
KStG).
Almost all of Germany’s treaties allocate the right to tax capital gains from the sale of shares in a German company by a
resident of the other state to the seller’s state of residence. In these cases, Germany usually exempts the capital gain from
German taxation. If capital gains derived from the sale of shares may be taxed in Germany, they are subject to the above-
mentioned provisions: 95% exempt or fully taxable (recapture of depreciation made by parent company).
For capital gains derived by resident companies from the disposal of shares of non-resident companies, see section 7.2.1.5.
6.1.6.3. Portfolio corporate shareholders
See section 6.1.6.2.

6.1.7. Purchase by a company of its own shares

Own shares must be recorded by the company under current assets, provided they were not purchased exclusively for the
reduction of the capital. In this case, a special reserve amounting to the book value of the own shares must be created as a
counterbalance.
If the shares have been purchased exclusively with the purpose to reduce the capital, they are not shown as current assets,
but their purchase price is immediately deducted from the capital. If the purchase price exceeds the nominal par value of the
shares, the price is deducted from the capital contribution account.
For the shareholder, the sale of shares to the company results in a capital gain (see section 6.1.6.) to the extent the price is at
arm’s length. An excessive price is a constructive dividend (see section 6.1.5.). This applies regardless of whether the shares
are recorded as an asset or used for the reduction of capital (Decree of the Federal Ministry of Finance of 2 December 1998,
BStBl. 1998 II, at 1509).
For mergers and other corporate reorganization situations, see section 9.

6.1.8. Liquidation
The proceeds received by a shareholder upon liquidation of a company must be divided into the distribution of retained
earnings and the repayment of capital. The distribution of retained earnings is taxed as a regular dividend.
The repayment of capital is generally tax exempt. If the shares are the business property of an individual or corporate
shareholder, the exemption is limited to the book value of the shares at the shareholder level. Any excess is taxable. This
situation typically occurs if the shareholder has depreciated the shares beforehand. The subsequent taxation of the excess
capital repayment thus represents recapture of the former depreciation of the shares.

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6.2. Directors
The remuneration of a member of the management board (Vorstand) and of a manager of a company (Geschäftsführer) is
usually classified as employment income and subject to income tax according to the normal rules applicable to income from
dependent services (section 19 of the EStG). If he is at the same time a shareholder of the company, especially a controlling
shareholder, the total remuneration (including pension promises, profit-dependent remuneration, benefits in kind) must be at
arm’s length. Excessive amounts are treated as constructive dividends (see section 6.1.5.). The absence of clear agreements
at the time of payment also leads to the assumption of a constructive dividend. Constructive dividends are treated as capital
investment income of the shareholder, with the results described in section 6.1.5. As the excessive payment is not treated
as a salary for tax purposes, but as capital investment income, it is not subject to wage tax withholding and social security
contributions.
Managing shareholders with a controlling influence on the company are not obligated to use the public social security system
and are thus not obligated to pay social security contributions. They may participate on a voluntary basis. However, members of
the board of directors of an AG are subject to the statutory pension scheme in respect of work performed for other employers in
addition to the occupation as a member of the board.
In contrast to the management functions of managers and directors, the remuneration paid to resident members of supervisory
boards (Aufsichtsrat) gives rise to income from independent services (section 18 of the EStG). The remuneration paid to non-
resident members of a supervisory board is subject to a 30% withholding tax (see section 7.3.4.4.).

7. International Aspects
7.1. Definitions
7.1.1. Resident and non-resident companies
See section 1.1.5.

7.1.2. Permanent establishment

7.1.2.1. Definition under domestic law
The maintenance of a permanent establishment in Germany by a non-resident gives rise to limited tax liability (section 49(1)
No. 2a of the EStG), i.e. the non-resident is taxable on the income attributable to the German permanent establishment. For
the definition of the term “permanent establishment”, domestic law applies if the foreign company doing business in Germany is
located in a non-treaty country. If the foreign company is located in a treaty country, the treaty definition prevails over domestic
law (section 2 of the AO).
According to domestic law (section 12 of the AO), a permanent establishment is a fixed place of business which serves the
business activity of the company. Under domestic law, permanent establishments are created mainly by any of the following:

- the place of management;

- registered branches;
- production facilities;
- warehouses;
- purchase and selling facilities;
- mines and quarries;
- installation and construction projects lasting more than 6 months; and
- permanent agents.
The three major differences between the OECD Model Convention and domestic law concern warehouses, installation projects
and agents. According to domestic law, warehouses are regarded as permanent establishments, whereas the OECD Model
provides an exception for warehouses because their activity is regarded as auxiliary. According to domestic law, installation
and construction projects constitute a permanent establishment if their duration exceeds 6 months, whereas the OECD Model
provides for 12 months.

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Under domestic law, a person constitutes the permanent establishment of a company if the person is subject to the company’s
directives and usually concludes contracts for the company or maintains a stock for the company and delivers the stock
(permanent agent). Whereas the OECD Model Convention focuses on dependent agents, a permanent establishment under
domestic law generally also includes independent agents, such as commissionaires, who are usually excluded from the
treaty definition of a permanent establishment. To achieve consistency between domestic law and treaty provisions, the tax
authorities have agreed not to tax the income derived by independent agents, such as commissionaires, even if they constitute
a permanent establishment under domestic law (laid down in R 49.1EStR).
For allocating income and expenses to a German permanent establishment of a foreign company, see section 7.2.1.2.
7.1.2.2. Definition under treaties
For the definition of a permanent establishment, Germany’s tax treaties generally follow the definition in the OECD Model
Convention.
Warehouses are excluded from the definition as an auxiliary activity – in contrast with domestic law (see section 7.1.2.1.).
Independent agents, such as commissionaires, are generally also excluded from the definition of a permanent establishment.
The period for which an installation or construction project must continue in order to constitute a permanent establishment is
usually 12 months, as opposed to 6 months under domestic law. Treaties with developing countries, however, apply the 6-
month period.

7.2. Taxation of resident companies

7.2.1. Taxable foreign income
7.2.1.1. General principles
Corporate income tax is imposed on worldwide income and capital gains. For the business tax treatment of foreign income, see
section 7.2.3.1. For exit taxation, see section 7.2.5.
7.2.1.2. Business profits
Resident companies must include the income of their foreign permanent establishments in their German taxable base, unless
a treaty provides an exemption for the permanent establishment’s income in Germany. Almost all of Germany’s treaties provide
such an exemption, but some treaties include an activity clause. If the requirements of the activity clause are not met, the
foreign permanent establishment’s income is not exempt. The foreign tax may be credited in these cases.
The losses of a foreign permanent establishment may be deducted from German income only under certain circumstances (see
section 7.2.2.).
Before 2013, Germany did not have a legal provision for allocating income and deductions between a head office and its
foreign permanent establishment. A decree of the Federal Ministry of Finance dealing with the treatment of permanent
establishments was issued on 24 December 1999, serving as a legal basis.
In accordance with international usage, the German tax authorities generally determine the profit of a permanent establishment
by the direct method, whereby the permanent establishment is treated as an independent entity.
The assets and liabilities are attributed to the foreign permanent establishment based on their economic function. There are
no specific rules on the debt/equity ratio of a permanent establishment. According to the Federal Tax Court, the tax authorities
must generally follow the decision of the taxpayer to what extent he attributes equity to the permanent establishment, provided
the debt/equity ratio complies with the arm’s length standard (BFH 20 July 1988, BStBl. 1989 II, at 140). According to the
above-mentioned decree, however, the equity of the permanent establishment should mirror the equity of its head office.
The transfer of fixed or current assets to a permanent establishment located in a non-treaty country or in a country where the
treaty provides for a foreign tax credit (rather than an exemption of the permanent establishment’s income) does not generally
lead to a taxable gain in Germany because German taxation is still ensured. If the assets are transferred to a permanent
establishment whose income is exempt in Germany under a tax treaty, the transfer of assets must generally occur at an arm’s
length price and therefore generally leads to a taxable gain. The tax authorities, however, allow a tax deferral of the gain until
the asset is actually sold by the permanent establishment. The tax deferral applies for a maximum period of 10 years. If the
asset is not sold during that period, the capital gain from the transfer of the asset will be taxed.
The charge of interest or royalties between the head office and the permanent establishment is not accepted. On the other
hand, interest and royalties paid to independent third parties may be attributed to the permanent establishment and deducted

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from its income if they economically relate to it (see above comments on the debt/equity ratio). An exception applies to banks
because their main business consists of dealing in money.
The indirect method (allocating profit according to certain criteria) may apply in exceptional circumstances, e.g. when the
business can be divided using simple criteria. This could be true for insurance companies, where the profit might be allocated
between the head office and the permanent establishment based on earned insurance premiums, or in the case of global
trading.
For German tax purposes, the income of a foreign permanent establishment must be determined according to German tax and
accounting principles.
A special problem of foreign permanent establishments is the foreign exchange conversion of the permanent establishment’s
financial statements. Each transaction must generally be converted at the rate applicable on the date the transaction is carried
out. For the sake of simplicity, however, income and expenses recorded in the profit-and-loss statement may be converted at
an average exchange rate. Balance sheet positions may generally be converted at the rates applicable on the balance sheet
date.
Income received by the head office from a permanent establishment is treated simply as a transfer of cash from one part of
the business to another part of the business. It is not treated as taxable income for the head office. Conversely, simple cash
transfers from the head office to the permanent establishment are not deductible.
With effect from 1 January 2013, the scope of the transfer pricing rules contained in section 1 of the Foreign Tax Law was
extended to also apply to dealings between a resident company and its foreign permanent establishment and to dealings
between a non-resident company and its domestic permanent establishment (see section 10.2.). The amendments aim to
implement the Authorized OECD Approach, as set out in article 7 of the OECD Model Convention 2010 and the respective
OECD Commentary, to allocating profits between permanent establishments and headquarters, in the domestic law. Further
guidance on the application of the amendments, in particular on how to determine the amount of free capital of a permanent
establishment, is set out in the ordinance on the application of the arm's length principle to permanent establishments
(Betriebsstättengewinnaufteilungsverordnung), which entered into force on 18 October 2014.
For the purpose of the application of the transfer pricing rules, a permanent establishment is treated as a separate legal entity.
Therefore, significant people functions and assets connected with the functions carried out by the permanent establishment
and related risks must be attributed to the permanent establishment. Moreover, an appropriate amount of free capital must be
attributed to the permanent establishment. Subsequently, on the basis of the aforementioned attributions, the arm’s length price
for the dealings between a company and its permanent establishment must be determined.
7.2.1.3. Dividends
Basically, the same tax exemption as applies to German-source dividends from qualifying shareholdings and similar income
(see section 6.1.3.) not only applies to foreign-source dividends, but also to similar earnings derived from a participation in a
foreign company including the alienation of the sole foreign dividend certificate (section 8b(1) of the KStG). The 5% add-back
rule, which represents non-deductible business expenses, also applies to all earnings derived from a participation in a foreign
company and is not limited to dividends (section 8b (5) of the KStG).
In principle, dividends are not exempt for business tax purposes because of the add-back discussed in section 2.2.
The basics of the dividend taxation according to section 8b of the KStG are explained in a decree of the Federal Ministry of
Finance, issued on 28 April 2003 (BStBl. 2003 I, at 292).
7.2.1.4. Interest, royalties and other income
Foreign-source interest and royalties are taxable (sections 20 and 21 of the EStG; section 8 of the KStG).
Service fees received by resident companies from non-residents are taxable (sections 15 and 21 of the EStG, section 8 of the
KStG), unless they are attributable to a foreign permanent establishment. Under some tax treaties, mostly with developing
countries, certain types of service fees, mainly for technical services or commercial advice, may be treated as royalties (e.g.
fees paid for the use of know-how or trademarks).
Rents from immovable property located in a non-treaty country are subject to German tax (section 21 of the EStG, section 8 of
the KStG). Foreign tax is credited to the extent the German tax relates to foreign-source rental income (see section 7.2.6.3.). If
the immovable property is located in a treaty country, the rental income is usually exempt in Germany because the right to tax
is generally attributed to the country in which the immovable property is located.

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7.2.1.5. Capital gains

Capital gains on the sale of foreign assets are taxable as regular business income for the German company, with the
exceptions indicated below.
If the capital gains are realized in a foreign permanent establishment, they are treated as the regular income of the permanent
establishment. Thus, with respect to treaty countries, the capital gain realized in a foreign permanent establishment is generally
exempt from German tax, although sometimes subject to an activity clause (see section 7.2.1.2.). In a non-treaty situation or if
the treaty exemption does not apply, a tax credit is generally granted (see sections 7.2.6. and 7.4.1.2.).
For immovable property, Germany’s treaties usually attribute the right of taxation to the country in which the property is located.
Germany usually exempts the capital gains stemming from the sale of real estate.
According to section 8b(2) of the KStG, capital gains on the sale of shares in a non-resident company are exempt from
corporate income tax for a resident shareholder. The exemption also applies to repayments of capital stemming from a
liquidation or a capital decrease, to balance sheet gains arising from a revaluation adjustment of the participation and to non-
recurring gains derived from the alienation of a shareholding which was granted on the basis of a tax-relieved contribution of a
business.
A lump sum of 5% of the gains is added back to taxable income representing non-deductible business expenses (section 8b(3)
of the KStG). On the other hand, actual expenses directly linked to (exempt) capital gains are deductible.
The exemption is not granted to the extent that the parent company had written down the investment to its lower fair market
value and the former write-down is not recaptured. Furthermore, the exemption does not apply if the shareholding which was
granted on the basis of a tax-relieved contribution of a business is alienated within a holding period of 7 years. This holding
period also applies if the investment was received within the last 7 years in a tax-free share-for-share exchange according to
the Merger Directive (2009/133). Finally, the capital gains exemption is not granted to short-term capital gains realized by banks
and financial institutions from the sale of their commercial portfolio (section 8b(7) of the KStG).
The basic principles of the taxation of capital gains according to section 8b of the KStG are laid down in a decree of the Federal
Ministry of Finance, issued on 28 April 2003 (BStBl. 2003 I, at 292).
Losses connected with the sale, liquidation or capital decrease of the investment, as well as its write-down to the fair market
value, may be subject to restrictions (see section 7.2.2.).

7.2.2. Foreign losses

Foreign-source losses are not deductible from German-source income if they stem from:

- the depreciation, sale or capital reduction of shares in foreign companies. These losses are deductible if they are short-term
capital losses realized by banks and financial institutions from the sale of their commercial portfolio (section 8b(7) of the
KStG);
- agriculture and forestry;
- foreign permanent establishments (unless active, see below);
- silent partnerships and profit-oriented loans; or
- the lease of foreign immovable property.
Losses from these activities may be set off only against income from the same kind of activity realized in the same foreign
country. If not offset, the losses may be carried forward for an unlimited period (section 2a(1) of the EStG).
On the other hand, foreign-source losses are deductible from German income if they stem from an active foreign permanent
establishment engaged almost exclusively in:

- the production of goods (except weapons);

- the extraction of raw materials and other commercial activities (except tourism); or
- the rental of goods and rights (section 2a(2) of the EStG).
The above-mentioned restrictions are not applicable to losses stemming from operations in an EEA country, if the Directive on
Administrative Cooperation (2011/16) (DAC) or a similar agreement is applicable between Germany and the respective EEA
country (section 2a (2a) of the EStG).

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The loss deduction is not possible if a tax treaty excludes the foreign permanent establishment’s income from the German
taxable base (see section 7.4.1.2.).

7.2.3. Other taxes on income

7.2.3.1. Business tax on income
The business tax (see section 2.2.) is due on any business carried on in Germany. A business is deemed carried on in
Germany if the taxpayer has a permanent establishment in Germany (see section 1.1.1.) or on a ship listed on a German ship
register (section 1 of the GewStG).
As the business tax focuses on German business, the following foreign-source income is disregarded for business tax
purposes:

- income from foreign partnerships (section 9 No. 2 of the GewStG);

- income from foreign permanent establishments (section 9 No. 3 of the GewStG) (see sections 7.1.2.1. and 7.1.2.2.);
- dividends from a non-resident company in which the German company has held at least 15% of the shares at the beginning
of the tax year concerned (section 9 No. 7 of the GewStG); and
- 95% of dividends from a non-resident company if a tax treaty provides an exemption (section 9 No. 8 of the GewStG) (see
section 7.4.1.2.).
On the other hand, certain deductions relating to foreign sources, e.g. losses from foreign partnerships (section 8 No. 8 of the
GewStG) must be added to the business tax base.
7.2.3.2. Solidarity surcharge
The base for the solidarity surcharge is the corporate income tax due by the company after deducting any tax credits. To the
extent the unilateral and treaty relief provisions reduce the corporate income tax burden, the taxpayer may avoid the solidarity
surcharge on that part of its corporate income tax.

7.2.4. Taxes on foreign capital

Germany abolished the net worth tax effective 1 January 1997 and the business tax on capital effective 1 January 1998.
The real estate tax (see section 5.3.) is a local tax and is not due on immovable property located abroad.

7.2.5. Emigration
If a resident company organized under German commercial law transfers its legal seat (Satzungssitz) outside Germany in
a way that the company will not be subject to unlimited tax liability in any EU Member State/EEA country, commercial law
principles provide for its liquidation (because a company organized under German law must have its legal seat in Germany;
for the ECJ’s decision in Überseering BV, see Business and Investment - Country Surveys). Tax law follows this treatment,
i.e. there is a deemed disposal of assets so that all hidden reserves are realized and subject to corporate income tax at the
regular rate, if a company relocates its legal seat, i.e. registered office, or its place of management, outside Germany, and
thus ceases to be subject to unlimited tax liability in Germany (sections 11 and 12 of the KStG). If a company relocates to an
EU Member State/EEA country and the Directive on Administrative Cooperation (2011/16) (DAC) or a similar agreement is
applicable between Germany and the respective EU Member State/EEA country, the taxation of the profits from the hidden
reserves on exit may be spread over 5 consecutive years. As a general principle, to the extent Germany will lose the taxing
rights over assets transferred in a cross-border reorganization, those transfers will be valued at their fair market value with the
resulting capital gains triggering immediate taxation. There are no specific anti-"corporate inversion” rules.

7.2.6. Double taxation relief

7.2.6.1. Business profits
Double taxation of business income derived through a foreign permanent establishment can be relieved by the rules indicated
below.
7.2.6.1.1. Foreign tax credit
Resident taxpayers may credit foreign national, provincial and local income taxes on the permanent establishment’s income
against their German tax on this foreign-source income. The foreign tax must be comparable to the German individual or

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corporate income tax (section 34c of the EStG; section 26 of the KStG). The foreign tax credit is limited to the amount of
German tax due on the foreign-source income (section 34c of the EStG, section 26(1) of the KStG).
According to section 34c of the EStG, the maximum foreign tax credit must be calculated separately for each foreign country
(per-country limitation) from which taxable income is derived. Income that is exempt abroad should not be taken into account in
calculating the sum of foreign income, even if it is taxable in Germany. Furthermore, income that basically is subject to taxation
in the source country according to that country’s domestic law, but not taxable under that country’s double taxation treaty
with Germany, will not be considered in calculating the foreign tax credit limitation for that country. Finally, domestic business
expenses incurred in connection with foreign income must be directly allocated to the foreign income before calculating the
maximum tax credit, irrespective of whether the expenses are directly or indirectly economically related to the foreign income.
As long as the foreign tax is 15% or below (on the recalculated foreign-source income), the foreign tax is credited in a profit
situation. The use of loss carry-forwards, however, decreases the effective German tax and therefore limits the foreign tax
credit. The calculation is made on a per-country basis.

Examples

(a) Profit situation

Foreign-source income (according to German rules) 100
German tax (15%) 15

Foreign tax (10%) 10

Full credit (as not more than 15%) (10)
Remaining German tax 5

(b) Loss situation

Foreign-source income (according to German rules) 100
Offset by loss carry-forward (100)
Taxable income 0
German tax (15%) 0

Foreign tax (20%) 20

No credit (as German tax is 0) (0)
Remaining German tax 0

In the loss situation, the loss carry-forwards are used up by the foreign-source income at an amount of 100, without giving
access to the foreign tax credit. In such cases, it is usually recommended that the taxpayer elect to deduct the foreign tax
from the German taxable base (see below).

7.2.6.1.2. Deduction of foreign tax

Instead of a tax credit, a taxpayer may elect to deduct the foreign income tax from total taxable income as an expense (section
26(6) of the KStG, section 34c(2) of the EStG). This is useful if the foreign taxes exceed the German tax, e.g. due to the use of
loss carry-forwards.
Taking the figures in example (b) in section 7.2.6.1.1., this has the following impact:
Foreign-source income (according to German rules) 100
Deduction of foreign tax (10)
Offset by loss carry-forward (90)
Taxable income 0

The example demonstrates that the deduction of foreign tax allows the taxpayer to preserve the loss carry-forwards at an
amount equal to the foreign tax.

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7.2.6.1.3. Flat-tax rate for foreign-source income

The German tax authorities may assess the tax due on foreign-source income at a flat rate or may reduce the actual rate
(even to zero) (section 26(6) of the KStG, section 34c(5) of the EStG). Application of this provision is subject to the approval
of the Federal Ministry of Finance and is generally granted when it is of importance to Germany or when the calculation of the
allowable foreign tax credit is exceptionally difficult.
7.2.6.2. Dividends
Dividends derived by resident companies from substantial shareholdings (direct holding of more than 10% at the beginning
of the calendar year) are generally exempt irrespective of their source (see section 6.1.3.). A lump sum of 5% of the gross
dividends is added back to taxable income representing non-deductible business expenses. Actual business expenses,
however, are fully deductible. Dividends derived by resident companies from portfolio shareholdings (i.e. holdings of less than
10%) are included in the taxable income.
7.2.6.3. Interest, royalties and other income
Foreign withholding taxes on interest and royalties are credited against the German corporate income tax of the recipient,
provided the foreign tax is similar to the German corporate income tax (direct tax credit) (section 26(1) of the KStG).
Alternatively, the foreign withholding tax may be deducted from the German taxable base (section 26(6) of the KStG) or, in
exceptional circumstances, flat-rate taxation may apply (section 26(6) of the KStG). For details of these relief methods, see
section 7.2.6.1.
7.2.6.4. Capital gains
If the capital gains on the sale of foreign assets are subject to German tax (see section 7.2.1.5.), they are treated as regular
business income for the German company. Unilateral relief is granted by a direct credit for the foreign tax against the German
income tax due (section 26(1) of the KStG). Alternatively, the foreign tax may be deducted from the German taxable base or, in
exceptional circumstances, a flat-rate tax may apply (section 26(1) of the KStG). For details of these relief methods, see section
7.2.6.1.

7.3. Taxation of non-resident companies

7.3.1. General
For the definition of “non-resident company” and “permanent establishment of non-resident company”, see sections 7.1.1. and
7.1.2.
Either the legal seat or the place of management is sufficient to establish residence in Germany (see section 7.1.1.).
Consequently, if the place of management of a foreign company is in Germany, it is deemed to be resident and thus subject to
unlimited taxation in Germany. Otherwise, the foreign company is deemed to be non-resident in Germany and thus subject to
limited taxation, i.e. only on German-source income (see section 7.3.3.).

7.3.2. Immigration
German law is silent regarding the tax consequences if a foreign company with a permanent establishment in Germany
changes from non-resident to resident taxation by transferring its place of management.
The incorporation of a permanent establishment via the transfer of all its assets and liabilities to a German company leads to a
deemed liquidation and full taxation of the hidden reserves.
For EU companies, the taxation of hidden reserves on incorporation may be avoided by applying the Merger Directive
(2009/133) (see section 9.).

7.3.3. Taxable domestic income

7.3.3.1. General
If a foreign company is deemed to be resident in Germany due to its German place of management (see section 7.3.1.), its
worldwide income is subject to German tax in the same manner as that of other resident companies.
Other foreign companies (non-resident companies) are subject to German tax only if their income from German sources falls
into one or more of the following categories (section 8(1) of the KStG, section 49 of the EStG):

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(1) agriculture and forestry;

(2) business income from:

(a) the operation of a branch or other permanent establishment in Germany;

(b) the disposal of German-situs immovable property, and of rights entered into a German public book or register;
(c) the disposal of shares in a German company, but only if the seller owned at least 1% of the capital of the company at
any time during the 5 years preceding the sale;
(d) income from the sale of shares in a resident or non-resident company, if at any time during the 365 days preceding the
alienation, these shares derived more than 50% of their value directly or indirectly from immovable property situated in
Germany (with effect from 1 January 2019);
(e) rents and royalties, unless connected to operations falling under (a);
(3) capital investment income (including dividends and certain forms of interest);
(4) other specified income, such as speculative gains on the sale of German-situs immovable property (within 10 years
from acquisition) (unless the gain is classified as business income, as specified above). If the acquisition and resale of
immovable property occurs on a regular basis, it can constitute a commercial activity yielding business income mentioned in
(2)(b).
If the income is not subject to withholding tax, taxable income is calculated as the difference between income and related
expenses. The corporate income tax rate is 15%, increased to 15.825% by the 5.5% solidarity surcharge (section 23 of the
KStG). The taxpayer must file a return for each tax year and receives an assessment from the tax authorities.
If the income is subject to withholding tax, as in the case of dividends, certain interest payments and royalties, the tax
is withheld on gross income, i.e. without deduction of related expenses. The withholding tax represents a final tax in full
settlement of the tax liability, unless the income is effectively connected with a permanent establishment. In that case, it is
classified as business income (section 50(2) of the EStG): the (net) income is included in the German taxable base and the
withholding tax is credited. The inclusion of the income allows the taxpayer to offset losses arising in other parts of the German
permanent establishment.
For capital gains, see section 7.3.3.5.; for withholding taxes, see section 7.3.4.
7.3.3.2. Business profits
The business profits of a non-resident company are subject to German tax to the extent the profits are effectively connected
with a German permanent establishment.
For determining the income and debt/equity ratio of a permanent establishment, see section 7.2.1.2.
The transfer of assets from the German permanent establishment to the foreign head office must occur at arm’s length and
therefore leads to realization of a profit or loss. A tax deferral of the capital gain, e.g. until the asset is sold by the foreign head
office, is not allowed.
Income transferred from the permanent establishment to the foreign head office is treated simply as a transfer of funds from
one part of the business to another part of the business. It is not treated as deductible by the permanent establishment.
Conversely, simple cash transfers from the head office to the permanent establishment are not taxable.
The taxable business profits of the permanent establishment also include other types of income, such as interest, dividend
and royalty income as well as capital gains if they are effectively connected with the permanent establishment. The exemption
for capital gains from the sale of foreign shares (see section 7.2.6.4.) is also available for permanent establishments of non-
resident companies (section 8b(2) of the KStG). Furthermore, the exemption of German and foreign-source dividends (see
sections 6.1.3. and 7.2.1.3.) also applies to dividends derived by a German permanent establishment of a non-resident
company.
Finally, a registered branch (but no other type of permanent establishment) of a non-resident company can act as a top
company for tax consolidation purposes. In this case, the profits and losses of the subsidiaries held by the branch can be
consolidated with the income of the branch. See section 8.2.

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7.3.3.3. Dividends, interest and royalties

7.3.3.3.1. Dividends
Non-resident companies are subject to German tax on dividends paid on shares of a German AG, KGaA or GmbH.
If the dividends are derived by a non-resident shareholder through a German permanent establishment, the dividends may
qualify for the 95% exemption (see section 6.1.3.). If the dividends are received by a non-resident shareholder directly, they are
subject to withholding tax, unless an exemption applies under the Parent-Subsidiary Directive (2011/96) (see section 7.3.4.1.).
Dividends may also qualify for an exemption or reduced rate of withholding tax under a tax treaty (see section 7.4.1.5.).
In addition, for dividends paid after 31 December 2008, the receiving non-resident company may apply for a refund of two fifths
of the withholding tax. The refund procedure requires that the receiving non-resident company complies with the substance
requirements under the domestic anti-treaty shopping rule and provides a certificate of residence. Applications for refund must
be filed with the Federal Tax Office (Bundeszentralamt für Steuern, An der Küppe 1, D-53225 Bonn, http://www.bzst.bund.de).
Apart from regular dividends from shares in an AG, KGaA or GmbH, there are hybrid instruments where the payments are
dependent on the profit, but are deductible for the company, in general both for corporate income tax and business tax
purposes. These are payments on typical silent partnerships, participating loans and profit-sharing bonds when the payer has
its residence, place of management or legal seat in Germany (section 49(1) No. 5 of the EStG). Exceptionally, payments to
foreign silent partners are not deductible for business tax purposes for the payer. Jouissance rights also fall into this category,
but the payments are deductible for the company only if the bearer does not participate in a liquidation surplus.
If income from these hybrid instruments is effectively connected with a permanent establishment, it is part of the business
profits and included in the tax return in its full amount (the 95% exemption generally does not apply to such income). Otherwise,
such income is subject to withholding tax (see section 7.3.4.).
7.3.3.3.2. Interest
If the interest payments to a non-resident are attributable to a German permanent establishment of the non-resident, the
interest is part of the business profits and assessed based on the basis of a tax return, as described in section 7.3.3.1.
Otherwise, interest payments to non-resident companies are subject to German tax if:

- the loan is secured directly or indirectly by a mortgage on German immovable property or on a ship registered in a German
ship register (section 49(1) No. 5c of the EStG);
- the interest is paid on convertible bonds (section 49(1) No. 5a of the EStG); or
- the interest is paid on coupons from bearer bonds and is not credited to an account of a foreign bank (anonymous over-the-
counter transactions) (section 49(1) No. 5c of the EStG).
In the first case, corporate income tax is assessed at a rate of 15%, increased to 15.825% by the 5.5% solidarity surcharge;
a treaty can exclude German taxation or reduce the rate (see section 7.4.1.5.). In the other cases, interest is subject to
withholding tax at source. However, for interest paid after 31 December 2008, the receiving non-resident company may
apply for a refund of two fifths of the withholding tax. The refund procedure requires that the receiving non-resident company
complies with the substance requirements under the domestic anti-treaty shopping rule and provides a certificate of residence.
Applications for refund must be filed with the Federal Tax Office (Bundeszentralamt für Steuern, An der Küppe 1, D-53225
Bonn, http://www.bzst.bund.de). For the withholding tax rates, see section 7.3.4.
Under the domestic law (section 50g of the EStG) implementing the provisions of the Interest and Royalties Directive (2003/49),
outbound interest and royalty payments are exempt from withholding tax, provided that the beneficial owner of the interest or
royalties is an associated company of the paying company and is resident in another EU Member State or such a company’s
permanent establishment situated in another EU Member State. Two companies are “associated companies” if (a) one of them
has a direct minimum holding of 25% in the capital of the other or (b) a third EU company has a direct minimum holding of 25%
in the capital of the two companies. No minimum holding period is required. The relevant companies must have a legal form
listed in the Annex of the Interest and Royalties Directive (2003/49) and be subject to a corporate income tax. The exemption
does not apply to (i) interest which is treated as a profit distribution under German law; (ii) interest from profit-participating debt
claims; and (iii) interest and royalties exceeding an arm’s length amount.
Under article 15 of the EU-Switzerland Exchange of Information Agreement (2004) providing for measures equivalent to those
laid down in the Savings Directive (2003/48) (repealed with effect from 1 January 2016), the EU Member States must exempt
interest and royalty payments to recipients resident in Switzerland under essentially the same conditions as those laid down in
the Interest and Royalties Directive (2003/49). The provisions of the agreement are effective from 1 July 2005. According to a

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letter of the German Ministry of Finance, the domestic provisions implementing the Interest and Royalties Directive (2003/49)
with effect from 1 July 2005 apply correspondingly in relation to Switzerland.
7.3.3.3.3. Royalties
If royalty payments to a non-resident are attributable to a German permanent establishment of the non-resident, the royalty is
part of its business profits and assessed as described in section 7.3.3.1.
Otherwise, royalty payments are deemed German-source income and taxable for a non-resident if the underlying right is
registered in a German register (e.g. the patent or trademark register) or if the right belongs to a German business (not
necessarily the business of the recipient of the royalties; section 49(1) Nos. 2(f) and 6 of the EStG). The Ministry of Finance
issued official guidance (IV B 8-S 2300/19/10016:007, of 11 February 2021 and IV B 8-S 2300/19/10016:009, of 29 June
2022) providing for simplification in cases where non-residents would be subject to a limited tax liability solely as a result of the
registration of rights in Germany and a given tax treaty would be applicable, allocating the taxation right over a royalty payment
exclusively to the residence state of the recipient. This simplified procedure applies to relevant income received between 30
September 2021 and 1 July 2023. The tax on royalties is withheld at source (section 50a(1) of the EStG). For the withholding
tax rates, see section 7.3.4.
Under the domestic law implementing the provisions of the Interest and Royalties Directive (2003/49), outbound royalty
payments between associated companies are exempt from withholding tax. For details, see section 7.3.3.3.2.
Article 15(2) of the EU-Switzerland Exchange of Information Agreement (2004) has been implemented into German domestic
law (section 50g(6) of the EStG) reducing the German withholding tax rate to nil in the following cases (where the treatment is
more beneficial than under the tax treaty):

- a German company pays royalties to the Swiss permanent establishment of an associated company of another EU Member
State; and
- a Swiss company has an associated subsidiary in Germany and one in another EU Member State, which has a tax treaty
with Germany providing for German source taxation of royalties. The German subsidiary pays royalties to its sister company
in the other EU Member State.
7.3.3.4. Other income
Service fees paid to a non-resident company are subject to German tax if they are attributable to a German permanent
establishment. They are then taxable as business profits as described in section 7.3.3.1. Otherwise, service fees are subject to
withholding tax to the extent they contain elements that classify them as German-source royalties (see section 7.3.3.3.3.).
For the withholding tax rates, see section 7.3.4.
7.3.3.5. Capital gains
Capital gains realized by a non-resident company are subject to German tax only if they fall within one of the categories of
German-source income set out in section 7.3.3.1. and if a treaty does not restrict Germany’s right to tax. German-source capital
gains thus are gains arising from the sale of assets attributable to a permanent establishment and from the sale of partnership
shares and immovable property located in Germany. Capital gains on shares in a resident company derived by a non-resident
corporate shareholder or a permanent establishment of a non-resident are 95% exempt under the same conditions as for
resident shareholders (see section 6.1.6.2.).
Germany’s treaties usually restrict its right to tax gains from shares in German companies and from the sale of substantial
interests. On the other hand, Germany retains the right to tax the gains of the permanent establishment and the capital gains
arising from partnership shares and from the sale of German-situs immovable property.
The sale of an investment in a foreign company held by a German permanent establishment is exempt under the conditions of
section 8b(2) of the KStG (see section 7.2.1.5.).

7.3.4. Withholding taxes

7.3.4.1. Dividends
Dividends and other profit distributions paid by resident companies (AG, KGaA, GmbH) are subject to withholding tax
(Kapitalertragsteuer) at a rate of 25% (section 43a(1) No. 1 of the EStG), increased to 26.375% by the 5.5% solidarity
surcharge. This also applies to income from the alienation of the dividend certificate (Dividendenschein) without an alienation
of the respective underlying share, and to distributions on jouissance rights that entitle the holder to participate both in profit

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distributions and in the liquidation surplus (non-deductible jouissance rights; for deductible jouissance rights, see section
7.3.4.2.).
A 25% withholding tax (26.375% including the solidarity surcharge) applies also to payments in respect of the participation of
silent partners in a trade or business and in respect of loans with profit participation right, in addition to or instead of interest
(partiarische Darlehen) (section 43a(1) No. 1 of the EStG).
Under the domestic law (section 43b of the EStG) implementing the provisions of the Parent-Subsidiary Directive (2011/96) in
Germany, no withholding tax is levied, on request, if:

(1) the subsidiary is subject to unlimited German tax liability;

(2) the parent and the subsidiary have a corporate form mentioned in the Annex to the Directive (as amended);
(3) the parent and the subsidiary are subject to a corporate income tax listed in article 2 of the Directive (as amended), without
the possibility of an option or of being exempt;
(4) the parent holds at least 10% of the capital of the subsidiary; and
(5) the required holding is maintained for at least 12 months.
Regarding condition (5), the wording of the German tax law (section 43b(2) of the EStG) had to be changed due to the Denkavit
decisions of the ECJ (Joined Cases C-283/94, C-291/94 and C-292/94). The old wording required that 12 months must have
elapsed at the time the withholding tax arose. According to the revised wording, withholding tax on distributions made before
the expiry of the 12-month holding period is also reduced to zero if the holding period requirement is subsequently met. If
dividends are paid within the 12-month period, withholding tax is due at the domestic rate, or at a lower treaty rate if a partial
exemption certificate has been provided (see section 7.3.4.5.2.). Once the 12-month holding period requirement is fulfilled, the
tax withheld is refunded to the shareholder upon application made to the Federal Tax Office.
If a permanent establishment of a qualifying parent receives the dividends, it only qualifies for the exemption if the participation
in the subsidiary effectively forms part of the business capital of the permanent establishment. Furthermore, the permanent
establishment must meet the requirements set out in article 2(2) of the Parent-Subsidiary Directive (2011/96).
Under article 9 of the European Union–Switzerland Exchange of Information Agreement (2004) providing for measures
equivalent to those laid down in the Savings Directive (2003/48) (repealed with effect from 1 January 2016), the EU Member
States must exempt dividend payments to qualifying recipients resident in Switzerland under essentially the same conditions as
those laid down in the Parent-Subsidiary Directive (2011/96). The provisions of the agreement are effective from 1 July 2005.
However, the exemption under the tax treaty between Germany and Switzerland is subject to more lenient conditions.
7.3.4.2. Interest
Interest paid to non-residents on profit-sharing bonds and convertible loans is subject to withholding tax (Kapitalertragsteuer) at
a rate of 25% (section 43a(1) No. 1 of the EStG), increased to 26.375% by the 5.5% solidarity surcharge. This also applies to
interest on jouissance rights that do not entitle the holder to participate either in profit distributions or in the liquidation surplus
(deductible jouissance rights; for non-deductible jouissance rights, see section 7.3.4.1.).
Interest on coupons of bearer bonds that is not credited to a bank account at a foreign bank (over-the-counter transactions) is
also subject to withholding tax at the rate of 25%, increased to 26.375% by the 5.5% solidarity surcharge.
In the case of interest on a loan secured by a mortgage on German immovable property or on a German ship, corporate
income tax is imposed by assessment at the general rate (see section 7.3.3.1.).
The withholding tax on regular bank interest (see section 1.10.3.2.) does not apply to payments to non-residents.
For the Interest and Royalties Directive (2003/49), see section 7.3.3.3.2.
7.3.4.3. Royalties
Royalties paid to non-residents are subject to corporate income tax (Körperschaftsteuer), which is imposed by withholding at a
rate of 15% (section 50a(1) of the EStG), increased to 15.825% by the 5.5% solidarity surcharge.
The withholding tax base of royalties includes net payments without any deductions concerning relating expenditure. After the
introduction of the reverse charge mechanism effective from 2002 (see section 13.11.), German VAT is no longer part of the
withholding tax base.
For the Interest and Royalties Directive (2003/49), see section 7.3.3.3.2.

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7.3.4.4. Other income

Service fees are not subject to withholding tax, unless they contain royalty elements. For the latter case, see the comments on
royalties in section 7.3.4.3.
Fees paid to non-resident members of supervisory boards (Aufsichtsrat) of AGs and GmbHs are subject to withholding tax at
the rate of 30%, increased to 31.65% by the 5.5% solidarity surcharge.
Payments to non-residents for artistic, sports, literary, journalistic services and the like are subject to withholding tax at a rate
of 15% (increased to 15.825% by the solidarity surcharge) if the services are performed or used in Germany and the gross
remuneration exceeds EUR 250. The withholding tax is levied on gross income. After the introduction of the reverse charge
mechanism effective from 2002 (see section 13.11.), VAT is no longer part of the withholding tax base.
If the recipient of the payments is a national and resident of an EEA country, the debtor may deduct directly linked business
expenses at the withholding stage if the recipient can provide proof of such expenses. In that case, the withholding tax rate is
30% of the net payments if the recipient is an individual, and 15% if the recipient is a company established in an EEA country.
7.3.4.5. Withholding procedure
7.3.4.5.1. General
The payer of dividends, interest, royalties and other payments that are subject to withholding tax (see section 7.3.4.) must
withhold the relevant tax on behalf of the recipient and transfer it to the local tax office. A withholding tax return must be filed,
indicating the taxable base and the amount of tax withheld.
Withholding tax arises at different times, depending on the kind of income, as follows:

- for dividends and other distributions which must be decided by the shareholders, on the date of payment specified in the
shareholders’ distribution decision. If the date is not specified, it arises on the date after the shareholders’ decision (section
44(2) of the EStG);
- for payments to silent partners, on the date of payment specified in the silent partnership agreement. If the date is not
specified, it arises, at the latest, 6 months after the end of the financial year concerned (section 44(3) of the EStG);
- for interest and royalties, on the date of payment (sections 44(1) and 50a(5) of the EStG); and
- for installation and construction work, on the date of payment (sections 48 and 48a of the EStG).
For dividends (as defined in the first paragraph of section 1.10.3.1.), the tax must be transferred to the local tax office on the
accrual of the dividend amount. For dividends paid prior to that date, silent partnership payments and interest, the tax must
be transferred to the local tax office by the tenth day of the month following the month in which the withholding tax arose. For
royalties, the tax must be transferred by the tenth day following the end of the quarter in which the royalties were paid. For
installation and construction work, withholding tax must be transferred by the tenth day of the month following the month in
which the consideration for the work was paid.
7.3.4.5.2. Treaties
As a general rule, if a tax treaty provides for a reduction of the domestic rate of withholding tax, the payer must withhold the full
domestic rate, and the recipient of the income must apply for a refund of the excess withholding tax at the Federal Tax Office
(Bundeszentralamt für Steuern, An der Küppe 1, D-53225 Bonn, http://www.bzst.bund.de).
To avoid the refund procedure, the recipient may apply for an exemption or partial exemption certificate at the Federal Tax
Office before payment of the dividend (affiliation privilege situation) and royalties (not applicable to interest). In order to obtain
the certificate of exemption, the recipient generally must submit a certificate of residence issued by the authorities of the
treaty country. Such certificate is valid for a maximum of 3 years from the day on which the Federal Tax Office received the
application form. If the certificate is presented to the payer, he may apply the exemption or the lower treaty rate under the treaty
immediately (section 50c(1), (2) and (3) of the EStG).
In the case of dividends, the certificate of exemption is issued if the shareholding company (section 50c(2) of the EStG):

- is a resident of the treaty country for the treaty purposes;

- is subject to income tax in the treaty country and is not tax exempt; and
- holds directly a participation of at least 10% of the nominal capital in the German company.

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Furthermore, a certificate of exemption is obtainable for dividends qualifying under the domestic law implementing the
provisions of the Parent-Subsidiary Directive (2011/96) (see section 7.3.4.).

7.3.5. Branch tax

Germany does not levy a branch profits tax, i.e. a withholding tax levied on payments made by a German branch to the head
office. Branches are taxed at the same corporate income tax rate as resident companies (see section 1.10.1.).

7.3.6. Other taxes on income

7.3.6.1. Business tax
German business tax is due by non-residents on the business profits they realize in a permanent establishment in Germany
(see section 1.1.1.) or on a ship listed on a German ship register (section 1 of the GewStG). For the definition of a permanent
establishment, domestic law is relevant in non-treaty cases (section 12 of the AO) (see section 7.1.2.1.). If a treaty applies, the
treaty definition prevails (see section 7.1.2.2.). Generally, Germany’s income tax treaties also apply to the business tax.
The general rules described in section 2.2. also apply to non-residents. Foreign-source income is disregarded to a great extent
(see section 7.2.3.1.).
7.3.6.2. Solidarity surcharge
Solidarity surcharge (see section 2.3.) is due on the German income tax payable by a non-resident company (section 3 of the
Solidarity Surcharge Law (Solidaritätszuschlaggesetz, SolZG)). If German tax is reduced under a treaty (see section 7.4.1.5.),
the tax rate increased by the solidarity surcharge may not exceed the treaty rate (section 5 of the SolZG).

7.3.7. Taxes on capital

Germany abolished the net worth tax effective 1 January 1997 and the business tax on capital effective 1 January 1998.
Non-residents are subject to the real estate tax (see section 5.3.) on German-situs immovable property.

7.3.8. Closure of branch/permanent establishment

The closure of a permanent establishment is treated as a liquidation and leads to the full reversal of hidden reserves (section
12(2) of the KStG).
The same applies if the permanent establishment is transferred abroad or transferred to another entity. The reversal of hidden
reserves may be avoided if the head office of the branch is located in an EU Member State and if the permanent establishment
is contributed to a German or other EU company in exchange for shares on the basis of the Merger Directive (2009/133) (see
section 9.).

7.3.9. Administration
With regard to tax returns and other administrative issues, the same rules apply to non-resident companies as to resident
companies (see section 1.11.).
For administrative issues in connection with withholding taxes, see section 1.11.9.

7.4. Tax treaties and other agreements

7.4.1. Tax treaties
7.4.1.1. Treaty policy
Germany has an extensive treaty network. The treaties generally follow the OECD Model Convention.
Treaty provisions prevail over domestic tax law (section 2 of the AO). A domestic law that became effective after the treaty,
however, may override a treaty provision (BFH 1995, BStBl. 1995 II, at 129). See section 10.6.2. for an anti-treaty shopping rule
in the form of a treaty override provision.
For the policy on tax sparing credits, see section 7.4.1.6.2.

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7.4.1.2. Treaty relief from double taxation

The two methods for avoiding double taxation of foreign income used in Germany’s tax treaties are the exemption method and
the credit method. The treaties also provide for a reduction of withholding taxes in the source state.
The exemption method allows an exclusion of foreign-source income from the German taxable base. The exemption method
generally applies to:

- income of a foreign permanent establishment;

- income from foreign immovable property; and
- dividends, if the investment in the non-resident company is at least 25% of the nominal share capital (affiliation privilege).
From 1 January 1999, 5% of gross dividends are added back to taxable income as a lump-sum compensation for the
non-deductible interest and other expenses that are directly connected with the exempt dividends. Thus, only 95% of
the dividends are actually exempt (section 8b(5) of the KStG). Foreign dividends and similar income from qualifying
participations of at least 10% in the capital of the paying company are exempt from corporate income tax under domestic
law (see section 7.2.1.3.). The 5% add-back is maintained.
Many treaties include an activity clause under which an exemption is granted only if the foreign subsidiary or permanent
establishment carries on an active business. The activity clause became irrelevant for foreign-source dividends from 2002 due
to the domestic exemption of foreign-source dividends, which does not require an active business of the subsidiary (see section
7.2.1.3.). The German rules on controlled foreign companies can be applicable, however (see section 10.4.).
If the exemption method does not apply, the foreign taxes paid in the treaty country are credited against the German corporate
income tax. However, in respect of the 5% add-back, a credit is not granted, as it only represents non-deductible business
expenses (see section 7.2.1.3.). Most of Germany’s treaties follow the OECD Model Convention, but specify that Germany’s
unilateral tax credit rules are to be respected (see section 7.2.6.).
The credit method applies mainly to withholding tax on interest and royalties, and income taxes on foreign permanent
establishments that do not meet the activity test.
If the treaty tax credit relief is less favourable than the unilateral relief provisions, the latter can be used. Thus, instead of
claiming a tax credit under the treaty, the foreign tax might be deducted under the unilateral relief provisions, which are more
favourable in loss situations (section 26(6) of the KStG) (see section 7.2.6.1.).
An application to reduce the foreign withholding tax to the treaty rate must first be presented to the German tax authorities for
confirmation that the applicant is entitled to the reduction as a resident.
7.4.1.3. Tax treaties in force
The following is a complete list of tax treaties concluded by Germany which are in force. For the effective date, only the date
on which a treaty generally takes effect in Germany is given (a treaty may take effect at different times for the treaty partner, as
well as for different types of taxes).
Country Scope Date of signature Date of entry into force Effective date
Albania Income and Capital 6 Apr. 2010 23 Dec. 2011 1 Jan. 2012
Algeria Income and Capital 12 Nov. 2007 23 Dec. 2008 1 Jan. 2009
Argentina Income and Capital 13 July 1978 25 Nov. 1979 1 Jan. 1976
Protocol Income and Capital 16 Sep. 1996 30 June 2001 1 Jan. 1996
Armenia Income and Capital 29 June 2016 23 Nov. 2017 1 Jan. 2018
Australia Income and Capital 12 Nov. 2015 7 Dec. 2016 1 Jan. 2017 (DE)
1 Jan. 2017 (AU)
1 Apr. 2017 (AU)
1 July 2017 (AU)
Austria Income and Capital 24 Aug. 2000 18 Aug. 2002 1 Jan. 2003
Multilateral Instrument Income and Capital 7 June 2017 1 July 2018 n/a
Protocol Income and Capital 29 Dec. 2010 1 Mar. 2012 1 Jan. 2011
Azerbaijan Income and Capital 25 Aug. 2004 28 Dec. 2005 1 Jan. 2006
Bangladesh Income 29 May 1990 21 Feb. 1993 1 Jan. 1990
Belarus Income and Capital 30 Sep. 2005 31 Dec. 2006 1 Jan. 2007

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Country Scope Date of signature Date of entry into force Effective date
Belgium Income and Capital 11 Apr. 1967 30 July 1969 1 Jan. 1966
Memorandum of Understanding Income and Capital 22 Mar. 2022 22 Mar. 2022 n/a
Protocol Income and Capital 5 Nov. 2002 28 Dec. 2003 1 Jan. 2004
Bolivia Income and Capital 30 Sep. 1992 12 July 1995 1 Jan. 1991
Exchange of Notes Income and Capital 30 July 1993 12 July 1995 1 Jan. 1991
Bosnia and Herzegovina Income and Capital 26 Mar. 1987 3 Dec. 1988 1 Jan. 1989
Bulgaria Income and Capital 25 Jan. 2010 21 Dec. 2010 1 Jan. 2011
Canada Income and Capital 19 Apr. 2001 28 Mar. 2002 1 Jan. 2001
China (People's Rep.) Income and Capital 28 Mar. 2014 5 Apr. 2016 1 Jan. 2017
Chinese Taipei Income and Capital 19 Dec. 2011 7 Nov. 2012 1 Jan. 2013
Costa Rica Income and Capital 13 Feb. 2014 10 Aug. 2016 1 Jan. 2017
Croatia Income and Capital 6 Feb. 2006 20 Dec. 2006 1 Jan. 2007
Multilateral Instrument Income and Capital 7 June 2017 1 June 2021 n/a
Cyprus Income and Capital 18 Feb. 2011 16 Dec. 2011 1 Jan. 2012
Protocol Income and Capital 19 Feb. 2021 8 Dec. 2021 1 Jan. 2022
Czech Republic Income and Capital 19 Dec. 1980 17 Nov. 1983 1 Jan. 1984
Multilateral Instrument Income and Capital 7 June 2017 1 Sep. 2020 n/a
Denmark Income, Capital, 22 Nov. 1995 25 Dec. 1996 1 Jan. 1997
Inheritance and Gift
Protocol Income, Capital, 1 Oct. 2020 23 Dec. 2021 1 Jan. 2022
Inheritance and Gift
Ecuador Income and Capital 7 Dec. 1982 25 June 1986 1 Jan. 1987
Egypt Income and Capital 8 Dec. 1987 22 Sep. 1991 1 Jan. 1992
Estonia Income and Capital 29 Nov. 1996 30 Dec. 1998 1 Jan. 1994
Protocol Income and Capital 15 Dec. 2020 29 June 2021 1 Jan. 2022
Finland Income 19 Feb. 2016 16 Nov. 2017 1 Jan. 2018
Protocol Income 18 Nov. 2019 25 Feb. 2021 1 Jan. 2022
France Income and Capital 21 July 1959 4 Nov. 1961 1 Jan. 1957
Multilateral Instrument Income and Capital 7 June 2017 1 Jan. 2019 n/a
Protocol Income and Capital 31 Mar. 2015 24 Dec. 2015 1 Jan. 2016
Protocol Income and Capital 20 Dec. 2001 1 June 2003 1 Jan. 2002
Protocol Income and Capital 28 Sep. 1989 1 Oct. 1990 1 Jan. 1990
Protocol Income and Capital 9 June 1969 8 Oct. 1970 1 Jan. 1968
Georgia Income and Capital 1 June 2006 21 Dec. 2007 1 Jan. 2008
Protocol Income and Capital 11 Mar. 2014 16 Dec. 2014 1 Jan. 2015
Ghana Income and Capital 12 Aug. 2004 14 Dec. 2007 1 Jan. 2008
Greece Income and Capital 18 Apr. 1966 8 Dec. 1967 1 Jan. 1964
Multilateral Instrument Income and Capital 7 June 2017 1 Apr. 2021 n/a
Hungary Income and Capital 28 Feb. 2011 30 Dec. 2011 1 Jan. 2012
Multilateral Instrument Income and Capital 7 June 2017 1 Apr. 2021 n/a
Iceland Income and Capital 18 Mar. 1971 2 Nov. 1973 1 Jan. 1968
India Income and Capital 19 June 1995 26 Oct. 1996 1 Jan. 1997 (DE)
1 Apr. 1997 (IN)
Indonesia Income and Capital 30 Oct. 1990 28 Dec. 1991 1 Jan. 1992
Iran Income and Capital 20 Dec. 1968 30 Dec. 1969 1 Jan. 1970
Ireland Income and Capital 30 Mar. 2011 28 Nov. 2012 1 Jan. 2013
Protocol Income and Capital 19 Jan. 2021 30 Dec. 2021 1 Jan. 2022
Memorandum of Understanding Income and Capital 18 Dec. 2020 19 Dec. 2020 n/a

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Country Scope Date of signature Date of entry into force Effective date
Memorandum of Understanding Income and Capital 7 Aug. 2020 8 Aug. 2020 n/a
Protocol Income and Capital 3 Dec. 2014 30 Dec. 2015 1 Jan. 2016
Israel Income and Capital 21 Aug. 2014 9 May 2016 1 Jan. 2017
Italy Income and Capital 18 Oct. 1989 24 Dec. 1992 1 Jan. 1993
Ivory Coast Income and Capital 3 July 1979 8 July 1982 1 Jan. 1982 (DE)
1 Jan. 1982 (CI)
Jamaica Income and Capital 8 Oct. 1974 13 Sep. 1976 1 Jan. 1973
Japan Income 17 Dec. 2015 28 Oct. 2016 28 Oct. 2016
1 Jan. 2017
Multilateral Instrument Income 7 June 2017 1 Apr. 2021 n/a
MLI Synthesized Text Income 17 Dec. 2015 28 Oct. 2016 28 Oct. 2016
1 Jan. 2017
Jersey Income 7 May 2015 30 Jan. 2016 29 Aug. 2014
Kazakhstan Income and Capital 26 Nov. 1997 21 Dec. 1998 1 Jan. 1996
Kenya Income and Capital 17 May 1977 17 July 1980 1 Jan. 1980
Korea (Rep.) Income and Capital 10 Mar. 2000 31 Oct. 2002 1 Jan. 2003
Kosovo Income and Capital 26 Mar. 1987 3 Dec. 1988 1 Jan. 1989
Kuwait Income and Capital 18 May 1999 2 Aug. 2000 1 Jan. 1998
Kyrgyzstan Income and Capital 1 Dec. 2005 22 Dec. 2006 1 Jan. 2007
Latvia Income and Capital 21 Feb. 1997 27 Sep. 1998 1 Jan. 1996
Liberia Income and Capital 25 Nov. 1970 24 Apr. 1975 1 Jan. 1970
Liechtenstein Income and Capital 17 Nov. 2011 19 Dec. 2012 1 Jan. 2013
Exchange of Notes Income and Capital 12 July 2021 15 July 2021 n/a
Protocol Income and Capital 27 Oct. 2020 29 Oct. 2021 1 Jan. 2022
Lithuania Income and Capital 22 July 1997 11 Nov. 1998 1 Jan. 1995
Luxembourg Income and Capital 23 Apr. 2012 30 Sep. 2013 1 Jan. 2014
Multilateral Instrument Income and Capital 7 June 2017 1 Apr. 2021 n/a
Malaysia Income 23 Feb. 2010 21 Dec. 2010 1 Jan. 2011
1 Jan. 2010
1 Jan. 2011
Malta Income and Capital 8 Mar. 2001 27 Dec. 2001 1 Jan. 2002
Multilateral Instrument Income and Capital 7 June 2017 1 Apr. 2021 n/a
Protocol Income and Capital 17 June 2010 19 May 2011 19 May 2011
Mauritius Income 7 Oct. 2011 7 Dec. 2012 1 Jan. 2013
Mexico Income and Capital 9 July 2008 15 Oct. 2009 1 Jan. 2010
Moldova Income and Capital 24 Nov. 1981 15 June 1983 1 Jan. 1980
Mongolia Income and Capital 22 Aug. 1994 23 June 1996 1 Jan. 1997
Montenegro Income and Capital 26 Mar. 1987 3 Dec. 1988 1 Jan. 1989
Morocco Income and Capital 7 June 1972 8 Oct. 1974 1 Jan. 1974
Namibia Income and Capital 2 Dec. 1993 27 July 1995 1 Jan. 1993
Netherlands Income 12 Apr. 2012 1 Dec. 2015 1 Jan. 2016
Memorandum of Understanding Income 28 Mar. 2022 29 Mar. 2022 n/a
Protocol Income 24 Mar. 2021 31 July 2022 1 Jan. 2023
Other Income 25 May 2016 26 May 2016 26 May 2016
Protocol Income 11 Jan. 2016 31 Dec. 2016 1 Jan. 2017
Memorandum of Understanding Income 13 Oct. 2015 13 Oct. 2015 1 Jan. 2016
New Zealand Income and Capital 20 Oct. 1978 21 Dec. 1980 1 Jan. 1978 (DE)
1 Apr. 1978 (NZ)
North Macedonia Income and Capital 13 July 2006 29 Nov. 2010 1 Jan. 2011

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Country Scope Date of signature Date of entry into force Effective date
Protocol Income and Capital 14 Nov. 2016 16 Jan. 2018 1 Jan. 2019
Norway Income 4 Oct. 1991 7 Oct. 1993 1 Jan. 1991
Protocol Income 24 June 2013 3 Feb. 2015 1 Jan. 2015
Pakistan Income 14 July 1994 30 Dec. 1995 1 Jan. 1995 (DE)
1 July 1995 (PK)
Philippines Income and Capital 9 Sep. 2013 18 Dec. 2015 1 Jan. 2016
Poland Income and Capital 14 May 2003 19 Dec. 2004 1 Jan. 2005
Portugal Income and Capital 15 July 1980 8 Oct. 1982 1 Jan. 1983
Romania Income and Capital 4 July 2001 17 Dec. 2003 1 Jan. 2004
Russia Income and Capital 29 May 1996 30 Dec. 1996 1 Jan. 1997
Protocol Income and Capital 15 Oct. 2007 15 May 2009 1 Jan. 2010
Serbia Income and Capital 26 Mar. 1987 3 Dec. 1988 1 Jan. 1989
Serbia and Montenegro Income and Capital 26 Mar. 1987 3 Dec. 1988 1 Jan. 1989
Singapore Income and Capital 28 June 2004 12 Dec. 2006 1 Jan. 2007
Other Income and Capital 16 Aug. 2021 16 Aug. 2021 1 Jan. 2022
Protocol Income and Capital 9 Dec. 2019 29 Mar. 2021 1 Jan. 2021 (DE)
29 Mar. 2021 (DE)
1 Jan. 2022 (DE)
29 Mar. 2021 (SG)
1 Jan. 2022 (SG)
Slovak Republic Income and Capital 19 Dec. 1980 17 Nov. 1983 1 Jan. 1984
Multilateral Instrument Income and Capital 7 June 2017 1 Apr. 2021 n/a
Slovenia Income and Capital 3 May 2006 19 Dec. 2006 1 Jan. 2007
Protocol Income and Capital 17 May 2011 30 July 2012 30 July 2012
South Africa Income 25 Jan. 1973 28 Feb. 1975 1 Jan. 1965
Spain Income and Capital 3 Feb. 2011 18 Oct. 2012 1 Jan. 2013
Multilateral Instrument Income and Capital 7 June 2017 1 Apr. 2021 n/a
Sri Lanka Income and Capital 13 Sep. 1979 20 Feb. 1982 1 Jan. 1983
Sweden Income, Capital, 14 July 1992 13 Oct. 1994 1 Jan. 1995
Inheritance and Gift
Switzerland Income and Capital 11 Aug. 1971 29 Dec. 1972 1 Jan. 1972
Memorandum of Understanding Income and Capital 15 July 2022 n/a n/a
Memorandum of Understanding Income and Capital 11 Apr. 2022 11 Apr. 2022 n/a
Memorandum of Understanding Income and Capital 25 Oct. 2019 n/a n/a
Memorandum of Understanding Income and Capital 21 Dec. 2016 21 Dec. 2016 21 Dec. 2016
Protocol Income and Capital 27 Oct. 2010 21 Dec. 2011 1 Jan. 2011
1 Jan. 2012
Protocol Income and Capital 12 Mar. 2002 24 Mar. 2003 1 Jan. 2004
Protocol Income and Capital 21 Dec. 1992 29 Dec. 1993 1 Jan. 1994
Protocol Income and Capital 17 Oct. 1989 30 Nov. 1990 1 Jan. 1990
Protocol Income and Capital 30 Nov. 1978 5 Sep. 1980 1 Jan. 1977
Syria Income 17 Feb. 2010 30 Dec. 2010 1 Jan. 2011
Tajikistan Income and Capital 27 Mar. 2003 21 Sep. 2004 1 Jan. 2005
Thailand Income and Capital 10 July 1967 4 Dec. 1968 1 Jan. 1967
Trinidad and Tobago Income 4 Apr. 1973 28 Jan. 1977 1 Jan. 1972
Tunisia Income and Capital 8 Feb. 2018 16 Dec. 2019 1 Jan. 2020
Turkmenistan Income and Capital 29 Aug. 2016 28 Nov. 2017 1 Jan. 2018
Türkiye Income 19 Sep. 2011 1 Aug. 2012 1 Jan. 2011
Ukraine Income and Capital 3 July 1995 3 Oct. 1996 1 Jan. 1997

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Country Scope Date of signature Date of entry into force Effective date
United Kingdom Income and Capital 30 Mar. 2010 30 Dec. 2010 1 Jan. 2011 (DE)
1 Jan. 2011 (UK)
1 Apr. 2011 (UK)
6 Apr. 2011 (UK)
Protocol Income and Capital 12 Jan. 2021 17 Dec. 2021 1 Jan. 2022 (DE)
1 Jan. 2022 (UK)
1 Apr. 2022 (UK)
6 Apr. 2022 (UK)
Protocol Income and Capital 17 Mar. 2014 29 Dec. 2015 1 Jan. 2016 (DE)
1 Apr. 2016 (UK)
6 Apr. 2016 (UK)
Memorandum of Understanding Income and Capital 8 Nov. 2011 9 Nov. 2011 1 Jan. 2011 (DE)
1 Jan. 2011 (UK)
1 Apr. 2011 (UK)
6 Apr. 2011 (UK)
Memorandum of Understanding Income and Capital 20 Sep. 2011 20 Sep. 2011 1 Jan. 2011 (DE)
1 Jan. 2011 (UK)
1 Apr. 2011 (UK)
6 Apr. 2011 (UK)
United States Income and Capital 29 Aug. 1989 21 Aug. 1991 1 Jan. 1990
Protocol Income and Capital 1 June 2006 28 Dec. 2007 1 Jan. 2007
1 Jan. 2008
Uruguay Income and Capital 9 Mar. 2010 28 Dec. 2011 1 Jan. 2012
Uzbekistan Income and Capital 7 Sep. 1999 14 Dec. 2001 1 Jan. 2002
Protocol Income and Capital 14 Oct. 2014 29 Dec. 2015 1 Jan. 2016
Venezuela Income and Capital 8 Feb. 1995 19 Aug. 1997 1 Jan. 1997
Vietnam Income and Capital 16 Nov. 1995 27 Dec. 1996 1 Jan. 1997
Yugoslavia Income and Capital 26 Mar. 1987 3 Dec. 1988 1 Jan. 1989
Yugoslavia (Fed. Rep.) Income and Capital 26 Mar. 1987 3 Dec. 1988 1 Jan. 1989
Zambia Income and Capital 30 May 1973 8 Nov. 1975 1 Jan. 1971 (DE)
1 Apr. 1971 (ZM)
Zimbabwe Income and Capital 22 Apr. 1988 22 Apr. 1990 1 Jan. 1987 (DE)
1 Apr. 1987 (ZW)

Notes:
There are no taxes on capital currently imposed in Germany.
The treaty with China (People’s Rep.) does not apply to Hong Kong and Macau.
7.4.1.4. Tax treaties signed but not yet in force
The following treaties, amending protocols or exchanges of notes have been concluded by Germany but have not yet entered
into force:
Country Scope Date of signature Date of entry into force Effective date
Albania
Multilateral Instrument Income and Capital 7 June 2017 n/a n/a
Armenia
Multilateral Instrument Income and Capital 7 June 2017 n/a n/a
Belgium
Protocol Income and Capital 21 Jan. 2010 n/a n/a
Bosnia and Herzegovina
Multilateral Instrument Income and Capital 7 June 2017 n/a n/a
Bulgaria
Protocol Income and Capital 21 July 2022 n/a n/a

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Country Scope Date of signature Date of entry into force Effective date
China (People's Rep.)
Multilateral Instrument Income and Capital 7 June 2017 n/a n/a
Egypt
Multilateral Instrument Income and Capital 7 June 2017 n/a n/a
India
Multilateral Instrument Income and Capital 7 June 2017 n/a n/a
Italy
Multilateral Instrument Income and Capital 7 June 2017 n/a n/a
Ivory Coast
Multilateral Instrument Income and Capital 7 June 2017 n/a n/a
Jamaica
Multilateral Instrument Income and Capital 7 June 2017 n/a n/a
Kazakhstan
Multilateral Instrument Income and Capital 7 June 2017 n/a n/a
Latvia
Protocol Income and Capital 29 Sep. 2022 n/a n/a
Liechtenstein
Multilateral Instrument Income and Capital 7 June 2017 n/a n/a
Lithuania
Protocol Income and Capital 30 Sep. 2022 n/a n/a
Multilateral Instrument Income and Capital 7 June 2017 n/a n/a
Malaysia
Multilateral Instrument Income 7 June 2017 n/a n/a
Mauritius
Protocol Income 29 Oct. 2021 n/a n/a
Multilateral Instrument Income 7 June 2017 n/a n/a
Mexico
Protocol Income and Capital 8 Oct. 2021 n/a n/a
Multilateral Instrument Income and Capital 7 June 2017 n/a n/a
Mongolia
Multilateral Instrument Income and Capital 7 June 2017 n/a n/a
Morocco
Multilateral Instrument Income and Capital 7 June 2017 n/a n/a
Namibia
Multilateral Instrument Income and Capital 7 June 2017 n/a n/a
Netherlands
Multilateral Instrument Income 7 June 2017 n/a n/a
New Zealand
Multilateral Instrument Income and Capital 7 June 2017 n/a n/a
North Macedonia
Multilateral Instrument Income and Capital 7 June 2017 n/a n/a
Oman Income and Capital 15 Aug. 2012 n/a n/a
Pakistan
Multilateral Instrument Income 7 June 2017 n/a n/a
Papua New Guinea
Exchange of Notes Income and Capital 25 July 1995 n/a n/a

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Country Scope Date of signature Date of entry into force Effective date
Portugal
Multilateral Instrument Income and Capital 7 June 2017 n/a n/a
Romania
Multilateral Instrument Income and Capital 7 June 2017 n/a n/a
Serbia
Multilateral Instrument Income and Capital 7 June 2017 n/a n/a
Singapore
Multilateral Instrument Income and Capital 7 June 2017 n/a n/a
South Africa Income and Capital 9 Sep. 2008 n/a n/a
Switzerland Income 21 Sep. 2011 n/a n/a
Memorandum of Understanding Income and Capital 8 May 2020 n/a 1 Jan. 2020
Protocol Income 5 Apr. 2012 n/a n/a
Thailand
Multilateral Instrument Income and Capital 7 June 2017 n/a n/a
Türkiye
Multilateral Instrument Income 7 June 2017 n/a n/a
Ukraine
Multilateral Instrument Income and Capital 7 June 2017 n/a n/a
United Arab Emirates
Multilateral Instrument Income 7 June 2017 n/a n/a
Uruguay
Multilateral Instrument Income and Capital 7 June 2017 n/a n/a
Vietnam
Multilateral Instrument Income and Capital 7 June 2017 n/a n/a
Yugoslavia
Multilateral Instrument Income and Capital 7 June 2017 n/a n/a
Yugoslavia (Fed. Rep.)
Multilateral Instrument Income and Capital 7 June 2017 n/a n/a

7.4.1.5. Treaty withholding tax rates

See Germany - Treaty Withholding Rates Table, Quick Reference Tables IBFD.
7.4.1.6. Special provisions in tax treaties
7.4.1.6.1. Limitation on benefits provisions
The following tax treaties (as possibly amended by protocols) concluded by Germany contain a limitation on benefits clause:
Country Treaty article
Australia 10(3), 23
Canada 29(3)
China 29
Cyprus 27
Denmark 45
Estonia 27
Finland 25
Ireland 29A
Israel 26
Japan 21

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Country Treaty article

Kuwait 23
Liberia 4 (Protocol)
Liechtenstein 31
Malta 27
Netherlands 23 and 15 (Protocol)
Singapore 29
Spain 28
Switzerland 4(6)
Trinidad and Tobago 1 (Protocol)
United Kingdom 30A
United States 28

Additionally, the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting
(MLI), which is effective in Germany from 1 April 2021, provides for the implementation of anti-abuse rules in the tax treaties
covered by the MLI. Article 7 of the MLI on the prevention of treaty abuse requires that one of the following measures is
adopted: (i) a principal purpose test (PPT); (ii) a PPT together with a simplified or detailed limitation on benefits (LOB) test; or
(iii) a detailed LOB (together with an anti-conduit provision).
7.4.1.6.2. Tax sparing credit
The effect of tax exemptions granted by some countries to non-resident investors is not intended to be nullified by levies in the
investor’s country of residence. To that effect, several German tax treaties contain provisions granting a foreign tax credit on
certain categories of foreign income, even if such income is exempt from foreign tax or subject only to a reduced taxation under
the law of the source country.
Tax sparing credits are granted by Germany to its resident companies under the following tax treaties:
Country Qualifying Credit Treaty article Expiry date
income rate (%)
Argentina Dividends [1] 20 23(3) None
Interest 15 23(3) None
Royalties 20 23(3) None
Bangladesh Dividends 15 22(1)(c) None
Interest 15 22(1)(c) None
Royalties 15 22(1)(c) None
Bolivia Interest 20 23(1)(c) None
Royalties 20 23(1)(c) None
Ecuador Interest 20 23(1)(c) None
Royalties 20 23(1)(c) None
Egypt Dividends 15 [2] 24(1)(c) None
Interest 15[2] 24(1)(c) None
Greece Dividends[1] 30 [3] 17(2)(2)(b) None
Interest 10 17(2)(2)(a) None
Indonesia Interest 10 23(1)(c) None
Iran Dividends 20[2] 24(1)(c) None
Royalties 10[2] 24(1)(c) None
Ivory Coast Dividends[1] 15 23(1)(c) None
Interest 15 23(1)(d) None
Jamaica Dividends 15[2] 23(1)(c) None
Interest 10/12.5[2] [4] 23(1)(c) None
Royalties 10[2] 23(1)(c) None

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Country Qualifying Credit Treaty article Expiry date

income rate (%)
Kenya Dividends[1] 15 [5] 23(1)(c) None
Interest 15[5] 23(1)(c) None
Royalties 20[5] 23(1)(c) None
Management fees 15[5] 23(1)(c) None
Liberia Interest 10 23(1)(c) None
Royalties 10 [6] 23(1)(c) None
Mongolia Dividends[1] 10 23(1)(c) None
Interest 10 23(1)(c) None
Royalties 10 23(1)(c) None
Morocco Dividends 15 23(1)(3) None
Interest 10/15 [7] 23(1)(4) None
Portugal Dividends[1] 15 24(2)(c) None
Interest 15 24(2)(c) None
Royalties 15 24(2)(c) None
Sri Lanka Dividends[1] 20 23(1)(c) None
Interest 15 23(1)(c) None
Royalties 20 23(1)(c) None
Trinidad and Tobago Dividends 20[2] 22(1)(c) None
Interest 10/15[2] [4] 22(1)(c) None
Royalties 10[2] 22(1)(c) None
Uruguay Dividends 5[8] 22(1)(f) None
Interest 10 22(1)(f) None
Royalties 10 22(1)(f) None
Venezuela Dividends 15 23(1)(c) None [9]
Interest 5 23(1)(c) None[9]
Royalties 5 23(1)(c) None[9]
Zimbabwe Royalties 10 23(1)(c) None
Technical fees 10 23(1)(c) None

1 For qualifying activities/income.

2 The tax sparing credit is limited to the allowable withholding tax rate given.
3 A 25% holding is required.
4 The 10% rate applies to interest paid to banks.
5 Not to exceed the normal domestic rates in those countries.
6 Does not apply to copyright royalties, excluding films, etc., and to trademarks.
7 The 15% rate applies only to interest paid by Moroccan entities listed in the final protocol.
8 A 10% holding is required.
9 Ten years following the entry into force of the appropriate economic programme.
7.4.1.6.3. Special provisions for offshore activities
The following tax treaties (as possibly amended by protocols) concluded by Germany contain offshore provisions:
Country Treaty article
Denmark 23
Lithuania 20A
Netherlands 5(4)
Norway 20
United Kingdom 20

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7.4.1.6.4. Excluded individuals

German tax treaties do not generally contain provisions on excluded individuals. However, the treaty with Switzerland includes
a provision on excluded individuals (article 4(6)).
The following German tax treaties contain remittance basis clauses:
Country Treaty article
Ghana 23
Ireland 29
Jamaica 3(3)
Malaysia 3 (Protocol)
Mauritius 3 (Protocol)
Singapore 22
Trinidad and Tobago 1 (Protocol)
United Kingdom 24

7.4.1.6.5. Other special provisions

The following tax treaties (as possibly amended by protocols) concluded by Germany contain frontier worker provisions:
Country Treaty article
Austria 15(6)
France 13(5)
Netherlands 12 (Protocol)
Switzerland 15A

The following tax treaties (as possibly amended by protocols) concluded by Germany contain arbitration clauses:
Country Treaty article
Armenia 24(5)
Australia 25(5)
Austria 25(5)
Canada 25(6)
France 25(5)
Ireland 22
Japan 24(5)
Jersey 9 (5)
Liechtenstein 25(5),(6),(7)
Luxembourg 24(5)
Netherlands 25(5)
Singapore 26(5)
Sweden 41(5)
Switzerland 26(5),(6),(7)
United Kingdom 26(5)
United States 25(5)

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7.4.2. Treaties on administrative assistance

7.4.2.1. Multilateral agreements on administrative assistance
Directive on Administrative Cooperation (2011/16) (DAC)
As regards EU Member States, mutual administrative assistance is governed by the Directive on Administrative Cooperation
(2011/16) (DAC) and the Recovery Directive (2010/24). Derogations may apply to the United Kingdom because it is no longer
an EU Member State.
For a more extensive description of DAC, see European Union – Direct Taxation – Global Topics section 8.1.
DAC has been amended by various directives, and, in particular, by the Amending Directive to the 2011 Directive on
Administrative Cooperation (2018/822) (DAC6), which provides for the automatic exchange of any cross-border arrangement
within the European Union, as well as between EU Member States and third countries from 1 July 2020.
Germany has implemented the rules contained in the DAC6 into its domestic law.
Germany has chosen as follows as regards the two implementation options granted by DAC6:
Option Implementation
Possibility for intermediaries to receive a waiver from filing information on a Yes
reportable cross-border arrangement if that obligation would breach the legal
professional privilege under the national law of that EU Member State
Require each relevant taxpayer to file information about its use of the Yes
arrangement to the tax administration in each of the years for which the
taxpayer uses it

OECD Convention on Mutual Administrative Assistance in Tax Matters

Germany is a signatory to the multilateral OECD Convention on Mutual Administrative Assistance in Tax Matters of 25 January
1988, as amended by the 2010 Protocol. The Convention and the Protocol are applicable in respect of Germany from 1
January 2016. For all countries that are currently applying the Convention, see here. Under the Convention, Germany will
automatically exchange tax information with other parties to the Convention.
OECD Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports
Germany is a signatory to the OECD Multilateral Competent Authority Agreement on the Exchange of Country-by-Country
(CbC) Reports (CbC MCAA). Germany signed the CbC MCAA on 27 January 2016. The CbC MCAA provides for the automatic
exchange of annual CbC reports filed by MNE groups with all jurisdictions in which the MNE groups operate.
OECD Multilateral Competent Authority Agreement on automatic exchange of financial account
information
Germany is a signatory to the OECD Multilateral Competent Authority Agreement on automatic exchange of financial account
information (CRS MCAA), which provides for the automatic exchange of financial account information pursuant to the Common
Reporting Standards on the basis of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.
7.4.2.2. Bilateral agreements on administrative assistance
Additionally, Germany has entered into exchange of information treaties with the following countries:
Country Date of signature Effective date
Andorra 25.11.10 20.01.12
Anguilla 19.03.10 11.04.11
Antigua and Barbuda 19.10.10 30.05.12
Austria 04.10.54 26.11.55
Bahamas 09.04.10 12.12.11
Bermuda 03.07.09 01.01.13
British Virgin Islands 05.10.10 04.12.11
Cayman Islands 27.05.10 20.08.11
Cook Islands 03.04.12 11.12.11

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Country Date of signature Effective date

Finland 25.09.35 01.01.36
Gibraltar 13.08.09 04.11.10
Grenada 03.02.11 22.11.13
Guernsey 26.03.09 22.12.10
Isle of Man 02.03.09 05.11.10
Italy 09.06.38 01.01.54
Jersey 04.07.08 28.08.09
Liechtenstein 02.09.09 01.01.10
Monaco 27.07.10 09.12.11
Montserrat 28.10.11 03.01.14
Netherlands 21.05.99 23.06.01
San Marino 21.06.10 21.12.11
St. Kitts and Nevis 19.10.10 01.01.17
St. Lucia 07.06.10 28.02.13
St. Vincent and the Grenadines 29.03.10 07.06.11
Turks and Caicos Islands 04.06.10 25.11.11

Notes:
The agreement with Italy was reinstated from the date mentioned.
The agreement with the Netherlands applies to collection claims that are not more than 15 years old (from the date of the
original collection order).

7.4.3. Foreign account reporting agreements

7.4.3.1. Foreign account reporting agreements signed
Country Scope Date of signature Date of entry into force Effective date
United States FATCA Model 1A 31 May 2013 11 Dec. 2013 n/a
Agreement
Other FATCA Model 1A 21 Dec. 2015 n/a n/a
Agreement

7.4.3.2. Foreign account reporting agreements not signed

7.4.4. Transportation (tax) treaties
Germany has concluded transportation (tax) treaties (as possibly amended by protocols) with the following countries:
Country Scope Date of signature Entry into force Effective date
Brazil Sea 17.08.50 10.05.52 10.05.52
Cameroon Air 24.08.17 07.12.20 01.01.21
China (People’s Rep.) See 31.10.75 29.03.77 29.03.77
Colombia Air/sea 10.09.65 14.06.71 01.01.62
Hong Kong Air 08.05.97 12.11.98 01.01.98
Sea 13.01.03 17.01.05 01.01.98
Isle of Man Sea 02.03.09 05.11.10 01.01.10
Panama Air/sea 21.11.16 27.10.17 01.01.17
Paraguay Air 27.01.83 13.04.85 01.01.79
Saudi Arabia Air 08.11.07 08.07.09 01.01.67
Venezuela Air/sea 23.11.87 30.12.89 01.01.90
Yemen Air 02.03.05 23.01.07 01.01.82

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Country Scope Date of signature Entry into force Effective date

The treaty with Saudi Arabia applies from 1 January 2009 in the case of individuals employed aboard an aircraft of an
international air transport enterprise of a contracting state.
In addition, there is a unilateral exemption from the German taxes on income connected with the operation of ships and aircraft
in international traffic (section 49(4) of the EStG), which applies to residents of:
Country Scope Effective date
Afghanistan Air 01.01.59
Brunei Air 01.01.90
Chile Air 01.01.70
China (People’s Rep.) Air -
Ethiopia Air -
Ghana Air/sea 17.05.85
Iraq Air/sea n/a
Jordan Air 01.01.70
Lebanon Air/sea 01.01.57
Lithuania Air 01.01.92
Papua New Guinea Air/sea 10.02.89
Seychelles Air 01.01.89
Sudan Air 04.06.83
Syria Air/sea -
Taiwan Sea 23.08.88

Note:
The exemption regarding residents of China, Ethiopia and Syria, is effective since flights/shipping commenced between the
countries.

7.4.5. Inheritance and gift tax treaties

Germany has concluded inheritance and gift tax treaties (as possibly amended by protocols) with the following countries:
Country Scope Date of Entry into Effective
signature force date
Denmark I/g 22.11.95 25.12.96 01.01.97
France I/g 12.10.06 03.04.09 03.04.09
Greece I 18.11.10/22.03.12 01.12.10 22.03.12
Sweden I/g 14.07.92 13.10.94 01.01.95
Switzerland I 30.11.78 28.09.86 28.09.80
United States I/g 03.12.80 27.06.86 01.01.79

7.4.6. Social security agreements

The coordination of various EU social security systems is done by Social Security Regulation (2004/883) and Social Security
Implementing Regulation (2009/987), as amended by Amending Regulation to the Social Security Regulation (2012/465),
which are effective from 1 May 2010, and which replaced the former Social Security Regulation (71/1408) and Social Security
Regulation (72/574). Social Security Regulation (2004/883) provides for a common social security territory covering all EEA
countries (EU Member States plus Iceland, Liechtenstein and Norway) with effect from 1 June 2012. Since 2 February 2013,
Amending Regulation to the Social Security Regulation (2012/465) also applies to Iceland, Liechtenstein and Norway. With
effect from 1 April 2012, both regulations are applicable in relations between Switzerland and EU Member States. Since 1
January 2011, Social Security Regulation for Nationals of Third Countries (2010/1231) extends the applicability of Social
Security Regulation (2004/883) and Social Security Implementing Regulation (2009/987) to nationals of non-EU countries

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legally resident in the European Union, with the exception of Denmark and the United Kingdom. Effective 1 January 2021,
with the United Kingdom not being an EU Member State anymore, EU social security systems no longer apply with regard
to the United Kingdom. However, UK and EU nationals who were in a cross-border situation before the end of the transition
period (before 1 January 2021) continue to be subject to Social Security Regulation (2004/883) and Social Security Regulation
(2003/859) as long as their cross-border situation does not change after 1 January 2021. Further measures will be taken either
unilaterally by the EU Member States to settle the applicable social security framework or by the European Union in relation
with the United Kingdom that qualifies as a third state.
In addition, Germany has concluded the following social security agreements (as possibly amended by protocols):
Country Date of signature Date of entry into force Effective date
Albania 08.09.15 01.12.17 01.12.17
Australia 13.12.00 01.01.03 01.01.03
Austria[1] 04.10.95 01.01.98 01.01.98
Belgium[1] 07.12.57 in force effective
Bosnia and Herzegovina 12.10.68 01.09.69 01.09.69
Brazil 03.12.09 01.05.13 01.05.13
Bulgaria[1] 17.12.97 01.02.99 01.02.99
Canada 14.11.85 01.04.88 01.04.88
(see also
Quebec)
Chile 05.03.93 01.01.94 01.01.94
China (People’s Rep.) 12.07.01 04.04.02 04.04.02
Croatia[1] 24.11.97 01.12.98 01.12.98
Czech Republic[1] 27.07.01 01.09.02 01.09.02
France[1] 10.07.50 in force effective
Hungary[1] 02.05.98 01.05.00 01.05.00
India 12.10.11 01.05.17 01.05.17
Israel 17.12.73 01.05.75 01.05.75
Japan 20.04.98 01.02.00 01.02.00
Korea (Rep.) 10.03.00 01.01.03 01.01.03
Moldova 12.01.17 01.03.19 01.03.19
Montenegro 12.10.68 01.09.69 01.09.69
Morocco 25.03.81 01.08.86 01.08.86
Netherlands[1] 129.03.51 in force effective
North Macedonia 08.07.03 01.01.05 01.01.05
Philippines 19.09.14 01.06.18 01.06.18
Poland[1] 08.12.90 01.10.91 01.10.91
Quebec 20.04.10 01.04.14 01.04.14
Romania[1] 08.04.05 01.06.06 01.06.06
Serbia 12.10.68 01.09.69 01.09.69
Slovak Republic[1] 12.09.02 01.12.03 01.12.03
Slovenia[1] 24.09.97 01.09.99 01.09.99
Spain[1] 04.12.73 01.11.77 01.11.77
Tunisia 16.04.84 01.08.86 01.08.86
Turkey 30.04.64 01.11.65 01.11.65
Ukraine 07.11.18 -
United Kingdom[1] 20.04.60 in force effective
United States 07.01.76 01.12.79 01.12.79
Uruguay 08.04.13 01.02.15 01.02.15

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Country Date of signature Date of entry into force Effective date

1 Certain provisions of bilateral social security agreements entered into by the EU Member States before the date of application
of Social Security Regulation (2004/883) may continue to apply provided that they are included in Annex II of Social Security
Regulation (2004/883).

7.4.7. Miscellaneous agreements

Germany is a party to the Arbitration Convention (90/436), which provides that where the commercial or financial relations
between two associated enterprises differ from those which would apply between independent enterprises, the profits of those
enterprises should each be adjusted as appropriate to reflect the arm’s length position. The Arbitration Convention (90/436)
provides for disputes with fiscal authorities to be referred to an advisory commission, subject to waiver of rights of appeal
under domestic law provisions. The Arbitration Convention (90/436) was first applicable with respect to the 15 old EU Member
States. With respect to the 10 new EU Member States that acceded to the European Union on 1 May 2004 a new Accession
Convention was signed on 8 December 2004 (EU Official Journal, C 160, 30 June 2005) and ratified by Germany on 21 March
2007. The Arbitration Convention (90/436), as extended by the Accession Convention, is applied by Germany from 1 June
2007. The Convention entered into force in relation to Bulgaria and Romania on 1 July 2008 and in relation to Croatia on 1
January 2015.
Additionally, Tax Dispute Resolution Mechanisms Directive (2017/1852) applies to complaints submitted as from 1 July 2019
relating to questions of dispute with regard to income or capital earned in a tax year commencing on or after 1 January 2018.
Derogations may apply to the United Kingdom because the United Kingdom is no longer an EU Member State.

8. Group Taxation
8.1. General
Group taxation (Organschaft) is possible in Germany for the purposes of corporate income tax, business tax and VAT. This
section deals only with corporate income tax and business tax. For VAT group taxation, see section 13.2.2. Under the group
taxation regime, separate companies may be treated as an integrated fiscal unit for tax purposes. According to a profit-and-
loss pooling agreement, the profits and losses of the participating companies are pooled and taxed at the level of the controlling
parent company.

8.1.1. Conditions
Group taxation applies under the following conditions:

- The controlled company (Organgesellschaft) must generally be a company (see section 1.1.4.) incorporated under the laws
of an EU Member State/EEA country which has its place of effective management in Germany (sections 14(1) and 17 of the
KStG).
- The controlling parent (Organträger) must be a business enterprise, which can be carried on by an individual, a partnership
or a company. The participation in the controlled company must be held throughout the entire application period of the
group taxation regime through a domestic permanent establishment within the meaning of section 12 of the AO. It is further
required that the income attributable to such permanent establishment is taxable in Germany under domestic law as well as
under an applicable tax treaty. A tax group may not have more than one controlling parent.
Partnerships can only act as the controlling parent of a tax group if they conduct an active trade or business (defined
in section 15(1) No. 1 of the EStG). The legal title to the shares of the controlled company must be held directly by the
partnership itself, as opposed to being held by the partners.
- According to former provisions, the controlled company had to be financially, economically and organizationally integrated
into the controlling parent. Economic and organizational integration is not necessary for corporate income tax purposes and
business tax purposes; financial integration is sufficient (section 14(1) No. 1 of the KStG and section 2(2) of the GewStG).
The conditions of economic and organizational integration are maintained for VAT purposes (see section 13.2.2.).
- The required integration must be in place at the beginning of the financial year of the controlled company for which group
taxation is sought to apply (section 14(1) No. 1 of the KStG).
- To achieve group taxation for corporate income tax and business tax purposes, a profit-and-loss pooling agreement
(Ergebnisabführungsvertrag) must be concluded (sections 14(1) and 17 of the KStG and section 2(2) of the GewStG).

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The profit-and-loss pooling agreement requires that the controlled company transfers all its profits to the controlling parent and
that the controlling parent actually covers the losses of the controlled company. The transfer of profits and losses occurs not
only for tax purposes but is also reflected in the commercial accounts. The controlling parent shows the controlled company’s
profits and losses in its own financial accounts. The tax advantage of the loss takeover thus results in the controlling parent
being legally responsible for the losses of the controlled company. Minority shareholders of the controlled company must get a
compensation payment (section 304 of the AktG), which for tax purposes must be independent from the profit of the controlled
company. It can represent a fixed payment or it can be dependent on the profit of the controlling parent.
As the total profit of the controlled company must be transferred to the controlling parent, the controlled company generally
cannot build up reserves during the period for which a profit-and-loss pooling agreement applies. Exceptions to this apply only
for legal reserves and reserves which may be built up for a specific economic reason, such as a planned expansion of the
business, a transfer of a plant or the substantial renovation of a plant.
If the controlled company is an AG or a KGaA, the conclusion of a profit-and-loss pooling agreement must comply with the
following formal requirements:

- the shareholders of both sides, the controlled company and the controlling parent, must give their consent at their
respective general shareholders’ meetings (section 293(1) and (2) of the AktG); 75% of the votes cast is required; and
- the contract must be concluded by the end of the financial year for which it is to be applied for the first time and must be
registered in the Commercial Register (Handelsregister) of the controlled company by the end of the following financial year
(section 14 No. 3 of the KStG).
There are no specific company law provisions for limited liability companies (GmbHs). Case law, however, imposes the same
formal requirements as mentioned above to GmbHs with the following modifications:

- case law leaves open whether the shareholders of a controlled GmbH must agree, by a 75% majority, to the profit-and-loss
pooling agreement or whether unanimity is required. Literature suggests that unanimity might be required; and
- the shareholders’ approval of a controlled company must be certified by a notary and registered in the Commercial Register
of the controlled company.
The profit-and-loss pooling agreement must be concluded for a minimum period of 5 years, starting from the date on which it
takes effect. Within the 5-year period, it can only be terminated for an important reason, such as the sale, liquidation, merger
or conversion of the controlled company. If the agreement is terminated within the 5-year period without an important reason,
group taxation is retrospectively cancelled from the beginning. After the 5-year period, the agreement can be terminated
annually without jeopardizing the group taxation of previous years (section 14 No. 3 of the KStG).
From financial year 2012 onwards, materially incorrect financial accounts of a group company do not invalidate an existing
group taxation regime provided that there was no negligence involved and the errors were corrected in the accounts for the
year concerned. Previously, there was a presumption that a profit-and-loss pooling agreement was not properly executed if the
underlying financial accounts of a controlled company appeared to be incorrect, which resulted in the retrospective invalidation
of a group regime.
Tax consolidations for corporate income tax and business tax purposes only become effective for the financial year in which
the profit-and-loss pooling agreement is actually registered in the Commercial Register (section 14(1) No. 3 of the KStG).
Therefore, it will only be possible to make a tax consolidation election effective back to the beginning of the financial year in
which the registration becomes effective.
On 30 September 2010, the European Commission announced that it had sent a formal request to Germany to amend the
group taxation regime. The Commission considers it discriminatory, that a company which is subject to unlimited tax liability in
Germany because its place of effective management is in Germany, but which is incorporated under the law of another Member
State, is not eligible for the group taxation regime which is available only to companies incorporated under German law.
On 28 March 2011, the Ministry of Finance issued a decree in response to the European Commission’s request. According
to the decree, the existing rules on the group taxation regime (sections 14(1) and 17 of the KStG) shall be applicable also to
companies incorporated under the laws of an EU Member State/EEA country which have their place of effective management
in Germany, with effect from 28 March 2011. From that date, an EU/EEA company with its place of effective management in
Germany can function as a group company (Organgesellschaft) within a German group taxation regime.
However, on 22 March 2012, the European Commission announced that it had referred Germany to the ECJ over this issue,
because according to settled case law, an infringement caused by a legal provision can only be effectively eliminated by
amending the law and not by a mere issuance of an administrative decree.

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On 26 September 2013, the European Commission closed the infringement procedure, because Germany had amended its
legislation.

8.1.2. Integration
For group taxation the financial integration of the controlled company into the controlling parent is required.
Financial integration means that the controlling parent must control, directly or indirectly, the majority (more than 50%) of the
voting stock of the controlled company (section 14(1) No. 1 of the KStG). Adding up of direct and indirect participations can
constitute a qualifying majority provided the controlling shareholder holds the majority of the voting stock in the company which
is providing the indirect participation (section 14 of the KStG). As an exception, several non-controlling shareholders are treated
as one controlling parent if they together control the subsidiary in a common interest within the context of a civil partnership
(Mehrmütterorganschaft).

8.2. Consolidated income

Group taxation leads to the pooling of the taxable income and losses of all participating companies at the level of the controlling
parent. The advantage of group taxation therefore is that the profits and losses of the participating companies can be offset
against each other.
The income of all the participating companies is calculated according to the normal rules. An exception applies for dividends
distributed and for capital gains derived from the sale of shares in a company, which types of income may be exempt in the
hands of the corporate shareholder (see sections 6.1.3. and 6.1.6.2.). For group taxation purposes, the exemption is only taken
into account at the level of the controlling parent and not at the level of the controlled company (section 15 No. 2 of the KStG).
For business tax purposes, certain transactions between participating companies are disregarded to avoid double taxation
within the group (see section 2.2.).
The income of the controlled companies is calculated separately based on their tax returns. The difference from a regular
tax return is that the controlled company’s income is shown as being transferred to the controlling parent. The income of
the controlled companies is thus reduced to zero if the controlling parent holds 100% of the shares. If there are minority
shareholders, they have a right to an indemnity. The part of the profit which represents the indemnity of the minority
shareholder is taxed at the level of the controlling parent itself. Such profits are treated as normal dividends and taxed at the
corporate income tax rate.
Losses of a controlled company which were incurred prior to group taxation cannot be used for corporate income tax purposes
as long as group taxation applies. The losses may be offset against the future profits of the controlled company after group
taxation has ended. This also applies for business tax purposes.
Losses of the controlling parent company and/or the controlled companies are not deductible for domestic tax law purposes
if such losses are tax deductible in another country at the level of the controlling parent company, the group companies or
another related party.
The controlling parent is liable for the tax payable on the consolidated income. The controlled companies, however, have a
supplementary legal responsibility for the taxes for which group taxation applies (section 73 of the AO).

8.3. Intercorporate dividends

If a profit-and-loss pooling agreement has been concluded, the controlled company is obligated to transfer all its profits to
the controlling parent, not only for tax purposes but also in its financial accounts, so that it does not generally accumulate
profits that could be distributed. The transfer of the profit based on the profit-and-loss pooling agreement is not treated as
a dividend. It does not trigger corporate income tax at the level of the controlled company, as a dividend distribution would
have (see sections 1.1.3. and 6.1.). After the abolition of the imputation system, dividend distributions in the case of qualifying
shareholdings are 95% exempt in the hands of a corporate shareholder (see section 6.1.3.). The transfer of profits will not
be treated as such an exempt dividend. Neither is the transfer of reserves that may have been created for specific economic
reasons by the controlled company (see section 8.1.) treated as a dividend. If the reserves are no longer needed, they may be
dissolved and transferred in the context of the profit-and-loss pooling agreement; they are not treated as a dividend distribution.
If, however, the controlled company disposes of retained earnings from the period before the profit-and-loss pooling agreement
was concluded, the reserves may be dissolved and distributed with the normal tax consequences of a dividend.
If there is no profit-and-loss pooling agreement, the controlled company must transfer its retained earnings to the controlling
parent via a regular dividend distribution with the normal tax consequences.

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8.4. Intercorporate transfers

Group taxation does not affect the capital gains treatment. For the capital gains treatment of intercorporate transfers, see
section 1.7.

8.5. Partial and total dissolution

Group taxation applies on a bilateral basis between the controlling parent and the controlled company concerned. If the
conditions for group taxation are no longer fulfilled for one of the controlled companies, the income of this controlled company is
no longer consolidated with the income of the controlling parent. This does not affect the consolidated taxation of the controlling
parent with the other controlled companies. Their tax consolidation continues as before.

8.6. Assessment and administration

The filing deadlines, assessment and administration procedures for group taxation do not deviate from the regular procedures;
see section 1.11.
The returns contain additional forms, including the necessary information for including the controlled company’s income at the
level of the controlling parent (taxable income, non-deductible expenses, tax-free income). The controlled companies and the
controlling parent receive specific notices on the transferred income as part of their tax assessments.

9. Restructuring and Liquidation

Tax relief provisions for changes of business entities, mergers, divisions, spin-offs, transfers of businesses and exchanges of
shares are laid down in the Reorganization Tax Law (Umwandlungssteuergesetz, UmwStG).
Germany has implemented the provisions of the Merger Directive (2009/133) regarding exchanges of shares, transfers of
businesses and business divisions.
On 12 December 2006, a revised tax law has been introduced (Law on Tax Measures Accompanying the Introduction of
the European Company and for the Change of other Tax Regulations – Gesetz über steuerliche Begleitmassnahmen zur
Einführung der europäischen Gesellschaft und zur Änderung weiterer steuerlicher Vorschriften, SEStEG), which implements
the European Company (SE) and the European Cooperative Society (SCE) in domestic law and introduces several changes
to the EStG, KStG), UmwStG and AStG, in order to deal with the cross-border transfer of assets and enable tax-neutral cross-
border reorganizations. As a general principle, to the extent Germany will lose the taxing rights over assets transferred in a
cross-border reorganization, those transfers will be valued at their fair market value with the resulting capital gains triggering
immediate taxation (section 4(1)(3) of the EStG and section 12 of the KStG). If all the assets remain within the German tax
jurisdiction, i.e. within a permanent establishment (PE), the cross-border reorganization remains tax neutral. To align this
treatment with ECJ case law, especially the judgment in the case Lasteyrie du Saillant (Case C-9/02), the taxation of hidden
reserves on exit may be spread over 5 consecutive years (section 4g of the EStG and section 8 of the KStG). With effect from
29 March 2019, Germany enacted legislation according to which, for the purposes of the aforementioned rule, the event of
Brexit would not constitute a harmful event for the purposes of the 5-year period and, therefore, would not result in immediate
taxation of any remaining amount.
With effect from 1 January 2022, tax-neutral cross-border reorganizations are extended to third-country corporations.
Previously, tax-neutral conversions of corporations were limited to conversions involving exclusively EU/EEA companies. By
abolishing section 1(2) of the UmwStG without replacement, this restriction no longer applies and the scope of application of
the Reorganization Tax Law is partly extended to third-country cases. For details, see Germany – Mergers & Acquisitions –
section 4.
By way of the Annual Tax Act 2010, the legislator introduced similar rules for entrepreneurs transferring their entire business
abroad. With effect from 1 January 2011, the relocation of a business abroad triggers an immediate taxation of the built-in
hidden reserves, if the profits of the relocated business are exempt from German taxation under a tax treaty. However, if the
business is transferred to an EU Member State/EEA country and the Directive on Administrative Cooperation (2011/16) (DAC)
or a similar agreement is applicable between Germany and the respective EU Member State/EEA country, the taxation of the
profits from the hidden reserves on exit may be spread over 5 consecutive years. The revised rules apply retrospectively to all
open cases (sections 16(3)(2), (3a), 36(5) and 52(34) of the EStG).
Assets that are transferred into the German tax jurisdiction can be recorded at the fair market value, irrespective of their
treatment in the other country (section 6(1) No. 5a of the EStG).

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9.1. Change of business entity

9.1.1. Conversion of an AG into a GmbH and vice versa
The conversion of an AG into a GmbH or vice versa does not trigger capital gains taxation or the real estate transfer tax (see
section 14.2.1.) because the legal identity of the company does not change.

9.1.2. Conversion of a partnership into a company

For tax purposes, the conversion of a partnership into a company is treated as the contribution of all of the partnership interests
to the (new or already existing) company (section 25 in connection with section 20 et seq. of the UmwStG). Capital gains
taxation can be avoided in this case if the receiving company issues new shares as consideration for the contribution of the
partnership interests and if the assets continue to be recorded at the book values (see section 9.3.2.2.).
The conversion is not subject to the real estate transfer tax because the identity of the entity does not change, but only its legal
form.

9.1.3. Conversion of a company into a partnership

In the case of a conversion of a company into a partnership, all assets including intangibles must be recorded at the fair market
value (apart from pension liabilities, which must be recorded at the value defined in section 6a of the EStG). Alternatively,
however, they may be recorded at the book value or any value between the book value and the fair market value, if:

- they become business assets of the partnership or sole entrepreneur and capital gains remain taxable at a later stage;
- Germany’s right to taxation of capital gains on the transferred assets will not be excluded or limited; and
- no consideration is paid (or participations are granted) for the transfer of the net assets.
Therefore, the conversion of a company into a partnership may be carried out without triggering taxation of hidden reserves
(section 3 et seq. of the UmwStG).
The conversion of a company into a partnership is not subject to the real estate transfer tax.

9.2. Merger and division

9.2.1. Companies
The absorption of one company by another normally triggers liquidation taxation, leading to a deemed sale of all assets and the
taxation of all hidden reserves of the absorbed company. Under section 11 of the UmwStG, liquidation taxation can be avoided
if:

- it is ensured that the hidden reserves of the absorbed company will be subject to corporate income tax later at the level of
the recipient company;
- the right of Germany regarding the taxation of the transferred assets will not be excluded or limited; and
- no consideration is paid for the transfer of the net assets or the total consideration consists of shares in the recipient
company.
Germany’s right to taxation of the transferred assets will not be excluded or limited if the acquiring company is subject to
unlimited German corporate income tax (see section 7.1.1.) or the transferred assets will belong to a German permanent
establishment of the acquiring company.
Technically, the absorbed company continues to use the book values in its final balance sheet before the transfer and thus
avoids the taxation of hidden reserves. The technique is generally referred to as Buchwertfortführung.
The recipient company takes over the values recorded by the absorbed company in its final balance sheet. It assumes the
tax position of the absorbed company with regard to the acquisition cost, depreciation and other tax characteristics of the
transferred assets (section 12(1) in connection with section 4(1) of the UmwStG). However, this does not apply to losses
accrued in the current tax year and remaining loss carry-forwards, which cannot be claimed by the receiving company (section
12(3) in combination with section 4(2) and (3) of the UmwStG).
Gains and losses of the receiving company resulting from the difference in the book value of the shares in the absorbed
company and the value at which the transferred assets are recorded minus the transfer costs are not taxable (section 12(2) of

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the UmwStG). However, 5% of any such takeover gain is deemed non-deductible expenses; in effect, only 95% is tax exempt
(section 8b of the KStG).
Gains or losses may also occur during the merger if the two merged companies had accounts receivable or payable against
each other which are recorded at different values, e.g. because one of the companies had to depreciate its account receivable
as a bad debt. The corresponding debts and claims are eliminated in the merger. The profit arising from a different valuation of
the debts and claims may be offset by a special reserve. The reserve must be dissolved within 3 years of the merger by at least
one third each year (sections 12(4) and 6(1) of the UmwStG). The dissolution is taxable.
Mergers can give rise to the real estate transfer tax (see section 14.2.1.).
For divisions, the same rules as for mergers apply. In as far as assets of a company are transferred into a partnership through
the division, the same rules as for conversion into a partnership apply (see section 9.1.3.). However, asset valuation at book
value or between book value and fair market value is only possible, if the transferred assets constitute a separately viable
business division (Teilbetrieb). In the case of a spin-off where the absorbed company continues to exist, the transferred assets
as well as the assets remaining in the absorbed company must constitute a separately viable business division. In preparation
for the division, the company’s assets therefore must be allocated to the different business divisions. If one of the substantial
assets of the company (e.g. a building) is used by several business divisions, the business divisions are not deemed separately
viable and a tax-neutral division is not possible. Substantial assets that are used by more than one business division must
therefore be separated until the decision on the division is taken. If separation is not possible, the relief provisions do not apply.
According to domestic understanding, non-substantial assets, such as cash, can be freely allocated to the different business
divisions. According to the ECJ (Andersen og Jensen, 15 January 2002, Case C-43/00), the term “separately viable business
division” should be defined less broadly. As a consequence, free allocation of non-substantial assets to different business
divisions should no longer be possible.
Interests in partnerships and 100% share participations in companies are deemed separate business divisions (section 15(1)
of the UmwStG). This does not apply, however, if the deemed business division was created during the 3 years before the
division by the transfer of assets which, in themselves, did not constitute a business division (section 15(2) of the UmwStG).
This provision is designed to prevent the abuse of law by, for example, contributing single assets tax free to a partnership
and subsequently absorbing the partnership interest which counts as a separate business division, where the single assets
could not have been treated as a business division and a tax-free division would not have been possible (section 15(2) of the
UmwStG).
The division must not be used as preparation for the sale of shares. A division is deemed to be preparation for the sale if,
within 5 years of the division, shares are sold which represent more than 20% of the shares of the divided company before
the division (section 15(2) of the UmwStG). A precondition for a tax-neutral treatment is also that the participations in the
transferring company existed at least 5 years prior to the transfer.
A loss carry-forward of the transferring company will be reduced according to the ratio of the fair market value of the assets
transferred to the acquiring company and the total fair market value of assets before the division (section 15(3) of the
UmwStG). Divisions can give rise to the real estate transfer tax (see section 14.2.1.).

9.2.2. Shareholders
Due to section 13(1) of the UmwStG, it is basically deemed that the shares of the target company are sold at fair market value
and that the replacing shares of the acquiring company are acquired for that value. However, according to section 13(2) of the
UmwStG, the shareholders may apply for a book value transaction avoiding a capital gain if:

- Germany’s right to tax a capital gain from the alienation of the shares in the acquiring company is not excluded or limited; or
- article 8 of the Merger Directive (2009/133) must be applied. In that case, Germany will tax the capital gain of a later sale
notwithstanding the provisions of tax treaties.
There are three alternative situations with respect to the tax position of shareholders if a capital gain arises.

- Capital gains arising from the sale of privately held shares are subject to a final flat withholding tax at a rate of 25%
(increased to an effective rate of 26.375% by the solidarity surcharge).
- Where an individual shareholder has a participation of 1% or more or a participation held as a business asset, 60% of the
gains arising on a disposal is usually taxable. In order to align this taxation with established case law of the ECJ (Lasteyrie
du Saillant, Case C-9/02), the exit tax provision of section 6 of the AStG has been redrafted. Previously, under that section,
an individual who had been subject to unlimited German income tax liability for at least 10 years prior to emigration, and

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who was thereby no longer subject to unlimited German income tax liability, was subject to tax on emigration in respect
of the unrealized increase in the value of his shares in a domestic company in which he owned at any time within the
preceding 5 years, directly or indirectly, at least 1% of the share capital. Under the revised rule, a tax deferral until the sale
without interest or the obligation to provide a security is possible, subject to the condition that the taxpayer is subject to a tax
corresponding to the German income tax in the other EU Member State, and assistance in the enforcement of German tax
is granted by that state. The deferral is revoked generally in all cases of change of ownership, or of economic sphere (e.g.
any sale, transfer to an enterprise, transfer from private property into business assets), and situations whereby Germany’s
taxing rights would be jeopardized (e.g. a transfer to a natural person outside the European Union or subsequent emigration
outside the European Union). A reassessment is operated at the time of sale or transfer, in order to adjust the capital gain
determined at the time of emigration for any subsequent losses occurring thereafter. With effect from 1 January 2022, this
exit tax will apply to individuals who have been subject to unlimited domestic income tax liability for at least 7 years within
the 12 years preceding the emigration to another country.
- Where the shareholder is a company, effectively 95% of the capital gain from disposals is tax exempt (the gain is completely
tax exempt, however, 5% of costs is deemed non-deductible). If the shares are a part of the Handelsbuch (trade book) of a
bank or another financial service company, the capital gain is subject to taxation at the normal rate. The same is true (i.e.
full capital gains taxation) for capital gains realized by a company engaged in the provision of finance as per the German
banking law through the sale of shares that have been acquired with the intention of the short-term realization of profits from
the dealing on the company’s own account.
The same rules for mergers apply as for divisions. The tax-neutral treatment is subject to the fulfilment of the above conditions
(see section 9.2.1.).

9.3. Purchase/takeover of a company

9.3.1. Companies
The acquisition of shares in exchange for cash or shares does not generally affect the target company itself. The company
continues to record its assets, as before, at book values.
The transfer of shares, however, can have an impact on the loss carry-forwards of the target company. For details of the current
restrictions, see section 1.8.1.
A transfer of shares can give rise to the real estate transfer tax (see section 14.2.1.).

9.3.2. Shareholders
9.3.2.1. Acquisition for cash
If shares are sold for cash, the selling shareholder realizes a capital gain or loss equal to the difference between the sale price
and the value of the shares in his books. For taxation of the shareholder, see sections 6.1.6., 7.2.1.5. and 7.3.3.5.
The acquiring shareholder must record the purchase price as the acquisition cost.
To convert the non-depreciable acquisition cost of the participation into the acquisition cost of assets subject to regular
depreciation, the only possibility is an asset deal (after the abolition of the step-up possibility via the conversion of the target
company in a partnership; see section 9.1.3.). This model is mainly interesting as long as the write-off of shares in other
companies is still deductible (see section 1.3.3.2.) and consists of selling the target company’s business to another company.
This sale generates a taxable capital gain for the target company. Capital gains taxation can be avoided for corporate income
tax purposes by the following two steps if the shareholder of the target company is a German resident and holds the shares as
a business asset:

- the target company distributes the capital gain to the parent company; and
- the parent company depreciates the shares in the target company because it is “empty” after the sale of its business and
distribution of the capital gain. The dividend income is offset by depreciation of the shares so that, in fact, the dividend
distribution is not taxable at the level of the shareholder. In addition, the shareholder receives a tax credit or a refund of the
corporate income tax paid by the target company (see section 6.). As a result, corporate income tax does not actually arise
in this structure.
The acquiring company records the assets at acquisition cost (i.e. fair market value) and benefits from depreciation on the
stepped-up basis.

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If a resident company or a branch of a non-resident company acquires more than 50% of the voting rights of the target
company and if the other conditions for group taxation are fulfilled (see section 8.1.), the acquiring company may pool the
profits and losses of the integrated company with its own profits.
9.3.2.2. Acquisition for shares
The realization of a taxable capital gain on assets acquired in exchange for shares can be avoided if there is a transfer to a
company of:

- an entire business as a going concern; or

- a separately viable business division (Teilbetrieb); or
- a participation in a partnership; or
- a shareholding in another company, under the condition that the company acquiring the shares after the transfer holds a
majority in the company whose shares it receives.
The receiving company must record the assets received at their fair market value (apart from pension liabilities, which must be
recorded at the value defined in section 6a of the EStG). Alternatively, however, it can choose to record the assets received at a
lower value (minimum is the book value), if:

- it is ensured that the hidden reserves will be taxed at a later time at the level of the acquiring company; and
- the contributed liabilities do not exceed the contributed assets; and
- the right of Germany regarding the taxation of the transferred assets will not be excluded or limited.
The value chosen by the receiving company is the deemed sales price of the business for the absorbed company (section
20(3) of the UmwStG). Thus, capital gains taxation is avoided if the receiving company chooses to continue with the book value
(Buchwertfortführung). Section 20(2) of the UmwStG provides for a limitation if other remuneration is provided in addition to the
transfer of shares. In this case, a continuation of the book value is only possible if the other remuneration does not exceed (i)
25% of the book value of the transferred business assets or (ii) EUR 500,000 (not exceeding the book value of the transferred
business assets).
The basis of valuation for the new shares is deemed to be the same basis as the acquiring company chooses for the assets
transferred. Hence, if book value or intermediate value is chosen, hidden reserves are preserved within assets transferred and
also in new shares issued, as they have the same value as the book value of the assets. If these new shares are sold within 7
years after the contribution date, a contribution gain is retrospectively determined as follows (section 22(1) of the UmwStG):
Fair market value of the transferred assets at contribution date
-/- Costs for the transfer of the assets
-/- Value at which the acquiring company recorded the transferred assets on contribution date
= Maximum contribution gain
-/- One seventh of the maximum contribution gain for each year which lapsed since contribution date
= Taxable contribution gain

The taxable contribution gain retrospectively increases the taxable income for the transferor for the year of the contribution and
is subject to taxation at normal tax rates. With effect from 29 March 2019, Germany enacted legislation according to which, for
the purposes of the aforementioned rule, the event of Brexit would not constitute a harmful event for the purposes of the 7-year
period and, therefore, would not trigger retroactive taxation, provided the transaction was carried out before Brexit.
The taxable contribution gain will furthermore be treated as additional acquisition cost for the shares received in exchange
for the contribution and consequently reduces a capital gain from the later sale of the shares. The acquiring company may
increase the book values of the contributed assets in the year of the sale of the shares by the transferor (section 23(2) of the
UmwStG) as far as the assets still belong to the company. The increase of the book values is limited to the taxable contribution
gain and must be proven by a certificate of the tax office of the transferor. The increase is income tax neutral and leads to
additional depreciation volume for the acquiring company.
The same treatment applies, for example, if

- the received shares in the acquiring company are transferred for free to a company;

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- the received shares are transferred against remuneration, unless the transferor proves that the transfer occurred at book
value according to a transaction falling under sections 20(1) or 21(1) of the UmwStG or a similar foreign transaction;
- the acquiring company is liquidated;
- the capital of the acquiring company is reduced and paid back to the shareholders; or
- the acquiring company distributes or repays funds out of the capital contribution account in the sense of section 27 of the
KStG.
After a holding period of 7 years the sale of shares from a contribution in kind will be treated like a sale of “normal” shares.
The tax consequences for the seller of shares in domestic companies depend on whether the shares were held by a company
or by an individual. Effectively 95% of the capital gain from the sale of shares held by a company is tax exempt (the gain is
completely tax exempt, but 5% of the costs is deemed non-deductible). For individuals, the capital gain is subject to a final flat
withholding tax at a rate of 25%, increased to an effective rate of 26.375% by the solidarity surcharge.
A taxable gain may be avoided in the case of a share-for-share swap if, after the swap, the acquiring company has the majority
of the voting rights of the target company, and Germany’s right regarding the capital gains taxation in the case of a sale of the
shares in the target company and the acquiring company is not limited or excluded.

9.4. Purchase of an existing business

9.4.1. Companies
9.4.1.1. Purchase for cash
A company that sells its business realizes a capital gain determined as the difference between the sales price and the net book
value of the business. The capital gain is subject to corporate income tax and business tax at the regular rates (see sections
1.7. and 2.2.). The acquiring company records the assets and liabilities at the acquisition cost and depreciates on that basis.
9.4.1.2. Purchase for shares
The same rules apply as for mergers (see section 9.2.1.).
9.4.1.2.1. Transfer of a business to a German resident company
The same rules apply as for mergers (see section 9.2.1.).
9.4.1.2.2. Transfer of a business within the European Union
The same rules apply as for mergers (see section 9.2.1.).
9.4.1.2.3. Transfer of the business to a partnership
The partnership to which the business has been transferred must record all assets, including intangibles, at the fair market
value (apart from pension liabilities, which must be recorded at the value defined in section 6a of the EStG). Alternatively,
however, the assets transferred may be recorded at the book value or any value between the book value and fair market value
if the right of Germany regarding the taxation of capital gains on the transferred assets will not be excluded or limited. The
value at which the assets are recorded by the transferee is deemed to be the sales price for the transferor.

9.4.2. Shareholders
9.4.2.1. Purchase for cash
There are no tax consequences for the shareholders.
9.4.2.2. Purchase for shares
There are no tax consequences for the shareholders.

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9.5. Liquidation
9.5.1. Company
The tax treatment of the liquidation of a company is governed by section 11 of the KStG. The total liquidation surplus is
defined as the difference between the net assets at the beginning of the liquidation period and the net assets at the end of the
liquidation period (section 11(2) of the KStG).
Capital gains and other profits arising from the liquidation are calculated according to the normal tax and accounting principles
(section 11(6) of the KStG). For determining the taxable liquidation surplus, non-taxable items are excluded and non-deductible
expenses are added back. Hidden reserves in self-created intangibles (e.g. goodwill) are not included in the liquidation surplus,
unless realized by a sale to a third party.
Losses brought forward can be offset against the liquidation surplus.
The taxable period is the total liquidation period, no longer the financial year. In general, only one tax return must be filed for
the whole liquidation period. It starts with the beginning of the financial year in which the company is dissolved, e.g. by decision
of the shareholders. It ends when all the assets are distributed to the shareholders but, at the earliest, 1 year after the date on
which the company’s creditors were last publicly summoned to present their claims to the liquidator (Sperrjahr).
The liquidation period should not exceed 3 years, but it may in exceptional cases. The tax office can assess prepayments
during the liquidation period.
The distribution of the liquidation surplus is subject to the normal rules for dividend distributions (see sections 1.1.3. and 6.) to
the extent the distribution does not represent a repayment of capital.

9.5.2. Shareholders
The distribution of the liquidation surplus and retained earnings of earlier years constitutes regular dividend income for the
shareholders, which is subject to the normal rules for dividend taxation (see section 6.), except for the part which represents
a repayment of capital. The repayment of capital does not generally lead to taxable income for the shareholder. If, however,
the shares are a business asset, the repayment of capital is taxable to the extent it exceeds the book value of the shares. This
situation can occur in cases where the shareholder has depreciated the shares.

10. Anti-Avoidance
10.1. General anti-avoidance rules
The general anti-abuse provision in Germany is in section 42 of the General Tax Code (AO). Under the old version of that
section, a structure was considered an abuse if it was unusual and if it was chosen exclusively for fiscal reasons. From 1
January 2008, the amended section 42 of the AO is applicable if an inappropriate legal structure is chosen that leads to a tax
advantage for which the taxpayer cannot provide significant non-tax reasons. A legal structure is considered inappropriate if the
taxpayer or a third party generates a tax benefit that is not intended by the law.
Indicators for an inappropriate legal structure are:

- if a third party, on considering the economic facts and effects of the structure, would not have chosen the same legal
structure without the generated tax benefit;
- the interposition of relatives or other closely related persons or companies solely for tax purposes; or
- the transfer or shifting of income or capital assets to other legal entities solely for tax purposes.
The amended section also includes a clear hierarchy, i.e. specific anti-abuse rules according to applicable tax laws must be
applied on a step-by-step basis, after which the general anti-abuse provision can become applicable.
If there is an abuse of law, the structure is disregarded for tax purposes, and the tax arises in the same way as if a normal
structure had been used.
For special anti-abuse provisions, see section 10.6.

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10.1.1. The Anti-Tax Avoidance Directive

On 21 July 2016, the Anti-Tax Avoidance Directive (2016/1164) (ATAD) was adopted. This Directive applies to all taxpayers
subject to corporate income tax (including permanent establishments of companies based in third countries) and contains
several rules to prevent tax avoidance. The ATAD was later amended by the Amending Directive to the 2016 Anti-Tax
Avoidance Directive (2017/952) (ATAD 2) (see also section 10.6.1.), which amends the ATAD to address hybrid mismatches
involving third countries.
Below is an overview of the implementation status of the ATAD in Germany:
Provision Implemented
Interest limitation rule Yes (see section 10.3.)
Exit taxation Yes (see section 7.2.5.)
General anti-abuse rule Yes (see section 10.1.)
Controlled foreign company rule Yes (see section 10.4.)
Hybrid mismatches Yes (see section 10.6.1.)

10.2. Transfer pricing

10.2.1. Statutory framework
The adjustment of inappropriate transfer prices is based on section 1 of the Foreign Tax Law. In addition, the
Federal Ministry of Finance has issued a detailed decree on the adjustment of transfer prices, the “Administrative
Guidelines” (Verwaltungsgrundsätze) and extensive guidelines on transfer pricing documentation (BStBl. 2005 I, at 570). With
effect from 3 December 2020, guidelines relating to the application of sections 90 and 162 of the AO concerning administrative
principles (audit of income allocation between related parties with cross-border business relations in respect of the duty of
cooperation and estimation of taxable income and imposition of penalties) are superseded by new administrative guidelines
(Verwaltungsgrundsätze 2020, IV B 5 - S 1341/19/10018:001). Section 1 of the Foreign Tax Law has been amended by the
bill on the modernization of withholding tax relief procedures, which entered into force on 9 June 2021. The amendments to
section 1 of the Foreign Tax Law, however, will only take effect from assessment year 2022. The amendments provide for an
alignment of the German transfer pricing rules with the OECD Transfer Pricing Guidelines, in particular regarding the outcome
of BEPS Actions 8-10. Besides, the current hierarchy of applicable transfer pricing methods is replaced by a reference to the
most appropriate method for an underlying case. Furthermore, an explicit reference to DEMPE functions is included as well as
a definition of the term "intangible". The latter is defined as an asset that is neither a tangible asset nor shares that could be
subject to an intercompany transaction without being necessarily separately transferrable and that provides a person with a
factual or legal right to a specific asset.
Section 1 of the Foreign Tax Law stipulates that related parties must deal with each other on an arm’s length basis. An arm’s
length price is determined based on what a prudent and diligent business manager would charge. For the purpose of applying
the arm’s length principle, it is assumed that the unrelated third parties understand all material facts and circumstances
about the business transaction and act as prudent and diligent business managers. The transfer price is adjusted if a prudent
and diligent business manager would not have granted a certain benefit to an unrelated party. The income of the German
taxpayer is adjusted to reflect arm’s length conditions. Effective from financial year 2003, the provision applies to all business
transactions between such parties and not to income derived as a result of the parent-subsidiary relationship (e.g. dividends)
(section 1(5) of the AStG). With effect from 1 January 2013, the provision also applies to dealings between a resident company
and its foreign permanent establishment and to dealings between a non-resident company and its domestic permanent
establishment (see section 7.2.1.2.).
In its decision of 31 May 2018 in Hornbach-Baumarkt-AG v. Finanzamt Landau (Case C-382/16), the ECJ had held that the
German transfer pricing rules must afford a resident taxpayer the opportunity to prove that the terms agreed with a related
non-resident company were agreed on for commercial reasons resulting from its status as a shareholder of the non-resident
company. The underlying case concerned a situation where the expansion of the business operations of a subsidiary required
additional capital due to the fact that it lacked sufficient equity capital. In such a situation, there may be commercial reasons for
a parent company to agree to provide capital on non-arm’s length terms.
In response to the ECJ decision, the tax authorities issued official guidance stipulating that an adjustment based on the
German transfer pricing rules will not be made, in so far as the taxpayer can prove objective economic reasons which require
an agreement deviating from the arm’s length principle in order to secure the otherwise endangered economic existence of

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either the whole group of companies as such, or of the related company with which such agreement has been made. Such
supporting measures are aimed at avoiding the over-indebtedness or insolvency of the related company or the whole group of
companies and securing their further existence. The taxpayer must prove the need for such a support measure. The taxpayer
must, in particular, prove that the related company or the whole group of companies is in need of redevelopment and capable of
being redeveloped. The guidance further notes that it is not applicable to cases involving third countries.

10.2.2. Documentation and disclosure requirements (including penalties)

Transfer pricing documentation requirements are provided for in the General Tax Code and guidelines issued by the Federal
Ministry of Finance. In particular, the following is required:

- a written and detailed cost allocation contract (containing a description of the services, costs, allocation key, determination
of the benefit for each pool member);
- documentation of the costs (breakdown per category, etc.); and
- documentation of the services provided (regular reports, memos, etc.).
Special importance is given to the documentation of the expected benefit (problem analysis, project report, objectives).
When R&D costs are allocated according to a cost allocation system, the entry of new members to the allocation system can
require an entry fee if this is justified by the arm’s length principle. The exit of a member may require a compensation payment
from the leaving member to the pool, if the leaving member continues to benefit from the results of the R&D activity. On the
other hand, the decree stipulates that it could be justified to pay a compensation fee to the leaving member, if he no longer
uses the results and transfers to the remaining members his participation in the R&D results.
A profit mark-up may not generally be used in a cost allocation scheme. It is accepted, however, that the company providing the
services can charge a reasonable interest on its equity.
In practice, taxpayers will generally be requested to provide substantial documentation only within the scope of a tax
audit. Contemporaneous documentation will only be required for extraordinary business transactions (such as corporate
restructurings). The affected taxpayer must comply with the duty to procure documents demonstrating the transfer price
calculation and to present relevant documentation within 60 days of being given notice; an extension is only granted in
exceptional cases. In the case of extraordinary business transactions, such as the transfer of functions, the submitting period is
reduced to 30 days (section 90(3) of the AO).
In 2016, Germany introduced country-by-country reporting rules for tax years starting after 31 December 2015. Accordingly,
an ultimate parent company of a multinational group that is resident in Germany must prepare a country-by-country report
provided that the multinational group generated a consolidated revenue of EUR 750 million or more in the previous tax year. In
addition, taxpayers must submit transfer pricing documentation upon request of the tax authorities within 60 days, including a
master file and a local file as recommended by OECD BEPS Action 13. For tax years starting after 31 December 2016, if the
taxpayer is part of a multinational group and had a revenue of EUR 100 million or more in the preceding tax year, the transfer
pricing documentation must include a master file with information on the multinational group’s worldwide activities and details
on the transfer pricing methods applied to all intercompany transactions between related entities. Relief from documentation
requirements is available for small enterprises and for taxpayers that generate income from business relationships other than
profit income. A taxpayer is eligible for relief if the remuneration received for intercompany deliveries of tangible goods amounts
to less than EUR 6 million in a given year, and to less than EUR 600,000 for all other categories of transactions in a given year.
The tax authorities, at their discretion, can impose penalties varying between 5% and 10% of the gross income adjustment
(but in no case less than EUR 5,000) if documentation is not provided or is unusable. In the case of a delayed compliance, a
maximum penalty of EUR 1 million (but in no case less than EUR 100 for each day of delay) may be imposed. The penalty will
generally be assessed after the audit in question has been completed (sections 90(3) and 162(3) and (4) of the AO).
In accordance with an authorization under the StVergAbG, the Federal Ministry of Finance has issued an ordinance explicitly
determining the form, content and extent of the documentation requirements (BStBl. I 2003, at 739). Under the ordinance, a
taxpayer must normally prepare, on paper or electronically, and store the following documentation (section 4 of the ordinance):

- general information on an entity, e.g. shareholdings between the taxpayer and related parties, organizational charts of the
group structure and a description of the business activities;
- a description of the business relations with related parties, e.g. identification of the transactions, such as purchases of
goods and services, and underlying contracts;

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- a functional and risk analysis, e.g. the functions exercised and risks assumed by the taxpayer and related business parties
and a description of the value chain (Wertschöpfungskette); and
- a transfer pricing analysis, e.g. the chosen method, the reasons for the method’s suitability, the computation and relevant
information on independent entities if the taxpayer based the transfer prices on third party data derived from these entities.
If specific circumstances are relevant to the business relations agreed on by the taxpayer or if the taxpayer refers to these
circumstances as the reason for agreed business conditions, additional documentation in respect of these circumstances
must be prepared (section 5 of the ordinance). Specific circumstances include a change in the business strategy, cost sharing
arrangements, agreements with foreign tax authorities, price adjustments and, if the taxpayer in 3 consecutive years has
reported a loss from business relations with related parties, the reasons for the losses and the steps taken to rectify the loss
situation.
In respect of contemporaneous documentation for extraordinary business transactions, the ordinance specifies that this
requirement is met if the documentation is prepared within 6 months of the end of the financial year in which the business
transaction occurred. Extraordinary business transactions include the transfer of assets in the course of restructuring,
significant changes in the business strategy relevant to the calculation of transfer prices and the conclusion or amendment of
certain important long-term contracts.
Further guidance on the transfer pricing documentation requirements is provided by the extensive administrative guidelines
of 12 April 2005. The guidelines state that it is the tax authorities’ obligation to investigate the facts of a case ex officio. The
guidelines recognize that in transfer pricing cases the correct arm’s length price usually does not exist, but rather a range of
prices or other comparable data may be available.
The transfer pricing documentation must show the taxpayer’s serious effort to observe the arm’s length principle in transactions
with related parties. The documentation must reflect the considerations made by the taxpayer and make these comprehensible.
The documentation must enable a competent third person to determine within an adequate time period whether or not the
taxpayer has complied with the arm’s length principle.
The tax authorities may use checklists and secret comparables; however, the use of secret comparables can lead to a
reduction of the value of the secret comparables as evidence in court procedures.
Transfer pricing documentation must be maintained and stored for 10 years. Within the limits of his legal and contractual
rights (vis-à-vis related persons), the taxpayer is obliged to ensure that documentation of a foreign related person that is
of relevance for the taxpayer’s taxation in Germany is not destroyed before the expiry of this preservation period. Foreign-
language documents must be translated into the German language upon request by the tax authorities.
The taxpayer is obliged to correct immediately a previously filed tax return if he finds out that he chose inappropriate transfer
prices.
Within the limits of its legal and contractual rights (vis-à-vis related persons), the taxpayer, in the beginning of its business
relations with related persons, is obliged to take precautions to ensure that he has contractual access to the documentation that
is of relevance for German tax purposes.

10.2.3. Transfer pricing methods and practice

10.2.3.1. Standard methods
The standard transfer pricing methods suggested by the Federal Ministry of Finance in the Administrative Guidelines are
the comparable uncontrolled price method, the resale price method and the cost-plus method. They may be modified and
combined with each other. The taxpayer is free to choose any of the methods, provided that the method is not inconsistent with
the conditions of the relevant market or the company’s business (section 2.4.4. of the Administrative Guidelines).
However, section 1(3) of the Foreign Tax Law, which was introduced by virtue of the Corporate Tax Reform Law 2008, provides
for an order of priority for the determination of transfer prices. If comparable arm’s length values can be determined, after
appropriate adjustments in view of exercised functions, used assets and opportunities and risks taken, the transfer price must
be determined according to the comparable uncontrolled price method, the resale price method or the cost-plus method.
Several such values constitute a range. If such arm’s length values cannot be established, the application of a suitable transfer
pricing method must be based on partly comparable values after appropriate adjustments have been made. If several partly
comparable arm’s length values can be established, the resulting range must be narrowed. If the transfer price determined by
the taxpayer falls outside the full range or respectively outside the narrowed range, the transfer price must be adjusted to the
median.

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10.2.3.2. Hypothetical arm’s length comparison

In the case that not even partly comparable transfer prices can be determined, the taxpayer must perform a hypothetical arm’s
length comparison under the assumption that the unrelated third parties know all essential facts and circumstances of the
business relation and act as prudent and diligent business managers. For this purpose, the range of agreement is determined
by the respective profit expectations of the parties. On the basis of a functional analysis the taxpayer must establish the range
of agreement by determining the minimum price of the person providing or selling a service and the maximum price of the
recipient.
In a second step, the determination of income must be based on that price within the range of agreement, which most likely
corresponds to the arm’s length principle. If the taxpayer fails to do so, the median of the range of agreement must be used
as basis. If the range of agreement used by the taxpayer is incorrect and therefore a different range of agreement must be
assumed, an adjustment of income may be set aside, if the value used by the taxpayer is within the alternative range of
agreement.
Previously, the taxpayer was free to choose any of the standard transfer pricing methods, provided that the method is not
inconsistent with the conditions of the relevant market or the company’s business, as suggested by the Administrative
Guidelines.
The Administrative Guidelines further stipulate that advantages and disadvantages of several intra-group transactions may be
offset against each other only if:

- the transactions are related;

- the advantages and disadvantages can be quantified;
- the set-off was agreed upon beforehand; and
- only two parties are involved. A set-off within a group involving more than two companies is not accepted by the tax
authorities.
If the disadvantages are not compensated during a certain financial year, it must be clear by the end of that financial year when
and by which advantages these drawbacks will be offset. They must be offset within the following 3 financial years; otherwise,
the transfer prices are adjusted.
Instructions on cost allocation for R&D costs as well as for administration costs are covered by a decree of the Federal Ministry
of Finance on cost allocation between internationally related enterprises of 30 December 1999 (BStBl. I 1999 at 1122). The cost
allocation contract can cover administrative services, R&D as well as common purchase of goods. The goods or services must
be in the interest of the pool members, they must give a benefit to the pool members and be auxiliary for them. Only companies
with the same interests may participate in one pool. For example on that basis, the tax authorities might refuse to have a
pool combining production and holding companies, because their needs might be too different. Only direct and indirect costs
which have been actually incurred may be allocated. The cost must be calculated on the basis of a recognized cost accounting
method that is accepted in the country of the service provider. The allocation key needs to reflect the benefit of the services for
the pool member. The cost allocation contract must be regularly revised and adapted if the circumstances change.
On 6 July 2018, the Ministry of Finance issued revised administrative guidelines on cost allocation between internationally
related enterprises in the form of a decree of 5 July 2018 which replaces the former decree of 30 December 1999. The revised
decree is applicable to cost contribution agreements between related enterprises signed after 31 December 2018. As for
existing cost contribution agreements, the revised decree will be applicable only with effect from 31 December 2019, with the
former decree continuing to apply in the meantime. The revised decree stipulates the general principle that cost contribution
agreements must comply with the arm's length principle. For the conditions of a cost contribution agreement to satisfy the
arm’s length principle, the value of participants’ contributions must be consistent with what independent enterprises would have
agreed to contribute under comparable circumstances given their proportionate share of the total anticipated benefits they
reasonably expect to derive from the arrangement. The guidance further refers to the principles set out in Chapter VIII of the
OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2017) as being generally applicable.
Section 1(3) of the Foreign Tax Law (AStG) further explicitly addresses business restructurings (Funktionsverlagerungen).
Instructions on all aspects relating to business restructurings are covered by a decree of the Federal Ministry of Finance
on transfers of functions 13 October 2010 (IV B 5 – S 1341/08/10003). A transfer of a function is assumed if a function,
including the corresponding opportunities and risks and including the assets and other benefits transferred or let therewith is
transferred (section 1(3), sentence 9 of the AStG). In case a function is transferred, the taxpayer must determine the range
of agreement on the basis of a transfer of the function as an aggregate (Transferpacket) under observance of discount rates

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corresponding to functions and risks (section 1(3), sentence 9 of the AStG). Instead of the value of the transfer package, the
sum of the individual asset prices will be accepted as being at arm’s length, if the taxpayer can prove to the satisfaction of
the tax authorities that (a) no significant intangible assets and benefits have been transferred or let for use together with the
function; (b) the sum of prices for the individual assets can be accepted as being at arm’s length as measured by the price for
the transfer package; or (c) at least one significant intangible asset is transferred and identified as such (section 1(3), sentence
10 of the AStG).
If significant intangible assets and benefits are transferred based on a transfer price determined by a hypothetical arm’s
length comparison, and the actual profitability deviates substantially from the expected earnings, it is refutably assumed that
uncertainty prevailed at the time the involved parties agreed on the transaction and that unrelated third parties would have
agreed on an appropriate adjustment clause. If such a clause has not been agreed and, in addition, within the first 10 years
after the transaction, a significant deviation from the expected earnings occurs, the taxation of the business year subsequent to
the year of deviation must be based on a one time appropriate adjustment on the initial transfer price (section 1(3), sentences
11 and 12 of the AStG).
Section 1(3) of the AStG does not define the terms “function” or “transfer package”. However, section 1(3), sentence 13 of the
AStG provides that the Federal Ministry of Finance is authorized to issue a statutory regulation to be approved by the Federal
Council in order to ensure uniform application of the law in accordance with the international principles of income allocation.
On 4 July 2008, the Federal Council approved an ordinance concerning the application of the arm’s length principle in the case
of a cross-border transfer of functions (Funktionsverlagerungsverordnung, BGBl. I 2008 at 1680).
The ordinance defines the term “function” as the aggregation of similar operational tasks, including corresponding opportunities
and risks carried out by certain departments of an enterprise. Correspondingly, a “transfer of functions” takes place where a
function carried out by one enterprise (the transferor) is transferred to another enterprise (the transferee), even if the transfer
is only partial or temporary. However, the mere sale or licensing of assets and the provision of services do not qualify as a
transfer of functions. The same applies to employee secondments, unless a function is transferred together with the seconded
employees.
Intangible assets are deemed to be significant if their total value is equivalent to more than 25% of the total value of the transfer
price package. A duplication of functions (a situation where a pre-existing function is also performed by a second enterprise
without changing the initial existing structure of the transferring company) is deemed to exist if, within the subsequent 5
years after the transfer, the transferring company limits its performance of the transferred function. In that case, the function
is deemed to be wholly transferred at the time the transferring company limited the performance of the function. Single
transactions carried out within a period of 5 years may be treated as a transfer of a function if all requirements of section 1(3) of
the AStG are met.
The ordinance has retrospective effect from 1 January 2008.
For further clarifications, the Ministry of Finance issued official guidelines in form of an official letter of 13 October 2010
(Verwaltungsgrundsätze Funktionsverlagerung, IV B 5 – S 1341/08/10003).

10.2.4. Corresponding adjustments

Nearly all of Germany’s tax treaties include provisions corresponding to article 9(1) of the OECD Model Tax Convention and
thus allow an adjustment of transfer prices. Germany is a party to the Arbitration Convention (90/436), which provides that
where the commercial or financial relations between two associated enterprises differ from those which would apply between
independent enterprises, the profits of those enterprises should each be adjusted as appropriate to reflect the arm’s length
position. The Convention provides for disputes with fiscal authorities to be referred to an advisory commission, subject to
waiver of rights of appeal under domestic law provisions. The Arbitration Convention (90/436) was first applicable with respect
to the 15 old Member States. With respect to the 10 new EU Member States that acceded to the European Union on 1 May
2004 a new Accession Convention was signed on 8 December 2004 (EU Official Journal, C 160, 30 June 2005) and ratified
by Germany on 21 March 2007. The Arbitration Convention (90/436), as extended by the Accession Convention, is applied by
Germany from 1 June 2007. The Convention entered into force in relation to Bulgaria and Romania on 1 July 2008.
Apart from the income adjustment, excessive transfer prices charged to a subsidiary are treated as a constructive dividend
distribution (section 8(3) of the KStG) (see section 6.1.5.). If, on the other hand, the parent company grants an advantage to its
subsidiary, the parent company’s income adjustment constitutes a constructive capital contribution. For tax purposes, a German
parent company must capitalize the contribution as an additional participation cost. At the level of a German subsidiary, the
contribution increases the reserves for tax purposes. The increase in reserves is tax free.

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A transfer pricing adjustment can be made only if the contracting persons are related. According to section 1(2) of the Foreign
Tax Law, this is the case if:

- a person directly or indirectly holds at least 25% in another person;

- a person directly or indirectly controls another person;
- a third person has a participation of at least 25% or controls the taxpayer and the other contracting party; or
- one of the parties can exercise a major influence on the conditions during the negotiation of the agreement or one party has
an interest in the income generated by the other contracting party.
10.2.5. Secondary adjustments
There are no specific rules on secondary adjustments.

10.3. Limitations on interest deductibility

The German thin capitalization rules are laid down in section 8a of the Corporate Income Tax Law. Effective from 1 January
2008, the previously applicable thin capitalization legislation with a debt/equity ratio of 1.5:1 is replaced with a general limitation
on the deduction of interest payments.
Under the old rules, interest payments on long-term loans by companies to their shareholders holding a substantial interest
were classified as non-deductible constructive dividends for corporate income tax purposes (see section 6.1.5.) if the interest
was paid on excessive debt financing and exceeded the amount of EUR 250,000 per tax year. Details of the application of
these rules are laid down in a letter issued by the Federal Ministry of Finance (letter of 15 July 2004, IV A 2 – S 2742a – 20/04,
BStBl. I 2004 at 593).
Under the old rules, a loan exceeding 1 year was generally treated as a long-term loan for thin capitalization purposes. A
substantial interest existed if a person (or several persons in common interest) owned directly or indirectly more than 25% of
the nominal capital of a resident company.
Debts were regarded as excessive if they exceeded the prescribed debt-equity ratios. The debt-equity ratios depended on the
nature of the debt financing. A distinction was made between two kinds of debt.

- For debt on which fixed interest was paid, a debt-equity ratio (safe haven) of 1.5:1 was accepted. Interest on excessive debt
was not deductible and was treated as a constructive dividend, unless the third-party test is met. In the third-party test, the
taxpayer had to demonstrate that an unrelated person would also have granted the loan (third-party test with regard to the
solvency of the company). Fixed interest was interest calculated as a percentage of the principal, which was not dependent
in any way on the debtor’s profit or turnover.
- Variable interest was not deductible. This type of interest included payments on profit-participating loans, participations or
contributions by silent partners and other liabilities with respect to which the interest was not calculated exclusively as a
percentage of the principal. The tax authorities included fixed interest-bearing liabilities in the variable interest category if
the loan contract stipulated that interest needed not be paid in a loss situation.
The thin capitalization rules included any debts from:

- a shareholder with a substantial interest;

- a related person of this shareholder; or
- a third party with a right of recourse against the substantial shareholder or its related persons.
Under the amended section 8a of the KStG in conjunction with section 4h of the EStG, all types of excessive interest expenses
are treated as non-deductible business expenses.
Interest expenses of a business are deductible up to the amount of its interest income of the same year. Interest expenses in
excess of exceeding interest income (net interest expenses) are deductible only up to 30% of earnings before interest, taxes,
depreciation and amortization (EBITDA, i.e. taxable income reduced by interest income and increased by interest expenses
as well as depreciation and amortization). Non-deductible net interest payments may be carried forward indefinitely, thereby
increasing interest expenses but not taxable income in the calculation of the limited deductibility of interest payments in future
tax years. Interest expenses carried forward may be fully set off (section 4h(1) of the EStG and section 8a(1) of the KStG).

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The rules also apply to non-resident companies subject to tax in Germany on German-source income calculated using the net
income method (section 8a(1) of the KStG).
For financial years ending after 31 December 2009, an EBITDA carry-forward applies. Unused EBITDA, i.e. interest expenses
lower than 30% of the EBITDA in a tax year, must be carried forward for a maximum period of 5 years. Consequently, if net
interest expenses in a subsequent financial year cannot be deducted because of the 30% limitation, such excess net interest
expenses can be deducted from taxable income up to the amount of the EBITDA carry-forward. Existing EBITDA carry-forward
cannot be increased in financial years in which any of the exceptions to the limited deductibility of interest expenses apply (see
below). Upon application to the tax authorities, EBITDA carry-forward resulting from previous financial years beginning after
2007 may be calculated and taken into account for assessment in 2010 only.
Interest expenses are defined as all interest on capital that has reduced taxable income. Correspondingly, interest income
constitutes interest that has increased taxable income. Payments on low-interest-bearing or non-interest-bearing assets or
liabilities (e.g. zero bonds) also constitute interest income or expenses (section 4h(3) of the EStG).

Exceptions to the limitation on the deduction of interest

Interest expenses may be deducted without limitation if:

- the total amount of excess interest expenses is less than the exempt threshold of EUR 3 million. If the net interest payments
exceed the threshold, the limitation applies to the full net interest payments. The minimum threshold applies per business.
While partnerships and companies are deemed to be only a single coherent business, sole entrepreneurs may be engaged
in multiple independent businesses, applying the minimum threshold for each separately. Consolidated corporate groups
under German group taxation rules are deemed to be one business, therefore the minimum threshold may be applied only
once for the whole group (section 4h(2)a of the EStG);
- the company does not belong to a group of related companies, or belongs to such a group only partially (stand-alone
clause). A company is deemed to belong to a group, if the company is or could be part of the consolidated group’s accounts
under German generally accepted accounting principles or the financial and business policy of the company can be
determined in uniformity with that of one or several other companies. Affiliated companies may be sole entrepreneurs,
partnerships or companies. Consolidation occurs in particular if a company holds more than 50% of the voting rights of
another company (section 4h(2)b of the EStG); or
- the company belongs to a group of companies, but its ratio of equity over total balance sheet assets is not lower than 2%
compared to the overall ratio for the whole group (escape clause, section 4h(2)c of the EStG).
If a part of the interest payments of a company constitutes hidden profit distributions to substantial shareholders, who directly
or indirectly hold more than 25% in the capital of the company, the application of the stand-alone and escape clauses is
precluded. In the case of the stand-alone clause, no hidden profit distributions is assumed if the company can prove that not
more than 10% of the net interest payments are paid to a substantial shareholder, a person closely related to such shareholder
or a third person with recourse against such shareholder or related person (section 8a(2) of the KStG). In the case of the
escape clause, the same applies concerning qualifying interest payments for debt of the company or another member of the
group to a substantial shareholder of a group member, a person related to such shareholder or third person with recourse
to such shareholder or related person, however, only for interest payments reported in the consolidated group’s financial
statements and in cases of back-to-back financing with recourse of the third person against a shareholder or related person
who is not a member of the group (section 8a(3) of the KStG).
In order to calculate the relevant equity ratio under the escape clause, choices concerning the accounting of assets and
liabilities must be exercised consistently in the financial statements of the business and the consolidated group’s financial
statements. When calculating the equity ratio for the financial statement of the single company, various amounts must be
added to or deducted from the equity capital. The company’s goodwill, as reported in the consolidated financial statements
and 50% of special items with accrual character (Sonderposten mit Rücklageanteil, section 273 of the HGB), must be added
to the equity capital. Further, the equity capital of the business must be decreased by the book value of shareholdings in other
group members, by capital contributions made within 6 months before the balance sheet date insofar as they correspond to
withdrawals or distributions made within 6 months after the balance sheet date and by participations that do not confer voting
rights with the exception of preferred shares. In addition, the balance sheet sum of the business must be corrected for accounts
receivable not entered in the consolidated group’s financial statements insofar as they correspond to accounts payable. Special
business assets are allocated to the business, insofar as they are included in the consolidated group’s financial statements
(section 4h(2)c of the EStG).

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The ratios are determined according to the separated financial statements of the business and the consolidated group’s
financial statements. The financial statements used for the comparison must be prepared under the international financial
reporting standards (IFRS). In case no such financial statements under IFRS are available (because there was no requirement
to report under IFRS and no IFRS financial statements have been prepared within the last 5 business years), financial
statements prepared under the commercial code of an EU Member State may be used. In case such financial statements are
also not available for the same reasons, financial statements prepared under the generally accepted accounting principles of
the United States may be used. Financial statements prepared under other financial reporting standards are not considered. In
case the financial statements of the business are not prepared under the same standards as the consolidated group’s financial
statements, a transition calculation by offsetting and reconciliation under the financial standards of the consolidated group’s
financial statements is admissible, subject to review by an auditor (section 4h(2)c of the EStG).
If the statements turn out to be inaccurate and a correction of the inaccuracies leads to an increase of non-deductible interest
expenses, a penalty of at least 5% up to a maximum of 10% of the increased income is assessed in addition to the increased
tax (section 4h(2)c of the EStG).
The Ministry of Finance published official guidance in the form of a letter of 4 July 2008 (IV C 7 – S 2742-a/07/10001), on the
application of the rules on the limitation of interest deduction contained in section 4h of the EStG and section 8a of the KStG.

10.4. Controlled foreign company

CFC rules were originally introduced in Germany in 1972, when the Foreign Tax Law was enacted. The latest amendments to
the CFC rules were brought by the bill on the implementation of the Anti-Tax Avoidance Directive (2016/1164) (ATAD), which
entered into force on 1 July 2021. The bill on the implementation of the ATAD provides for some amendments to fully align the
German CFC rules with the provisions of the ATAD; for example, the definition of passive income. The amendments, however,
will only take effect from assessment year 2022.
Under the Foreign Tax Law, a resident company or an individual may be deemed to have received a dividend paid out of
certain retained profits treated as passive income (Passive Einkünfte or Zwischeneinkünfte) of an intermediary company
(Zwischengesellschaft) resident in a low-tax jurisdiction (sections 7-13 of the AStG). The provisions apply if:

- one or more German residents control a non-resident intermediary company, for example, hold in total more than 50% of
the share capital in the intermediary company, see below. For specific capital investment income (Zwischeneinkünfte mit
Kapitalanlagecharakter) the provisions apply already if one German resident holds at least 1% of the share capital of the
intermediary company (see below). The rules apply to direct and indirect participations (section 13 of the AStG);
- the intermediary company yields passive income; and
- the passive income was subject to a tax rate of less than 25%.
Participation in an intermediary company
An intermediary company under section 7 of the AStG is a company within the meaning of section 1 of the KStG that neither
has its seat or place of management in Germany. For determining whether or not a foreign company is comparable to a
company within the meaning of section 1 of the KStG, solely German law is decisive. The qualification under foreign law does
not matter. The tax authorities developed guidelines for a typological comparison. The typological comparison is based on civil
law and statutory criteria. The tax treatment of the entity in the state where it has its seat or place of management is also not
decisive. Thus, a foreign partnership cannot be an intermediary company for the purposes of the German CFC rules, even if
the partnership is treated as a company under laws of the other state. The existence of a foreign permanent establishment is
not sufficient for the application of the CFC rules.
One or more German residents, individuals or companies, must hold more than 50% of the share capital or the voting rights
in an intermediary company at the end of the company’s fiscal year in which it received the passive income (applicable fiscal
year). Shares or voting rights held through another company are also added, in the proportion that corresponds to the ratio
of the shares or voting rights held in said other company to the total shares or voting rights of said company; this applies
correspondingly when shares or voting rights are held through several companies. If there is neither share capital nor voting
rights, the ratio of the investment to the assets of the company applies. If resident taxpayers hold an interest in a partnership
directly or through a partnership and the former partnership in turn holds an interest in a foreign company, they are deemed to
hold an interest in the foreign company. For the application of the CFC rules, shares or voting rights held by a person which is
required to follow the directives of the taxpayer or is following them, so that such a person has no significant decision-making
authority, are also allocated to the resident taxpayer.

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With effect from 1 January 2022, a non-resident intermediary company is deemed to be controlled if, at the end of the financial
year of the foreign company in which it earned the passive income in question (relevant financial year), more than half of the
voting rights or more than half of the shares in the nominal capital are directly or indirectly attributable to a resident taxpayer
(individuals or companies) alone or together with closely related persons within the meaning of section 1(2) of the AStG, or if
the taxpayer is directly or indirectly entitled to more than half of the profits or liquidation proceeds of that non-resident company.
The CFC rules also apply to a non-resident taxpayer to the extent that the participation in the foreign intermediary company is
directly or indirectly attributable to a domestic permanent establishment of the taxpayer through which an active business is
carried on.
Persons are related if one of them holds a 25% participation in, or controls, the other, or if a third person holds a 25%
participation in, or controls, both. Furthermore, persons are related if one of them can exercise a major influence on the other in
negotiations or if one has a personal interest that income arises in the hands of the other (section 1(2) of the AStG).

Intermediary company receiving specific capital investment

If the intermediary company receives specific capital investment income (Zwischeneinkünfte mit Kapitalanlagecharakter),
the CFC rules already apply if a resident taxpayer holds a participation of at least 1% of the share capital in the intermediary
company (section 13 of the AStG). Pursuant to section 13(2) of the AStG, specific capital investment is defined as income
derived from holding or managing currency, receivables, securities, investments and similar assets or from the increase in
value of the aforesaid. However, the lower participation threshold of at least 1% does not apply if the taxpayer provides proof
that the intermediary company derives said specific capital investment from activities which generate active income as defined
in section 8(1) Nos. 1 to 6 of the AStG (see below). Dividends and most capital gains are not covered by the definition of
specific capital investment income.
The lower participation threshold of at least 1% does not apply if the specific capital investment income of the intermediary
company does not exceed 10% of the total income of the intermediary company and such income also does not exceed the
amount of EUR 80,000 at the level of the intermediary company or at the level of the taxpayer (section 13(1) of the AStG).
If the income received by the intermediary company consists only or almost exclusively, i.e. for more than 90%, of specific
capital investment income, the CFC rules apply regardless of the level of participation of the taxpayer, unless the shares of
such intermediary company are regularly traded on a recognized stock exchange (section 13(1) of the AStG).

Passive income received by the intermediary company

The non-resident intermediary company must yield passive income. The assumption made in section 8 of the AStG is that all
income received by the intermediary company is passive except for the deemed active activities as listed in section 8(1) Nos. 1
to 10 of the AStG (with effect from 2022: section 8(1) Nos. 1 to 9 of the AStG). The following items of income are deemed to be
active income:

- agriculture and forestry activities, including the alienation of assets used for the respective activities (section 8(1) No. 1 of
the AStG);
- the production, finishing, processing or assembly of property, the generation of energy or the discovery and extraction of
mineral resources, including the alienation of assets used for the respective activities (section 8(1) No. 2 of the AStG).
Processing of items or objects within the meaning of section 8(1) No. 2 of the AStG requires that such items or objects,
following processing, are treated as being of different marketability. Mere repacking, decanting, marking, branding, sorting
or arranging is not sufficient;
- the operation of credit institutions or insurance companies maintaining a commercial operation for the purpose of operating
their business, unless the business is mainly (i.e. for more than 50%) conducted with resident taxpayers holding an interest
(more than 50%) in the intermediary company or related persons of such taxpayers within the meaning of section 1(2) of the
AStG.
Pursuant to this provision, persons are related if:

- a person directly or indirectly holds at least 25% in another person;

- a person directly or indirectly controls another person;
- a third person has a participation of at least 25% or controls the taxpayer and the other contracting party; or
- one of the parties can exercise a major influence on the conditions during the negotiation of the agreement or one party
has an interest in the income generated by the other contracting party.

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Mere holding or asset management activities, financing activities within a group of companies in order to compensate risks
or similar activities do not qualify as banking or insurance activities (section 8(1) No. 3 of the AStG). Therefore, captive
insurance companies cannot be considered insurance companies within the meaning of section 8(1) No. 3 of the AStG.
With effect from 1 January 2022, section 8(1) No. 3 of the AStG refers to the operation of insurance undertakings, credit
institutions and financial services institutions engaged in a substantial economic activity; unless more than one third of the
business underlying this income is conducted with the taxpayer or closely related persons. The same will apply to financial
undertakings within the meaning of the German Banking Act in which credit institutions or financial services institutions
directly or indirectly hold more than 50% of the shares;
- trade activities (section 8(1) No. 4 of the AStG), unless:

- a resident taxpayer holding an interest (more than 50%) in the intermediary company or a related person (see above)
whose income derived from such trade activities is taxable in Germany grants the intermediary company the authority
to dispose of the goods or merchandise held. The provision targets cases where resident companies regularly make
use of a related foreign intermediary company as a sales company, in order to shift profits to the jurisdiction where the
intermediary company is resident; or
- the intermediary company grants such a taxpayer or a related person the authority to dispose of the goods or
merchandise.
However, if the taxpayer provides proof that the intermediary company maintains a commercial operation for such
transactions, is involved in the general economy and completes the activities for the preparation, conclusion and execution
of transactions without the involvement of the taxpayer or related person, the trade activities still qualify as active income.
The provision targets cases where resident companies regularly obtain intermediate products from a related foreign
intermediary company which main purpose is to purchase such intermediate products. In such a scenario, profits could be
shifted to the intermediary company if it would charge inflated purchase prices for the intermediate products to the resident
company;
- the provision of services (section 8(1) No. 5 of the AStG). However, if the intermediary company employs, for said services,
a resident taxpayer involved in said company (more than 50% shareholding) or a related person (see above) who is liable to
tax with his or her income from his or her contributions in Germany, the income derived from the provision of such services
does not qualify as active income.
Income derived from services further qualifies as passive income if the intermediary company provides the services to such
a taxpayer or related person, unless the taxpayer provides proof that the foreign company maintains a business operation
for the provision of such services that participates in the general economy and completes the activities required to provide
the services without the involvement of such a taxpayer or such a related person;
- renting and leasing (section 8(1) No. 6 of the AStG). However, even though the renting and leasing activities are listed
among the activities that qualify as active, it is rather the exception than the rule that such activities are treated as active.
Section 8(1) No. 6 of the AStG) provides for exceptions to the rule. The following renting and leasing activities are deemed
to generate passive income:

- the transfer of the use of rights, plans, samples, processes, experience and knowledge, unless the taxpayer provides
proof that the intermediary company evaluates the results of its own R&D efforts conducted without the involvement of a
taxpayer or a related person who holds an interest (more than 50%) in the intermediary company. In the case of contract
research ordered from a foreign intermediary company, it may be difficult to determine when a harmful involvement of
the taxpayer takes place, as a certain involvement in the form of setting the specification within which the research is to
be conducted is necessary;
- the rental or lease of real estate, unless the taxpayer provides proof that the income would be exempt from tax
according to a tax treaty if it was received directly by the resident taxpayer holding an interest in the foreign company;
and
- the rental or lease of movable property, unless the taxpayer provides proof that the foreign intermediary company
maintains a business operation for commercial rental or lease transactions that participates in the general economy and
conducts all activities required for said commercial rental or lease transactions without the involvement of a resident
taxpayer or a related person who holds an interest in the intermediary company. Also regarding this exception, it may
be difficult to determine when a case of harmful involvement is given. A foreign intermediary company may very well
maintain a substantial commercial operation for rental activities that is involved in the general economy and completes

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most of the activities itself, but still certain activities, such as price calculation, insurance matters or purchase of new
rental goods, may be carried out by the taxpayer;
- the borrowing or lending of capital for which the taxpayer provides proof that it was borrowed exclusively on foreign capital
markets, and not borrowed from a related person or the intermediary company and provided to non-resident companies or
permanent establishments generating their gross earnings exclusively or almost exclusively through activities falling under
section 8 Nos. 1 to 6 of the AStG, or resident companies or permanent establishments in Germany (section 8(1) No. 7 of
the AStG). It is essential that the borrowing of capital takes place exclusively on foreign capital market; i.e. the issuance of
bonds, taking up of loans must take place abroad. Any indirect financing activity via the domestic capital market is harmful
in this context. The tax authorities take the position that if the capital acquired from the foreign intermediary company is
used to acquire participations in companies or similar rights or is used for capital contributions, it cannot be considered
that the respective funds were provided as a loan within the meaning of section 8(1) No. 7 of the AStG (with effect from 1
January 2022, income from the borrowing or lending of capital is generally deemed passive income);
- dividends received from other companies (section 8(1) No. 8 of the AStG, with effect from 2022: section 8(1) No. 7 of the
AStG). With effect from 1 January 2022, dividends are treated as passive income, if the dividend payment is deductible
for the distributing entity (hybrid payment). Also, portfolio dividends (i.e., shareholdings of less than 10%) and dividends
derived by credit or financial services institutions (which do not qualify for the domestic participation exemption) are treated
as passive income;
- the disposal of shareholdings in another company or its liquidation or the reduction of its capital insofar as the taxpayer
provides proof that the gain on the disposal is allocated to assets of the other company that serve activities other than those
identified in section 8(1) No. 6(b) of the AStG (rental or lease of real estate, see above). Losses on the disposal of shares
in the other company or its liquidation or the reduction of its capital are only taken into account insofar as the taxpayer
provides proof that said losses are related to assets that serve activities pursuant to section 8(1) No. 6(b) of the AStG
(section 8(1) No. 9 of the AStG, with effect from 2022: section 8(1) No. 8 of the AStG). With effect from 1 January 2022, the
disposal of shareholdings in another company or its liquidation or the reduction of its capital remains generally considered
active income, except for capital gains derived from the disposal of shares held by credit institutions or financial service
institutions which do not qualify for the domestic participation exemption; and
- reorganizations which could have been carried out at book value if the reorganization had taken place in Germany (with
effect from 2022, it is additionally required that the reorganization abroad actually took place at book values); this does
not apply insofar as a reorganization includes a shareholding in a corporation for which the disposal would not meet the
conditions under section 8(1) No. 9 of the AStG (see above) (section 8(1) No. 10 of the AStG, from 2022: section 8(1) No. 9
of the AStG).
Low taxation threshold
Another condition for the application of the CFC rules is that the passive income was subject to low taxation, i.e. effectively
subject to a tax burden of less than 25%. The 25% tax burden exclusively relates to foreign direct taxes. The foreign tax rate
is an important indication in this regard, but not alone decisive. A low taxation may be given, if the intermediary company’s
income was subject to a tax rate of more than 25% abroad, but the effective tax burden abroad was reduced to a rate of less
than 25% due to available benefits abroad.
Foreign tax refunds and tax credits granted to resident shareholders of an intermediary company, also in cases of indirect
shareholdings, by the state of residence of the intermediary company must be considered in determining whether or not an
intermediary company is low-taxed for German CFC rules purposes, if the foreign tax refund is related to the taxes paid by the
intermediary company on its passive income.
A tax credit is available if German CFC taxation is applicable. The German CFC’s shareholders obtain a foreign tax credit
basically in the amount of the taxes paid by the CFC on its passive income. However, this tax credit is reduced by the foreign
tax refunds and tax credits granted by the state of residence of the intermediary company to the resident shareholders of the
intermediary company or subsidiaries of such shareholders. The resident shareholders only receive a CFC foreign tax credit
in the amount of the effective tax burden of the intermediary company (taxes paid by the intermediary company less any tax
refunds at the shareholder level of the intermediary company).

Exception for EU/EEA intermediary companies

In 2008, the German CFC rules were amended in the light of the ECJ decision in Cadbury Schweppes (Case C-196/04) which
concerned the CFC rules applicable in the UK, which were similar to the respective German rules. The case concerned low-
taxed Irish subsidiaries of a UK resident parent company. In its decision, the ECJ held that such CFC rules may not be applied

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where it is proven, on the basis of objective factors which are ascertainable by third parties, that despite the existence of tax
motives, that controlled company is actually established in the host Member State and carries on genuine economic activities
there. Therefore, in conformity with EU law, no German CFC taxation may be applied if the taxpayer proves that:

- the controlled foreign company is resident in an EEA country (EU Member States and Iceland, Liechtenstein and Norway)
and carries out a genuine economic activity;
- the passive income otherwise subject to CFC taxation is derived in connection with such activities; and
- the Directive on Administrative Cooperation (2011/16) (DAC) or a similar agreement is applicable between Germany and
the respective EEA country (section 8(2) of the AStG).
The Ministry of Finance published official guidance in the form of a letter of 17 March 2021 (IV B 5-S 1351/19/10002:001), on
the application of the substance carve-out under section 8(2) of the AStG. The guidance, inter alia, notes that the substance
carve-out included in section 8(2) of the AStG also applies in situations where a controlled foreign company is located in a third
country.
With effect from 1 January 2022, no CFC taxation shall be applied in respect of income of a controlled non-resident
intermediary company of which it is proved that the company carries on a substantial economic activity in its state of residence.
This presupposes in particular the use of the required material and human resources necessary for the conduct of the activity
in that state. The activity must be carried out by sufficiently qualified staff independently and on their own responsibility. Only
income of the company that is generated by this activity will be attributed to the essential economic activity of the company
and only to the extent that the arm's length principle has been observed. This exception does not apply if the company has its
essential economic activity mainly carried out by third parties (section 8(2) of the AStG). Furthermore, the exception is limited to
intermediary companies that are resident in an EU Member State or an EEA country (section 8(3) of the AStG). In the case of
an intermediary company receiving specific capital investment, the exception is not limited to intermediary companies resident
in EU Member States or EEA countries (section 13(4) of the AStG).
If the intermediary company is situated in a state that does not participate in the international exchange of information that is
required for effective taxation purposes, the exception is not applicable (section 8(4) of the AStG).

Exception for intermediary companies with mixed income

For intermediary companies, regardless of their state of residence, which derive active income as well as income which is
deemed passive income, another exception from the CFC rules may apply. Under this exception, the CFC rules do not apply
if the deemed passive income of the intermediary company does not exceed 10% of the total income of the intermediary
company and the deemed passive income also does not exceed the amount of EUR 80,000 (section 9 of the AStG).

Determination of the deemed dividend

Passive income that is treated as a deemed dividend must be determined according to German tax and accounting rules.
Only income which is deemed passive and subject to low taxation is attributed to the resident shareholders of an intermediary
company. Active income and deemed passive income which is not subject to low taxation are not subject to the CFC rules. The
taxpayer can choose between an income calculation on a cash basis or on an accrual basis (with effect from 2022, the income
calculation may only be done based on an accrual basis). Foreign taxes are deductible (section 10 of the AStG). The amount of
the deemed dividend is determined as follows:
Gross income of the intermediary company
-/- Active income
-/- Withholding tax levied on subsequent dividends paid by the intermediary company
= Deemed passive income
-/- Foreign taxes paid
-/- Losses related to passive income generating activities
= Amount of deemed dividend

Treatment of deemed dividend at shareholder level

The general exemption for dividends from qualifying shareholdings (see section 6.1.3.) does not apply to the deemed dividends
under the Foreign Tax Law. Instead, the deemed dividend as added to the income of the German taxpayer, can be offset
against losses and is then taxed at the applicable (individual or corporate, as the case may be) tax rate. In addition, the

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deemed dividend is subject to business tax. The deemed dividend is treated as paid immediately after the end of the fiscal year
of the intermediary company in which it received the passive income. With effect from 1 January 2022, the deemed dividend is
treated as paid at the end of the of the fiscal year of the intermediary company in which it received the passive income.
If the intermediary company actually distributes its profits, the dividend received may be exempt at the level of the German
shareholder (section 8b(1) and (5) of the KStG; section 3 No. 41 of the EStG). In the case of an individual shareholder,
dividends received subsequently after a deemed dividend distribution under the CFC rules are exempt for a period of 7 years.
With effect from 1 January 2022, for individual shareholders, the exemption for a period of 7 years no longer applies. Instead,
there will be a credit available for the previously taxed CFC income, i.e., the previously taxed CFC income is deducted from
the amount of taxable income. Every year, the available amount of credit will be assessed separately per taxpayer. In the
case of a corporate shareholder, however, partial double taxation might exist, as 5% of the dividends representing related
expenses will be taxed (see section 7.2.1.3.) and the dividends might be subject to business tax (see section 2.2.). However,
any foreign withholding tax levied on the dividend will be credited against the tax liability or deducted from the taxable income
of the corporate shareholder, as 5% of the dividends is subject to German income tax. Corresponding to the tax exemption for
corporate shareholders, no further credit is granted to them.
If a foreign intermediary company derives passive income, including passive capital investment income, which falls within the
scope of the provisions of the Investment Tax Law (Investmentsteuergesetz) at the same time, the latter provisions override
those of the Foreign Tax Law (section 7(7) of the AStG, with effect from 2022: section 7(5) of the AStG). However, this override
only applies if the income is not exempt from German tax under a tax treaty. With effect from 1 January 2022, this override
does not apply if more than one third of the transactions underlying the income is conducted with the taxpayer or closely related
persons.

10.5. Closely held company

Germany has no rules on closely held companies. For deemed distribution rules on controlled foreign companies, see section
10.4.

10.6. Other anti-avoidance rules

10.6.1. Hybrid mismatches
Generally, the goal of the legislation combating hybrid mismatches is to neutralize the effects of arrangements that exploit
differences in the tax treatment of an entity or instrument under the laws of two or more countries.
Within the European Union, Member States are obliged to implement, through the ATAD, as amended by ATAD 2 (see also
section 10.1.1.), into their domestic law the anti-hybrid rules that address such mismatches between Member States, as well as
between Member States and third countries.
For more information on the rules regarding hybrid mismatches as contained in the ATAD, see European Union – Direct
Taxation – Global Topics section 3.4.5.
Germany has implemented the hybrid rules contained in the ATAD into its domestic law.
Germany has opted to postpone the application (until 1 January 2022) of the rules regarding reverse hybrid mismatches.

10.6.2. Anti-treaty shopping rule

Section 50d(3) of the EStG contains a treaty override provision: it is an anti-treaty-shopping provision which denies treaty
benefits (mainly reduction of withholding tax) to a non-resident (intermediate) company under certain conditions, if such a
company is not the beneficial owner of the income and its shareholders (the beneficial owners) would not be entitled to the
treaty benefit if they would have invested directly.
Section 50d(3) of the EStG has been amended by the bill on the modernization of withholding tax relief procedures with effect
from 9 June 2021. The amended version of section 50d(3) of the EStG shall be applicable to all pending cases unless a non-
resident company would be entitled to a relief in accordance with the previously applicable version of section 50d(3) of the
EStG. The anti-treaty-shopping rule contained in section 50d(3) of the EStG has been amended to take into account the
jurisprudence of the ECJ, in particular the decision in the Joined Cases C-116/16 (T Danmark) and C-117/16 (Y Denmark),
the decision in Deister Holding (Case C-504/16) and the decision in GS (Case C-440/17), and the general anti-avoidance
rule contained in the Anti-Tax Avoidance Directive (2016/1164) (ATAD). The revised structure of section 50d(3) of the EStG is
similar to the general anti-avoidance rule in article 6 of the ATAD.

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Accordingly, section 50d(3) of the EStG denies treaty benefits to a non-resident (intermediate) company as far as:

- the shareholders (the beneficial owners) would not be entitled to the treaty benefit if they had received the income in
question directly; and
- the source of income does not have a material connection with the economic activity of the intermediate company.
Regarding the second condition, section 50d(3) of the EStG provides for an assumption that the mere income generation and
its passing on to the beneficial owners as well as the carrying on of a business activity without being adequately equipped for it
in view of the business purpose, is not sufficient to create the required material connection with an economic activity.
The non-resident company may avoid the consequences of the application of section 50d(3) of the EStG, if it can prove that
none of the main purposes of its interposition is to obtain a tax advantage. Also, it may avoid the consequences if the non-
resident company is listed at a recognized stock exchange and the main type of its shares is regularly and materially traded at
such a stock exchange.
Until 9 June 2021, section 50d(3) of the EStG denied treaty benefits to a non-resident (intermediate) company if:

- it was not the beneficial owner of the income and its shareholders (the beneficial owners) would not be entitled to the treaty
benefit; and
- the foreign company did not generate its gross income from its own active business activities.
However, if the intermediate company failed both tests, it could qualify for treaty benefits, if:

- there were economic or other important reasons for the use of the intermediary company in view of the respective income;
and
- the foreign company was adequately equipped for carrying out its own business activities and for participation in the general
commerce.
In addition, section 50d(3) of the EStG imposed the burden of proof on the non-resident company in respect of the existence
of economic or other important reasons for the interposition of the intermediary company as well as for its adequate business
substance.
Before 2012, section 50d(3) of the EStG denied treaty benefits to a non-resident (intermediate) company if:

- it was not the beneficial owner of the income and its shareholders (the beneficial owners) would not be entitled to the treaty
benefit;
- the use of the intermediary company did not have economic or other important reasons; or
- the foreign company did not generate more than 10% of its gross income from its own active business activities; or
- the foreign company was not adequately equipped for carrying out its business activities.
The anti-treaty-shopping provision had been amended in 2011, in response to an infringement procedure against Germany
initiated by the European Commission. On 18 March 2010, the Commission had announced that it had sent Germany a
reasoned opinion, requesting Germany to amend section 50d(3) of the EStG. The Commission had considered that section
50d(3) of the EStG was disproportionate in particular as regards the third condition listed above, where the possibility to
produce proof to the contrary did not exist. Therefore, in the Commission’s view, the German measure went beyond what
was necessary to attain its objective of preventing tax evasion. On 27 September 2012, the Commission announced that it
closed the infringement procedure against Germany regarding section 50d(3) of the EStG, because Germany had amended its
legislation.
On 23 September 2016 and on 28 November 2016, reference was made to the ECJ by the Finanzgericht Köln (Cologne tax
court of first instance) for preliminary rulings in the case of Deister Holding AG, as full legal successor to Traxx Investments
N.V. v. Bundeszentralamt für Steuern (Case C-504/16) and in the case of Juhler Holding A/S v. Bundeszentralamt für Steuern
(Case C-613/16) respectively, concerning the compatibility of section 50d(3) of the EStG (as applicable before 2012) with
EU law. In its decision of 20 December 2017, the ECJ held that section 50d(3) of the EStG (as applicable before 2012) is
not compatible with EU law, in particular with article 1(2) of the Parent-Subsidiary Directive (2011/96) and the freedom of
establishment. In another decision of 14 June 2018, in the case of GS v. Bundeszentralamt für Steuern (Case C-440/17), the
ECJ held that also section 50d(3) of the EStG, as applicable from 2012, is not compatible with EU law.

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On 4 April 2018, the Ministry of Finance issued official guidance (IV B 3 – S 2411/07/10016-14) in response to the ECJ decision
in Deister Holding and Juhler Holding (Joined Cases C-504/16 and C-613/16). The guidance stipulates that the previously
applicable version of article 50d(3) of the EStG as amended in 2007 is not applicable any longer. The guidance further provides
that article 50d(3) of the EStG, in the current version as applicable from 1 January 2012, applies in a modified way. Accordingly,
sentence 2 of article 50d(3) of the EStG is no longer applicable. Sentence 2 of article 50d(3) of the EStG provides that only the
facts and circumstances of the foreign company are relevant, i.e. organizational, economic or other reasonable circumstances
of associated enterprises must be disregarded. The guidance, in addition, provides for some modifications regarding substance
requirements contained in the official guidance (IV B 3 – S 2411/07/100016) on the current version of article 50d(3) of the EStG
issued in January 2012.

10.6.3. Switch-over and subject-to-tax rule

Section 50d(9) of the EStG was enacted to counteract tax avoidance structures that take advantage of the exemption method
under Germany’s tax treaties to achieve double non-taxation of certain income. Section 50d(9)(1) provides that where items
of income of a taxpayer who is subject to unlimited tax liability are to be exempt from the German tax base under a tax treaty,
such exemption shall be denied notwithstanding such tax treaty if the other contracting state applies the provisions of the tax
treaty in a way that the items of income are exempt from tax in that state or may be taxed only at a reduced rate under the tax
treaty. The provision basically denies the exemption granted under a tax treaty if the application of the tax treaty by the other
contracting state leads to double non-taxation of the income or reduced taxation in that state, or the income is tax exempt in
that state because the person is not taxed as a resident therein.
Section 50d(9)(1) of the EStG only applies where the exemption in Germany under a tax treaty and the exemption or reduced
taxation of the income in the other contracting state is the result of the application of the tax treaty. Therefore, any tax
exemptions due to the domestic laws of the contracting states do not trigger its application. Technically, section 50d(9)(1) of the
EStG functions as a general switch-over clause: relief from double taxation is granted via a unilateral tax credit or deduction of
the foreign tax paid.
Section 50d(9)(2) of the EStG targets income that would be taxed in the source state in the hands of residents, but is tax
exempt for non-residents, irrespective of whether this is due to the application of the tax treaty or domestic law. General
domestic tax exemptions in the source state that apply to residents and non-residents alike do not trigger its application. In
contrast to section 50d(9)(1) of the EStG, situations limited to reduced taxation of non-residents are not covered. Section
50d(9)(2) of the EStG functions as a general subject-to-tax clause, reverting the taxing rights to Germany as the residence
state. Unlike section 50d(9)(1) of the EStG, however, dividends subject to a participation exemption under a tax treaty are
specifically excluded from its application, unless they were deductible from the tax base in the source state.

10.6.4. Hybrid financing instruments

Dividends derived by resident corporate shareholders from qualifying participations of at least 10% in the capital of the paying
company are, in principle, exempt irrespective of the holding period and the source (domestic or foreign). However, a lump sum
of 5% of the gross dividends is added back to taxable income representing non-deductible business expenses (see section
6.1.3.). With effect from assessment year 2014, the exemption further requires that the dividends were not deducted when
determining the profits of the distributing company (section 8b(1) sentence 2 of the KStG).

10.6.5. Restriction of the participation exemption for hybrid legal entities

Section 50d(11) of the EStG provides for a restriction of the application of the participation exemption under tax treaties for
hybrid legal entities. The provision is designed to deny the participation exemption privilege to domestic companies when
receiving foreign source dividends in as far as individual taxpayers may benefit from this privilege by way of using a domestic
hybrid legal entity such as a limited partnership with shares or a non-typical silent partnership. Accordingly, a tax exemption
for dividends derived from a qualifying participation under a tax treaty shall only be available for dividends that are attributable
to a corporate entity under domestic law. The participation exemption shall not be available in respect of dividends that are
attributable to individuals under domestic law.
The provision was introduced as a response to jurisprudence of the Federal Financial Court. In a decision of 19 May 2010 (I R
62/09), the Federal Financial Court ruled that a limited partnership with shares qualifies for the application of the participation
exemption under the Germany-France tax treaty, regardless of the legal form of the general partner. The limited partnership
with shares is a hybrid between a stock company and the limited partnership. The limited partnership with shares must have
at least one general partner with unlimited liability, while the other members of the KGaA are shareholders with limited liability
as in a stock company. The Federal Financial Court considered that the participation exemption privilege is applicable, if the
tax treaty concluded between Germany and the residence state of the company distributing the dividends does not provide for

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more requirements than that the taxable person must be a company and does not provide for any restrictions related to the
company’s structure or the allocation of income.

10.6.6. Uncooperative states and territories

On 1 July 2021, the Law on combatting tax avoidance and unfair tax competition (Gesetz zur Abwehr von Steuervermeidung
und unfairem Steuerwettbewerb – Steueroasen-Abwehrgesetz (StAbwG)) entered into force. The StAbwG replaces the
previously applicable ordinance on the combat of tax evasion which has been abolished with effect from 1 July 2021.
The aim of the StAbwG is to encourage states and territories that do not meet recognized standards in the areas of
transparency in tax matters, unfair tax competition and the implementation of the BEPS minimum standards to make
adjustments in the direction of implementation and compliance with international standards in the field of taxation. The
StAbwG is based on the conclusions of the European Council on the EU list of non-cooperative countries and territories for
tax purposes ("blacklist") as well as on those measures that were negotiated by the Code of Conduct Group in this context
and also approved by the European Council. The StAbwG applies to individuals, partnerships and corporate taxpayers. It is
designed as a domestic treaty override provision.
The StAbwG defines non-cooperative states and territories as states and territories that either do not guarantee a sufficient
level of transparency in tax matters, or that engage in unfair tax competition, or that did not oblige themselves to implement the
BEPS minimum standards.
A state or territory is deemed not to meet the required standards of transparency if:

- it does not carry out the automatic exchange of information on financial accounts in tax matters with Germany and all other
Member States in accordance with the common reporting standard;
- it has not largely implemented the OECD standard for transparency and effective exchange of information upon request; or
- it has not ratified the multilateral OECD Convention on Mutual Administrative Assistance in Tax Matters of 25 January 1988,
as amended by the 2010 Protocol or, if the tax jurisdiction does not have full state sovereignty, has not acceded to the
multilateral OECD Convention on Mutual Administrative Assistance in Tax Matters of 25 January 1988, as amended by the
2010 Protocol. However, transparency is sufficiently guaranteed if the tax jurisdiction ensures the effective exchange of
information upon request as well as the automatic exchange of information with Germany and all other Member States of
the European Union on the basis of applicable agreements.
A state or territory is deemed to engage in unfair tax competition if it applies rules, including laws, regulations and
administrative practices in the field of tax law that result in significantly lower effective taxation, including zero taxation,
compared to the levels of taxation normally applied in that state or territory. Such arrangements will be regarded as unfair tax
competition in particular if they:

- grant advantages exclusively to non-residents or for transactions with non-residents;

- grant benefits that are not available to the domestic economy of the non-cooperative tax jurisdiction so that they have no
impact on its tax base;
- decouple benefits from an actual economic activity or presence in the tax jurisdiction granting such benefits and the tax
benefits are granted even in the absence of such activity or presence;
- deviate from internationally generally accepted principles, in particular those of the OECD, in the determination of profits in
the case of activities within a multinational group of companies; or
- are non-transparent, in particular not generally foreseeable or sufficiently documented, including cases in which there is a
deliberate deviation from the rules in the handling by the administrative authorities in order to grant advantages not provided
for by law.
For a tax jurisdiction that has no corporate tax system or has a corporate tax system whose application results in an effective
corporate tax rate of zero or close to zero (zero-rate jurisdiction), regulations as well as structures are to be considered unfair
tax competition if they have the objective of attracting profits that do not reflect real economic activity in the tax jurisdiction.
A state or territory is deemed non-cooperative if it did not oblige itself to implement the BEPS minimum standards (i.e. BEPS
Actions 5, 6, 13 and 14). Further, a state or territory is also not considered cooperative if:

- it does not have a mechanism with Germany as well as all other Member States to exchange country-by-country (CbC)
reports; or

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- deviates significantly from the minimum standard of the OECD/G20 BEPS Project, Action Item 13 “Transfer Pricing
Documentation and Country-by-Country Reporting” with respect to confidentiality, data protection safeguards, appropriate
use or timely and sufficient exchange of information on CbC reports.
The StAbwG provides for an authorization of the Ministry of Finance to issue a decree with a list of states or territories that
are considered uncooperative based on the mentioned criteria. On 23 December 2021, a decree listing states and territories
that are considered uncooperative was published in the Official Gazette. The decree lists the following states and territories:
American Samoa, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, US Virgin Islands and Vanuatu.
Taxpayers that hold participations in entities that are resident in a non-cooperative state or territory or engage in business
relations involving non-cooperative states or territories will be subjected to different measures ranging from the denial of
deductibility of business expenses, the denial of withholding tax relief under tax treaties, stricter application of the CFC rules,
a non-application of the domestic participation exemption and extended information requirements and cooperation obligations.
These measures apply with effect from 1 January 2022. In respect of jurisdictions that are not listed on the official EU list of
non-cooperative countries and territories for tax purposes as per 1 January 2021, such measures may apply with effect from 1
January 2023.
Section 8 of the StAbwG denies the deductibility of expenses related to business transactions involving non-cooperative
states and territories unless the corresponding income is subject to taxation based on the unlimited or limited tax liability rules
included in the KStG or EStG.
If a resident taxpayer holds a participation in a CFC that is resident in a non-cooperative state or territory, the CFC that is
subject to low taxation will be subject with all its income to CFC taxation regardless of the definition of passive income for the
purposes of the CFC rules (section 9 of the StAbwG).
Section 10 of the StAbwG provides for an extended limited tax liability for taxpayers resident in non-cooperative states or
territories who derive income from financing transactions, insurance or reinsurance services, other services or from trade with
goods or services that would be subject to taxation in case of unlimited tax liability. The gross amount of such income is subject
to a withholding tax of 15%.
In addition, any dividends or other profit distributions made by corporate entities resident in an uncooperative state or territory
will be taxed in Germany without benefitting from the domestic participation exemption or any reduced withholding tax rates
under a given tax treaty (section 11 of the StAbwG). The same applies to capital gains from the sale of shares in a corporate
entity resident in an uncooperative state or territory.
Further, taxpayers with business relations involving uncooperative states and territories are subject to extended information
requirements and cooperation obligations (section 12 of the StAbwG). In particular, taxpayers must provide the following
information:

- presentation of the business relationships, overview of the type and scope of these business relationships, in particular,
purchase of goods, services, loan relationships, insurance relationships, transfer of use as well as cost allocations;
- contracts and agreed contractual conditions on which the business relations are based and their changes within the
business year;
- a list of agreements relating to intangible assets, including cost allocation agreements and research service and licence
agreements, and a list of the intangible assets that the taxpayer uses or transfers for use in the context of the business
relationships concerned;
- the functions performed and risks assumed by the parties involved in the business relationships as well as their changes
within the business year;
- the significant assets used;
- the business strategies chosen;
- the market and competitive conditions relevant to taxation; and
- the individuals who are directly or indirectly partners or shareholders of a company in the non-cooperative tax jurisdiction
with which the taxpayer has a business relationship; this does not apply if substantial and regular trading in the main class
of shares of the foreign company takes place on a stock exchange in an EU Member State or in an EEA country, or on a
stock exchange which is authorized in another state by the Federal Financial Supervisory Authority.

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The required information must be prepared and submitted no later than 1 year after the end of the calendar year or business
year concerned to the locally competent tax authorities. Upon request by the tax authorities, taxpayers must prepare and
submit such information within a shorter time, for example, 30 or 60 days. If taxpayers fail to provide the required information,
there is a legal assumption that there has been income derived from transactions involving non-cooperative state or territories
that has not been declared yet, or that derived income has been declared but the actual income is higher than what has been
declared. In such case, the tax authorities are entitled to estimate the actual income of taxpayers and levy a monetary fine.
Before 1 July 2021, the Ordinance on the combat of tax evasion (Steuerhinterziehungsbekämpfungsverordnung) provided for
a specific anti-abuse measure targeted at uncooperative states and territories. States or territories were generally considered
uncooperative if, regardless of whether a treaty existed between Germany and that state or territory, there was no exchange of
information between Germany and that state or territory in the manner envisaged by article 26 of the OECD Model Convention
(2005), and that state or territory did not express a willingness to exchange information. The Ministry of Finance had issued
a first decree, of 5 January 2010 (IV B 2 – S 1315/08/10001-09), stipulating that at that time no states or territories were
considered uncooperative.
The Ordinance required companies to provide detailed information on business relations with unrelated parties situated in an
uncooperative state or territory, such as the underlying contracts and terms of agreement, the intangible assets used in respect
of the business relation; a functional analysis of the functions performed and risks assumed by the involved parties, assets
used and business strategies chosen, and information on any individual shareholdings held, directly or indirectly, in the foreign
business partner. The taxpayer had to create such documentation within a narrow time frame and had to be able to submit it
within 30 days upon request by the tax authorities. However, if the turnover with respect to the supply of goods and services
for such business relations did not exceed EUR 10,000 per business year and per business partner, the documentation
requirements did not apply.
In addition, if there were indications or proof that a company had business relations with financial institutions situated in an
uncooperative state or territory, the company was obliged, upon request by the tax authorities, to authorize the tax authorities
legally to enforce possible claims for disclosure and information against such credit institutions in the name of the company. If
a company failed to comply with these requirements, deductibility of business expenses incurred in relation to such business
relations would be denied.
The Ordinance further provided that companies had to prepare transfer pricing documentation for all transactions with related
parties situated in an uncooperative state or territory within a narrow time frame and had to be able to submit it within 30 days
upon request by the tax authorities. If companies failed to comply with these requirements, the application of the domestic rules
regarding the 95% participation exemption on capital gains (see section 1.7.5.) and dividends from qualifying shareholdings
(see section 6.1.3.) was denied.
In addition, the Ordinance denied relief from withholding tax under tax treaties or the Parent-Subsidiary Directive (2011/96), or
refund of withholding tax under domestic law (see section 7.3.3.3.1.), for foreign companies resident in uncooperative states or
territories unless the foreign company disclosed the name and residence of any direct or indirect individual shareholder with a
shareholding exceeding 10%.

10.6.7. Change-in-ownership rule

Corporate acquisitions that result in a change in ownership are subject to limitations regarding the deduction of losses (see
section 1.8.1.).

11. Taxation of Special Types of Entity

11.1. Holding company
A special type of holding company with a specific tax treatment does not exist in Germany. A holding company can have any
company form (AG, GmbH, partnership) and is taxed according to the normal rules applicable to the chosen company form.
A holding company can take part in group taxation (see section 8.).

11.2. Partnership
11.2.1. General partnership
The general partnership (OHG) and limited partnership (KG) (see Business and Investment - Country Surveys) are transparent
entities for tax purposes. The income of the partnership is taxed in the hands of the partners. The income is subject to

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individual income tax if the partner is an individual and to corporate income tax if the partner is a company. A non-resident
partner is deemed to have a permanent establishment in Germany if the partnership conducts its business through a German
permanent establishment.
The partnership itself is liable for business tax.
Capital gains derived by a company from the sale of a partnership interest are subject to corporate income tax and business tax
in the normal manner. Such gains derived by an individual partner are subject to individual income tax in the normal manner;
the gains are not subject to business tax.
For tax purposes, any payments for services provided by the partners represent part of the partnership income. For example,
rent paid to a partner for immovable property let to the partnership is added back to the taxable partnership income and treated
as business income at the level of the partner, not as rental income. The immovable property is part of the partner’s business
property and, thus, subject to the rules for business property, e.g. any capital gain is taxable (gains from the sale of private
property are taxable only within the 10-year speculative period). The same holds for interest paid to the partners: it is part of the
business income and not capital investment income.
Apart from characterizing the income as business income at the level of the partner, these rules have the additional effect that
the payments are subject to business tax together with the rest of the business profit. The partners must establish “special
balance sheets” (Sonderbilanzen) in which the deemed business property is recorded.
If a German partnership has foreign partners, this can result in a treaty characterization conflict if the state of residence wants
to tax. For example, in the case of interest received from the German partnership, the residence state would tax the income as
interest income, whereas the German tax authorities would treat the interest as business income that is taxable in Germany.
Thorough tax planning is therefore necessary if partnerships are used in an international context.
For tax years starting from 1 January 2022, partnerships may opt to be treated as non-transparent and taxed as corporations. If
a partnership opts to be taxed as such, the partners will correspondingly be taxed as shareholders (section 1a of the KStG).
In order to exercise the option to be taxed as a corporate entity, a partnership must file a respective request with the competent
tax office at the latest 1 month before the beginning of the tax year from which the partnership wants to be taxed as corporate
entity. The option to be taxed as a corporate entity is not available to investment funds and non-resident partnerships that are,
after exercising the option, resident in a jurisdiction where they are not subject to an unlimited corporate tax liability that is
comparable to the unlimited corporate tax liability in Germany.
The change to be taxed as corporate entity is deemed a change of legal form within the scope of section 1(3) of the UmwStG
and the rules contained in sections 1 and 25 of the UmwStG are applied respectively (see section 9.1.2.). A partnership that
opted to be taxed as a corporate entity may also opt to be taxed again as partnership. Such change is also deemed a change
of legal form within the scope of the UmwStG, i.e., within the scope of section 1(1)1 No.2 of the UmwStG.
A change back to taxation as partnership also occurs without requesting it in the case that the penultimate partner of the former
partnership leaves the former partnership. In that case the corporate entity is deemed to be dissolved.

11.2.2. Limited partnership

See section 11.2.1.

11.2.3. Partnership limited by shares

The limited partnership with shares (KGaA) is a hybrid entity between a partnership and a company (see Business and
Investment - Country Surveys). It has a general partner with unlimited liability. The capital with limited liability is held by
shareholders.
For tax purposes, only the income attributable to the shareholders is subject to corporate income tax according to the normal
rules. The profit share of the general partner, including any management fees paid to him, is deductible at the level of the KGaA
(section 9(1) No. 1 of the KStG) and taxed in his hands.

11.2.4. Other
A special type of partnership is the silent partnership. It has similarities to a profit-sharing bond. The silent partner contributes
capital to a business and receives a share of the profit in return (see Business and Investment - Country Surveys).
From a tax point of view, a distinction is made between a typical and a non-typical silent partnership. The typical silent
partnership is similar to a profit-sharing bond. It usually entitles the silent partner to a certain percentage of the profit. For
corporate income tax purposes, the payments to the silent partner are tax deductible for the paying company. The typical silent

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partner can participate in the company’s losses, but not in the hidden reserves. Upon termination of the silent partnership, the
silent partner gets his capital contribution back, but does not participate in any increase in the value of the company.
The non-typical silent partnership is treated as a normal commercial partnership for tax purposes (see section 11.2.1.). Thus,
payments to the partner are not tax deductible. A silent partnership is deemed non-typical if the partner has an entrepreneurial
risk and an entrepreneurial initiative. The partner is deemed to participate in the risk of the company if he participates in the
company’s profit and loss and if he is entitled to a share in the hidden reserves. The entrepreneurial initiative is expressed
either in a certain participation in the decision-taking or in the exercise of the controlling rights of the silent partner.
Companies are only able to offset losses derived from silent partnership interests (both atypical and typical) in companies
against profits from the same investment (section 15(4) of the EStG).

11.3. Economic interest grouping

11.3.1. General
A European economic interest grouping (EEIG) (see Business and Investment - Country Surveys) is not subject to corporate
income tax. It is transparent from a tax point of view. Income derived through the EEIG is taxed at the level of the members.
Germany basically treats an EEIG as a general partnership (OHG). As the primary purpose of an EEIG is to support the activity
of its members, it does normally not have the purpose to generate profits itself. It is therefore normally not deemed to generate
business income as a normal commercial partnership.
If the income derived through the EEIG is characterized as business income, it is subject to business tax. In contrast to other
partnerships (see section 11.2.1.), the EEIG is not subject to business tax; rather, the members themselves are jointly liable for
the tax (section 5(1) of the GewStG).
As the EEIG can hold immovable property, it may be subject to the real estate transfer tax (see section 14.2.1.).
The EEIG can be liable to VAT if it carries out taxable transactions (see section 13.), even though the EEIG’s purpose might not
be profit-oriented.

11.3.2. International tax aspects

As a transparent entity, the EEIG itself does not normally benefit from tax treaty provisions. The treaties apply to the members
of the EEIG.
A non-resident member of a German EEIG is taxed on his German-source income according to the normal rules applicable
to non-residents (see section 7.3.). A resident member of a foreign EEIG is also taxed according to the normal rules, i.e. his
worldwide income is generally taxable in Germany unless a treaty or domestic law provides otherwise (see section 7.2.).

11.4. Association and cooperative

11.4.1. Association
Associations (see Business and Investment - Country Surveys) are exempt to the extent they pursue charitable, religious or
benevolent purposes (section 5(1) No. 9 of the KStG) or if they engage in certain agricultural activities (section 5(1) No. 14
of the KStG). They are also exempt if their purpose is to provide (a) common use of agricultural and forestry equipment, (b)
services in connection with agricultural and forestry businesses, (c) processing of agricultural and forestry products produced
by the members, or (d) consulting for the production or use of agricultural and forestry products (section 5(1) No. 14 of the
KStG). The tax exemption does not apply if more than 10% of the association’s income is derived from non-exempt activities.
If the association carries on a commercial activity (for definition, see section 11.5.), it is subject to corporate income tax at the
regular rate (see section 1.10.1.) on the income derived from the commercial activity, unless the activity is deemed to serve tax-
exempt purposes (Zweckbetrieb) (section 23 of the KStG). Such non-taxable commercial activities include organizing a sports
event by a sports club if the income, including VAT, does not exceed EUR 45,000 per year (EUR 35,000 before 2021); the sale
of food and beverages is not exempt.
If an association is taxable on its commercial activity, the income does not necessarily represent business income. The type of
income is determined according to the Income Tax Law (section 8 of the KStG in connection with section 2 of the EStG) and
can be of any type, e.g. capital investment income (dividends, interest) or rental income. As a result, an association can benefit
from the tax-free allowance for capital investment income equal to EUR 801 (section 20(9) of the EStG), which is usually
granted to individuals. The income is characterized as business income if the activity is a proper business activity (e.g. running
of a club restaurant) or if the activity has an extent which necessitates bookkeeping.

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A special tax allowance of EUR 5,000 applies to associations (section 24 of the KStG). If the association’s activity is in
agriculture or forestry, the allowance is EUR 15,000 and applies in the year the association was founded and the following 9
years (section 25 of the KStG).

11.4.2. Cooperative
Cooperatives (see Business and Investment - Country Surveys) are generally taxable as companies. They are subject to the
regular corporate income tax rate (see section 1.10.1.).
Reimbursements to members are deductible as business expenses to the extent they stem from the business made with the
members. Therefore, the cooperative’s total profit must be split on the basis of the turnover realized with members and non-
members. Only the proportion that can be attributed to the members is deductible upon reimbursement (section 22 of the
KStG).
Other payments to the members are taxed as regular dividends, i.e. the cooperative must withhold tax on the dividend. The
members benefit from a withholding tax credit (see section 6.).
Cooperatives are exempt if their activity consists of providing the common use of agricultural and forestry equipment, services
in connection with agricultural and forestry businesses, processing of agricultural and forestry products produced by the
members, or consulting for the production or use of agricultural and forestry products (section 5(1) No. 14 of the KStG). The
exemption does not apply if more than 10% of the cooperative’s income is derived from non-exempt activities (see section
11.5.).
A tax allowance of EUR 15,000 applies if the cooperative is engaged in agriculture or forestry. The allowance applies in the
year the cooperative was founded and the following 9 years (section 25 of the KStG).
Cooperatives cannot take part in a fiscal consolidation (see section 8.), either as controlling parent or as controlled company.

11.5. Non-taxable entities

Section 5 of the Corporate Income Tax Law provides a tax exemption for certain entities. The most important are:

- a number of public enterprises, including the Federal Bank, certain state banks that serve mainly to promote economic
development, and state lotteries;
- organizations with exclusively religious, benevolent or charitable purposes, including registered associations (see section
11.4.1.), estates and trusts;
- political parties;
- social welfare funds (with some limitations);
- non-public and non-commercial professional organizations (e.g. trade unions, employers’ organizations);
- cooperatives that provide housing for their members (with certain limitations) (see section 11.4.2.);
- agricultural cooperatives under certain conditions (see section 11.4.2.); and
- certain other groups that provide old-age benefits to their members comparable to those under the social insurance law.
The tax exemptions do not apply to foreign organizations. According to the Federal Tax Court, this does not violate the non-
discrimination clauses in tax treaties or the principles of the European Union.
If an exempt organization derives income that is subject to withholding tax (e.g. dividends), the withholding tax is not refunded
to the exempt organization. This means that, in such a case, it is effectively subject to German tax.
Exempt organizations are also subject to tax to the extent they carry on a commercial activity (wirtschaftlicher
Geschäftsbetrieb). A commercial activity is an independent, continuing activity with the purpose of deriving income or other
economic advantages (section 14 of the AO). The intention to derive profits is not a prerequisite for a commercial activity.
Examples of a commercial activity include the organizing of seminars for consideration, the sale of food and beverages, and
advertising.
For details on the exemption of associations, see section 11.4.1. and for cooperatives, see section 11.4.2.

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11.6. Other
A special regime exists for real estate investment trusts (REITs). REITs are German-resident stock companies investing in
commercial real estate. REITs are required to be listed on a recognized EU or EEA stock exchange within 3 years of being
established. To qualify as a REIT, the company’s business must be directed at acquiring, holding, administering and disposing
of real estate and real estate usage rights. Its main objective may be defined as long-term real estate holding and leasing.
Carrying out real estate-related ancillary services is possible only to a limited extent, where necessary to conduct the REIT’s
business. The minimum capital requirement for a REIT is EUR 15 million.
REITs must distribute at least 90% of their net income to their shareholders within 13 months of the end of the accounting
period in which the income was earned. REITs are exempt from corporate income tax and the municipal business tax,
irrespective of whether the income stems from real estate-related sources or not. In the hands of resident shareholders, any
distributions by the REIT are taxable, regardless of whether they are paid out of capital gains or ordinary income. Distributions
are treated as income from investment for individual shareholders and as business income for corporate shareholders. Neither
the partial-income system for individual shareholders, under which only 60% of dividends received are taxable, nor the 95% tax
exemption for dividends derived by corporate shareholders apply. Any capital gains generated on the sale of shares in a REIT
out of business assets are also taxable. Distributions to resident shareholders are subject to a 25% withholding tax (plus the
5.5% solidarity surcharge).

12. Taxation of Special Types of Activity

12.1. Tonnage tax
Companies whose place of management is situated in Germany may be granted the right to report, for corporate income
tax and business tax purposes, their taxable income from the operation of trading ships in international traffic as a certain
percentage of the tonnage of such ships (section 5a of the EStG). The election generally must be made in the year of
acquisition or manufacturing (commission) of the ship. The regime may be terminated by the taxpayer only after the first 10
years; if the taxpayer elects to terminate the regime, it will not be available for the next 10 years.
From the financial year in which the election was made, taxable income must be reported as follows:
Net tonnage EUR per day per ship per 100 tonnes
Up to 1,000 0.92
1,001 – 10,000 0.69
10,001 – 25,000 0.46
Over 25,000 0.23

The exploitation of the ship must take place from Germany. The regime is also available for ships used mostly outside the
German territorial waters in towing or salvaging services, for prospecting natural resources or for measuring energy deposits
under the seabed.

12.2. Bank levy

In 2011, a bank levy was introduced in Germany for all credit institutions within the meaning of section 1(1) of the Banking Act
with a permission under the Act to carry out regulated banking activities that are subject to the Credit Institution Accounting
Regulation. Other businesses that are classified as financial services institutions, financial enterprises or insurance companies
are not subject to the bank levy. Further, particular institutions pursuant to section 2(1) of the Banking Act, development
facilities according to section 5(1) No. 2 of the KStG, housing corporations with a saving mechanism, EU passported branches
pursuant to section 53b of the Banking Act and bridge banks are also not subject to the bank levy.
The amount of the bank levy depends on the size of the bank and its degree of interconnectedness within the financial system.
The bank levy must be calculated and is collected per single entity. The bank levy is payable on 30 September of each year.
The basis for the bank levy is the sum of the relevant liabilities as shown on the balance sheet of the previous financial year
and the sum of the off balance sheet derivatives. Liabilities relating to customer deposits and equity capital are excluded from
the basis of the bank levy.
The bank levy is levied at the following progressive rates on the relevant liabilities:

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Sum of relevant Rate

liabilities (billion EUR) (%)
Up to 0.300 0
0.300 – 10 0.02
10 – 100 0.03
100 – 200 0.04
200 – 300 0.05
Over 300 0.06

In addition, the sum for the off balance sheet derivates is subject to the bank levy at a rate of 0.0003%.
The maximum amount of the annual bank levy payable is limited to 20% of the bank’s annual profits. In turn, banks must pay a
minimum bank levy in the amount of 5% of their regular annual contribution to the bank levy. The bank levy is not deductible for
corporate income tax purposes.

13. Value Added Tax

13.1. General
The German tax on turnover (Umsatzsteuer, USt) is structured as a value added tax. It is also known as Mehrwertsteuer
(MWSt). It is the general tax on consumption of goods and services in Germany.
VAT is governed by VAT Act 2005, as amended (Umsatzsteuergesetz, UStG) and the VAT Implementing Ordinance
(Umsatzsteuer-Durchführungsverordnung, UStDV). The tax authorities have issued numerous public notices on VAT
(Umsatzsteuer-Anwendungserlass, UStAE).
“Germany” refers to the territory of the Federal Republic of Germany, with the exception of Büsingen (the German enclave in
Switzerland), the Island of Helgoland, the free ports (Bremerhaven and Cuxhaven), certain frontier waters and shallows, and
German ships and aircraft (i.e. such vessels registered in Germany) within the maritime territory or airspace not forming part of
any customs territory.
Until 31 December 2006, the provisions of the UStG were based on the Sixth VAT Directive (77/388), as amended, inter alia,
by the Directive on Abolition of Fiscal Frontiers (91/680), which supplemented the common system of VAT with a view to
the abolition of the fiscal frontiers within the European Union, with effect from 1 January 1993. Abolition of the internal fiscal
frontiers had the effect that the customs authorities no longer supervise and control movements of goods between the Member
States of the European Union. From 1993, controls at the internal borders are limited to the occasional tracing of drugs,
explosives and other prohibited goods. The 1993 changes affected movements of goods between the EU Member States only,
not movements of goods between EU Member States and non-EU countries, which are still treated as imports and exports.
On 1 January 2007, the Sixth VAT Directive (77/388) was replaced by VAT Directive (2006/112). The replacement Directive did
not make substantive changes to the Community VAT system.
On 20 February 2008, the following Directives were published in the Official Journal of the European Union:

- Directive 2008/8 as regards the place-of-supply rules for services; and

- VAT Refund Directive (2008/9) laying down detailed rules for refunds of VAT to taxable persons resident in another Member
State.
Both Directives amend VAT Directive (2006/112) on the common system of value added tax. Germany transposed these
amendments into national law with effect from 1 January 2010.

13.2. Taxable persons

Instead of the Community term “taxable person”, the German UStG uses the term “entrepreneur”, as defined in section 2 of the
UStG. That term is also used in this section. The term “entrepreneur” used for VAT purposes should not be confused with the
common understanding of that term.

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13.2.1. General
An entrepreneur is any person (individual, entity or other form of business organization) that carries on a commercial or
professional activity in an independent manner (section 2 of the UStG). An activity is regarded as commercial or professional
if it is carried out on an ongoing basis with the intention to yield receipts (not necessarily profits). The condition that the activity
must be carried on independently excludes, for example, employees from the definition of entrepreneur.
The tax authorities take the position that the mere acquisition and holding of shares is not a commercial activity (section 18 of
the UStR). Holding companies whose only activity is the holding of shares are therefore not considered to be entrepreneurs.
For the purposes of VAT, no distinction is made between resident and non-resident entrepreneurs. Non-resident entrepreneurs
who make taxable supplies in Germany are subject to VAT in the same way as resident entrepreneurs. However, in respect of
services supplied by non-resident entrepreneurs, German VAT is generally collected under a special procedure (the reverse
charge mechanism, see section 13.4.1.2.).
Any person (including individuals) who makes an intra-Community acquisition of a new means of transport (see section 13.3.2.)
is treated as an entrepreneur with regard to that transaction only.
Public bodies are entrepreneurs only to the extent that they supply goods and services in a division engaged in a commercial
activity, such as the operation of car parks, swimming pools, etc. Public bodies include, in particular, the federal government
and the governments of the federal states, municipalities and state universities. In so far as they act as “public authorities”,
public bodies are not treated as entrepreneurs.

13.2.2. Groups
If a subsidiary is financially, economically and organizationally controlled by its parent company, the subsidiary and parent
company are treated as a single entrepreneur for VAT purposes (VAT group) under the doctrine of Organschaft. For the
conditions under which an Organschaft exists, see section 8.1. Although the controlling company can also be established
outside Germany, the effects of VAT grouping are limited to Germany. For example, only the German subsidiaries of a non-
resident parent company can form a VAT group. A profit-and-loss pooling agreement (see section 8.1.) is not required for a VAT
group.
The effects of VAT grouping are twofold. First, the controlled companies cease to be independent entrepreneurs. They are
treated as business divisions of the controlling company, which is the sole entrepreneur and, for VAT purposes, all transactions
of the controlled companies are attributed to the controlling company. The controlling company must file a single VAT return
for the whole group. Second, all transactions between the members of the group are treated as internal business transactions,
which are outside the scope of VAT.

13.3. Taxable events

The following transactions are taxable:

- supplies of goods and services within German territory (see section 13.1.) by entrepreneurs in the course or furtherance of
their business (see section 13.3.1.);
- intra-Community acquisitions of goods made in Germany by entrepreneurs in the course or furtherance of their business
(see section 13.3.2.);
- the importation of goods (from outside the European Union) into Germany (see section 13.3.2.); and
- intra-Community acquisitions in Germany of a new means of transport by any person (see section 13.3.2.).
13.3.1. Supplies of goods and services
Supply of goods is defined as a transaction through which an entrepreneur enables another person to use goods economically
in his own name; the transfer of legal ownership is not a prerequisite for a supply (section 3(1) of the UStG). The concept of
supply of goods includes the provision of goods by entrepreneurs to their employees and the free-of-charge provision of goods
to other persons, provided that the entrepreneurs were entitled to deduct the VAT on the purchase of the goods (section 3(1b)
of the UStG).
Also the withdrawal by entrepreneurs of goods from their business, for example, for their private purposes, is deemed
to constitute a supply of goods (section 3(1b) of the UStG). However, the Ministry of Finance issued a decree (III C 2-S
7109/19/10002:001, of 18 March 2021) allowing retailers to make VAT-exempt donations in kind to tax-privileged organizations.

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Accordingly, in order to enable retailers that were unable to sell their seasonal goods due to restrictions in connection with the
COVID-19 pandemic to make VAT-exempt donations in kind to tax-privileged organizations, the VAT liability for donations in
kind made between 1 March 2020 and 31 December 2021 is waived.
The transfer by an entrepreneur of goods belonging to his business from one Member State to the other is also treated as a
supply of goods, unless the transfer is only for temporary purposes.
Supplies of goods in the framework of which the goods are transported to a place outside the European Union, are exports.
Supplies of goods in the framework of which the goods are transported to an entrepreneur in another Member State, are intra-
Community supplies. Exports and intra-Community supplies of goods are generally zero rated (see section 13.7.).
The supply of services is any transaction for consideration, including electronically supplied services, that is not a supply of
goods (section 3(9) of the UStG). It also includes the use of services for non-business purposes or for the private purposes of
the entrepreneur or his employees, if the entrepreneur was entitled to deduct the VAT on the purchase of the services (section
3(9a) of the UStG). Private use by entrepreneurs or their employees of goods that form part of the business is a separate
taxable event (see section 13.3.).
The transfer of an entire business or business division as a going concern does not constitute a supply of goods and services
(section 1(1a) of the UStG).
For exports and intra-Community acquisitions of goods, see section 13.7.

13.3.2. Importation and intra-Community acquisitions

The term “importation” refers only to the situation in which goods enter into the territory of the European Union from a place
outside the European Union, and are brought into free circulation in the European Union. The taxable event of importation
does not occur if the goods, on entry into the European Union, are stored in a bonded warehouse, or otherwise remain under
customs control. In that case, the release or withdrawal of the goods from the bonded warehouse or other customs regime
constitutes the importation of goods.
An intra-Community acquisition takes place where goods other than new means of transport are transported from one EU
Member State to another in the framework of a supply of goods, provided that:

- the customer is either an entrepreneur who purchases the goods for the purposes of his business, or a non-taxable legal
person, which purchases the goods for non-business purposes (see below);
- the supply is made by an entrepreneur for consideration in the course or furtherance of his business; and
- the supply is not exempt from VAT under the arrangements for small entrepreneurs (section 1a of the UStG) (see section
13.8.).
However, no intra-Community acquisition takes place if the customer is:

- an entrepreneur exclusively making exempt supplies (see section 13.8.);

- not subject to VAT under the arrangements for small entrepreneurs (see section 13.8.);
- a farmer and is taxed under the arrangements for flat-rate taxation (see section 13.6.);
- a non-taxable legal person, who purchases goods for non-business purposes,
provided that the above customers have not purchased goods from another Member State for more than EUR 12,500 in the
preceding or current calendar year, and they have not opted for taxation of their intra-Community acquisitions of goods (section
1a(3) of the UStG). With effect from 1 January 2011, the use of a VAT identification number by the above-mentioned customers
is deemed to constitute the renunciation of the application of the acquisition threshold of EUR 12,500 (section 1a(4) of the
UStG).
An intra-Community acquisition also takes place as a result of a taxable transfer by an entrepreneur of goods from one Member
State to the other (section 1a(2) of the UStG), if that transfer is treated as a supply of goods.
The acquirer must report the German VAT due on the intra-Community acquisition through his periodic VAT return and, if he is
entitled to deduct input tax, the acquirer may deduct the same amount as input VAT through the same return.
Special rules apply where the goods are new means of transport or goods subject to excise duty in the Member State of
destination (mineral oil, alcoholic beverages and manufactured tobacco; section 1a(5) of the UStG).

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Under section 1b of the UStG, the purchase of a “new means of transport” that is transported to another Member State in the
framework of the supply qualifies as an intra-Community acquisition, regardless of the VAT status of the customer, i.e. even if
the customer is a private individual.
The term “new means of transport” includes motorized cars, trucks, motorcycles, caravans and specific aircraft and ships
(section 1b of the UStG). Land vehicles are considered “new” if they have not travelled more than 6,000 kilometres or have not
been taken into use more than 6 months earlier. Ships are considered new if they have not sailed more than 100 hours or have
not been taken into use more than 3 months earlier. Aircraft are new if they have not flown for more than 40 hours or have not
been taken into use more than 3 months earlier.

13.4. Place of taxation

Transactions are subject to German VAT only, if the supply is deemed to be made in Germany, i.e. the “place of supply” is
within the VAT territory of Germany (see section 13.1.).

13.4.1. Place of taxation of domestic events

The domestic events covered by this subsection are supplies of goods and services. Those categories of transactions are
subject to different place-of-supply rules, which, in both cases, apply for VAT purposes only.
13.4.1.1. Place of taxation of supplies of goods
There are three main rules for determining the place of supply of goods:

- if the goods are transported, the supply is deemed to be made at the place of departure of the goods (section 3(6) of the
UStG);
- if the goods are not transported, the supply is deemed to be made at the place where the goods are located at the time of
supply (section 3(7) of the UStG); and
- if the goods are installed or assembled by or on behalf of the supplier, the supply is deemed to be made at the place where
installation or assembly takes place.
In addition, special rules apply to goods supplied on board a ship, aircraft or train during an intra-Community passenger
transport, the supply of gas and electricity, and cross-border supplies of goods within the European Union to unregistered
customers (distance selling).
Distance selling relates to supplies of goods that, in the framework of the supply, are transported from one Member State to
the other by or on behalf of the supplier and are supplied to customers, who do not effect an intra-Community acquisition,
i.e. generally unregistered customers (see section 13.3.2.). In principle, those supplies are deemed to be made at the place
where transport begins. However, where, in the preceding or current calendar year, the total value of the goods supplied
to unregistered customers in a specific Member State has exceeded the threshold (“distance selling threshold”) set by that
Member State, the place of supply shifts to the Member State of destination of the goods (section 3c of the UStG). Below the
distance selling threshold, the place of supply also shifts to the customer’s Member State if the supplier opts for taxation there
(section 3c(4) of the UStG).
The distance selling threshold for goods supplied to German customers is EUR 100,000. The threshold does not apply to
goods subject to excise duty if that duty has been paid in the Member State or origin (those goods are subject to VAT in the
Member State of destination under all circumstances) (section 3c(5) of the UStG).
Supplies of new means of transport are excluded from the distance selling arrangements because those transactions give rise
to an intra-Community acquisition under all circumstances (see section 13.3.2.).
13.4.1.2. Place of taxation of services
The main rule is that services are deemed to be supplied at the place where the service provider is established or has a fixed
establishment from where the service is provided (section 3a(1) of the UStG). With effect from 1 January 2010, this main rule
is supplemented by a rule on the supply of services between taxable persons (B2B). Accordingly, services between taxable
persons are deemed to be supplied at the place where the customer is established or has a fixed establishment (section 3a(2)
of the UStG) unless services are received for non-business-related purposes.
The following services are deemed to be supplied at the place where they are actually performed (section 3a(3) of the UStG):

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- cultural, artistic, scientific, educational, sporting, entertainment and similar services, including the services of the promoters
(i.e. the organizers). However, with effect from 1 January 2011, this rule is limited to supplies to non-taxable persons;
- supply of food and beverages for enjoyment on the spot, unless supplied on board of transport vehicle (vessel, plane or
train) during an intra-Community transport (section 3a(2)(1) of the UStG);
- work on movable goods and valuation of such goods;
- short-term hiring of means of transport is deemed to be supplied at the place where the vehicle is actually provided to the
customer; a renting period of less than 30 days (90 days for water vehicles) is treated as short-term;
- services relating to immovable property are deemed to be supplied at the place where the immovable property is located;
and
- services in respect of admission to cultural, artistic, sporting, scientific, educational, entertainment or similar events, such as
fairs and exhibitions, supplied to taxable persons.
Before 1 January 2010, work on movable goods and valuation of such goods were also deemed to be supplied at the place
where they were actually performed. However, where the customer received those services under a VAT identification number
issued to him in another EU Member State, the place of supply shifted to that Member State, unless the goods remained in the
Member State where the services were provided.
Intermediary services are deemed to be supplied at the place where the underlying supply is deemed to be made for VAT
purposes unless the customer is a taxable person (section 3a(3) of the UStG). Before 2010, where the customer received
those services under a VAT identification number issued to him in another EU Member State, the place of supply shifted to that
Member State.
Provided that the customer is resident outside the European Union and not an entrepreneur, the following services are deemed
to be supplied at the place where the customer is resident (section 3a(4) of the UStG):

- the granting, transfer and use of patents, copyrights, trademarks and similar rights, or the waiver of the entitlement to use
such rights;
- services concerning advertising and public relations;
- legal, economic and technical consultancy services, e.g. by lawyers, tax advisers, accountants, engineers, members of
supervisory boards, interpreters;
- data processing;
- supply of information, including commercial know-how and expertise;
- financial and insurance services;
- supply of labour;
- the waiver, in whole or in part, of the right to exercise commercial or professional services;
- the leasing of movable goods (except means of transport);
- telecommunications services (until 31 December 2014);
- radio and television broadcasting services (until 31 December 2014); and
- electronically supplied services (until 31 December 2014).
The transport of persons is deemed to be carried out at the place where the transport is exercised, having regard to distances
covered (section 3b(1) of the UStG). The same rule applies to the transport of goods, if the customer is not an entrepreneur.
An intra-Community transport of goods is normally deemed to be carried out at the place of departure (section 3b(3) of the
UStG), unless the customer is an entrepreneur, in which case it is deemed to be carried out at the place where the service
provider is established.
Before 1 January 2010, the transport of goods and persons was deemed to be carried out at the place where the transport was
physically carried out, having regard to distances covered. However, intra-Community transport of goods was normally deemed
to be carried out at the place of departure (section 3b(3) of the UStG), unless the customer received those services under a

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VAT identification number issued to him in another EU Member State, in which case the place of supply shifted to that Member
State.
Electronically supplied services provided by entrepreneurs resident outside the European Union to non-entrepreneurs resident
in Germany are deemed to be supplied in Germany (section 3a(5) of the UStG). With effect from 1 January 2015, electronically
supplied services as well as telecommunications services and radio and television broadcasting services supplied to non-
taxable persons resident in Germany are deemed to be supplied in Germany regardless of whether the supplier is established
within or outside the European Union. With effect from 1 January 2019, however, a simplification measure applies to intra-
EU telecommunication, broadcasting and electronically supplied services. Taxable persons not exceeding an annual total
value of EUR 10,000 in connection with the supply of such services may continue to apply the VAT rules of their country of
establishment.
Where services are deemed to be supplied in Germany and the customer is an entrepreneur established or registered in
Germany, the services are subject to the reverse charge mechanism, provided that the service provider is neither established
in Germany nor has a fixed establishment there (i.e. the service providers is a “non-resident entrepreneur”, see section 13.11.).
Under the reverse charge mechanism, the non-resident supplier does not charge the VAT due on the supply to his customer
(section 14a(4) of the UStG) but, instead, the customer must account for VAT through his periodic VAT return on the value of
the received services (section 13b of the UStG). This method of collection of the VAT due on services has the advantage that
non-resident suppliers do not have to be registered in Germany, unless their customers are private individuals.

13.4.2. Place of taxation of cross-border events

The cross-border events discussed in this subsection cover the importation and intra-Community acquisition of goods.
13.4.2.1. Place of taxation of imports
As regards the importation of goods, a distinction must be made between the VAT on the importation itself and the VAT on the
supply which is carried out in Germany:

- the importation itself is subject to VAT (Einfuhrumsatzsteuer) according to section 1(1)(4) of the UStG;
- where the non-resident supplier imports the goods, not only the importation but also the supply are subject to VAT (section
3(8) of the UStG).
The importation is deemed to be made in Germany if the imported goods are released or removed from customs control there.
13.4.2.2. Place of taxation of intra-Community acquisitions
Intra-Community acquisitions are deemed to be made at the place of arrival of the goods (section 3d of the UStG). However, if
he does not account for VAT on the acquisition there, the customer also effects an intra-Community acquisition in the Member
State that issued the VAT identification number under which he purchased the goods.
Triangulation occurs when A sells goods to B, who sells the same goods to C, and the goods are transported directly from A
to C (A, B and C all being entrepreneurs for VAT purposes). The supplier who undertakes to transport the goods is deemed
to make the supply in the framework of which the goods are transported (”bewegte Lieferung”). The place of this supply is the
place of departure of the goods (section 3(6) of the UStG). The other supply is the supply in the framework of which the goods
do not move (”ruhende Lieferung”). If the ruhende Lieferung occurs before the bewegte Lieferung, the ruhende Lieferung is
deemed to be made at the place of departure of the goods. If the ruhende Lieferung occurs after the bewegte Lieferung, the
ruhende Lieferung is deemed to be made at the place of destination of the goods.
For example, if A is established in country 1, B in country 2 and C in Germany, the transaction consists of two supplies: the
supply from A to B and the supply from B to C (countries 1 and 2 are outside the European Union). When A transports the
goods directly to C, A makes the bewegte Lieferung, which is outside the scope of German VAT (the supply is deemed to
be made in country 1). The supply from B to C is the ruhende Lieferung, which is deemed to be made in Germany. B must
therefore register for VAT purposes in Germany.
If the transport is organized by C, the supply from B to C is the bewegte Lieferung, which is outside the scope of German
VAT (the supply takes place in country 1, the place of departure of the goods). The supply from A to B takes place before the
bewegte Lieferung and is also deemed to be made at the place of departure of the goods, i.e. country 1.
If, in this example, country 1, 2 and 3 are EU Member States and entrepreneurs A, B and C use the VAT identification numbers
issued to them in their respective Member States of residence, the transaction qualifies as intra-Community triangulation. If
Germany is the Member State of destination (Member State 3) and the transaction between A and B is the bewegte Lieferung,

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the transactions have the following consequences: A makes a zero-rated intra-Community supply in Member State 1, the
place of departure. B makes a taxable intra-Community acquisition in Member State 3 (Germany), which means that he
must be registered there. B also makes a taxable intra-Community acquisition in Member State 2 (because he uses the VAT
identification number of Member State 2). B makes a ruhende Lieferung to C, which is subject to German VAT, which means
the B must be registered in Germany.
On the other hand, if the transaction between B and C is the bewegte Lieferung, the transactions have the following
consequences: A makes a ruhende Lieferung to B, which is subject to VAT in Member State 1. B makes a zero-rated intra-
Community supply in Member State 1, the place of departure, which means that he must be registered there. C makes a
taxable intra-Community acquisition in Member State 3 (Germany).
As the normal rules would result in administrative obligations for B in either the Member State of destination (Member State
3) or the Member State of departure of the goods (Member State 1), the tax rules relating to intra-Community triangulation
have been simplified (see section 25b of the UStG). The simplification is based on the assumption that the supply between A
and B is the bewegte Lieferung (regardless of the transaction to which transport of the goods must be attributed), and has the
effect that B’s intra-Community acquisition in Member State 3 is not subject to VAT and his subsequent supply to C is subject
to VAT under the reverse charge mechanism (see section 13.4.1.2.). B’s invoice to C must contain an explicit statement that
the simplified triangulation rules are applicable and that C must account for VAT. Although B’s supply is not an intra-Community
supply, B must include the transaction in the recapitulative statement (“EC Sales List”) (see section 13.10.4.).
The simplified rules for triangulation only apply if there are three entrepreneurs who use VAT identification numbers of three
different Member States.
With effect from 1 January 2020, article 36a of VAT Directive (2006/112), as amended by the Amending Directive to the VAT
Directive (2018/1910), harmonizing the rules on chain transactions has been implemented.

13.5. Time of taxation

VAT normally becomes chargeable when the supply is made (i.e. when the goods are delivered or the services are completed)
or when the invoice is issued, whichever occurs first. Entrepreneurs whose annual turnover in the previous calendar year did
not exceed EUR 250,000 may pay VAT on the basis of cash receipts. The ceiling is EUR 500,000 if a tax office in one of the
five new federal states is competent for the entrepreneur (section 20 of the UStG). However, for the period between 1 July 2009
until 31 December 2011, a uniform threshold of EUR 500,000 was applicable in all federal states. With effect from 1 January
2012, the uniform threshold of EUR 500,000 is permanently applicable.
With effect from 1 January 2020, the Amending Directive to the VAT Directive (2018/1910) amending VAT Directive (2006/112)
with regard to the harmonization and simplification of certain rules in the value added tax system for the taxation of trade
between Member States has been implemented. Section 6b of the UStG provides for the rules on call-off stock arrangements
as provided for by article 17a of VAT Directive (2006/112).

13.6. Taxable amount

In respect of supplies of goods and services, the taxable amount is the agreed consideration, i.e. the total price, less VAT
(section 10 of the UStG) and transitory expenses. Transitory expenses are expenses paid by the supplier of the goods or
services, but in the customer’s name, and for his account (section 10(1) of the UStG).
Where the taxable amount changes after the invoice has been issued, the supplier must correct the amount of VAT due on the
transaction, and the customer must accordingly correct his deduction. The same corrections must be made if the supplier does
not receive payment from the customer (the debt becomes irrecoverable) (section 17 of the UStG).
In the case of deemed supplies of goods, the taxable amount is their purchase price or production cost, to the extent that the
costs have entitled the entrepreneur to an input VAT deduction (section 10(4) of the UStG). The same holds for supplies to
employees or other persons, if the purchase price or production cost does exceed the consideration paid (section 10(5) of the
UStG), unless the lower consideration represents the market price (ECJ judgment of 29 May 1997 in Skripalle, Case C-63/96).
Under the special scheme for farmers, the latter account for VAT at a flat rate (section 24 of the UStG). Travel agents (section
25 of the UStG) must, and dealers in second-hand goods, works of art, collectors’ items and antiques may, account for VAT
under the margin scheme (section 25a of the UStG). Under the margin scheme, the taxable amount is limited to the difference
between the entrepreneur’s selling and purchase prices. On 8 February 2018, the ECJ held in Commission v. Germany (Case
C-380/16) that the German margin scheme for travel agents is incompatible with VAT Directive (2006/112).

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VAT on the importation of goods is based on the customs value of the goods, including customs duties and other levies (not
VAT), transport costs and any other cost incurred until the goods reach their first destination in the European Union (section 11
of the UStG).
VAT on the intra-Community acquisition of goods is based on the consideration (see supplies of goods).

13.7. Rates
In addition to the zero rate, supplies of goods and services are subject to two positive rates:

- the standard rate of 19% applies to every taxable supply of goods and services not subject to the reduced or zero rate
(section 12(1) of the UStG); and
- the reduced rate of 7% applies to the supply of essential goods and services, such as food and beverages (subject to 19%
if consumed on the spot), pharmaceuticals, newspapers, books, and admission to theatres, museums and concert halls
(section 12(2) of the UStG).
In order to stimulate the economy and to overcome the impact of the COVID-19 pandemic, the standard VAT rate of 19% was
temporarily reduced to 16% during the period between 1 July 2020 and 31 December 2020. Moreover, during this period,
the reduced rate of 7% was decreased to 5%. In addition, the supply of food shall also be subject to the reduced VAT rate
if consumed on the spot during the period between 1 July 2020 and 30 June 2021; this period has been prolonged until 31
December 2022.
The reduced rate of 7% applies also to short-term accommodation services provided by hotels, pensions and guesthouses.
Audiobooks are also subject to the reduced rate of 7%. With effect from 1 January 2020, e-books and domestic train travels are
also subject to the reduced rate of 7%.
The zero rate (or, in the terminology of the UStG, exemption with the right to deduct input tax, see section 13.9.) applies mainly
to exports and intra-Community supplies (section 15(3) of the UStG).
An export is a supply of goods in the framework of which the goods are transported from Germany to a place outside the
European Union. For the purposes of the zero rate, the supplier must hold documentary evidence showing that the goods have
actually left the territory of the European Union (section 4(1) of the UStG).
An intra-Community supply is a supply of goods which gives rise to an intra-Community acquisition in another EU Member
State (see section 13.3.2.). For the purposes of the zero rate, the supplier must hold documentary evidence showing that the
goods have actually left the territory of Germany and he must mention his own and the customer’s VAT identification number on
the related invoice (section 14a UStG).
As regards exports and intra-Community supplies of goods, the physical movement of the goods is decisive, not the place
where the supplier or customer are established. Those transactions are subject to stringent bookkeeping requirements
(sections 8 to 17c of the UStDV).
Other zero-rated supplies include:

- work on goods that, after the work is done, will be exported;

- supplies in connection with commercial shipping and aviation;
- cross-border transport of goods, including railway freight traffic; and
- cross-border transport of passengers by ship or aircraft.

13.8. Exemptions
Section 4 of the UStG provides for an exemption for certain transactions. Exempt transactions differ from zero-rated
transactions in that the input VAT on costs associated with exempt transactions is not deductible (see section 13.9.).
The most important exemptions include:

- banking activities;
- navigation and air traffic services;
- certain cross-border transportation services;

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- the delivery of gold to central banks;

- intra-Community supplies of goods;
- insurance activities; and
- the supply and letting of immovable property.
An entrepreneur may opt for the taxation of certain financial transactions and the supply or letting of immovable property if
the customer is an entrepreneur who uses the supply for his business (section 9 of the UStG). The option for taxation has the
advantage that the supplier may recover the input VAT incurred in connection with the transactions.
Regardless of their nature, supplies made by small entrepreneurs are exempt from VAT. Small entrepreneurs are not subject to
VAT if their turnover did not exceed EUR 22,000 (EUR 17,500 before 1 January 2020) in the preceding calendar year and will
not exceed EUR 50,000 in the current year (section 19 of the UStG).

13.9. Input tax deduction

Section 15 of the UStG deals with deduction of input VAT. Input VAT is the VAT charged to the entrepreneur during the
declaration period by other entrepreneurs in respect of goods and services supplied to him plus the VAT paid by the
entrepreneur on his imports and intra-Community acquisitions. VAT due by a taxable person as a result of the rules of the
reverse charge mechanism can be recovered on his VAT return, subject to the normal restrictions.

13.9.1. General
In principle, entrepreneurs are entitled to deduct input VAT, if the respective goods and services are used for at least 10% for
the purpose of making taxable (including zero-rated) supplies (section 15(1) of the UStG). With effect from 1 January 2011,
the right to deduct input VAT relating to immovable property that is used simultaneously for both business and non-business
purposes is limited to the proportion of the use of the property for business purposes.
VAT on inputs used for the purpose of making exempt supplies, described in section 13.8., is not deductible. Also non-
deductible is the VAT on certain categories of expenses, such as business gifts exceeding EUR 35.
In respect of business meals (see section 1.4.10.), 100% of the VAT is deductible. This is in contrast to the position regarding
direct taxes where only 70% of such expenses are deductible (see section 1.4.9.2.) (section 15(1a) of the UStG).
Deduction of input VAT is subject to the condition that the entrepreneur is in possession of a valid VAT invoice (see section
13.10.2.).
Entrepreneur exercise the right to deduct input tax by subtracting the amount of input tax from the amount of VAT due for the
tax period on supplies of goods and services (output tax). Where, for the tax period, the amount of deductible input tax exceeds
the amount of output tax, the balance (“excess input tax”) is refunded to the entrepreneur immediately. Entrepreneurs are not
obliged to carry excess input tax forward to the next tax period.

13.9.2. Partial deduction

VAT on goods and services used for the purposes of making taxable (including zero-rated) supplies is deductible in full and
VAT on goods and services used for the purposes of making exempt supplies is non-deductible. VAT on goods and services
used for the purposes of making both taxable and exempt supplies (e.g. VAT on general overheads) is partly deductible. The
deductible proportion must be based on a fair estimate (section 15(4) of the UStG).

13.9.3. Adjustment of input tax deduction

VAT paid on capital goods is initially deductible on the basis of the use of the goods in the year of purchase for taxable and
exempt purposes. If the use of the goods changes during the adjustment period, a proportional part of the initial deduction must
be adjusted at the end of each year of the adjustment period in accordance with the rate of deduction applicable to that year
(section 15a of the UStG). In respect of movable goods, the adjustment period is 5 years and, in respect of immovable goods,
10 years, including the year in which the goods were taken into use.

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13.10. Administration
13.10.1. Registration
Resident entrepreneurs must register with the tax office competent for the area where they mainly carry on their business
(section 21 of the AO). For non-resident entrepreneurs, see section 13.11.1.

13.10.2. Invoices
Entrepreneurs must issue invoices containing the following information (section 14 of the UStG):

- the name and address of the supplier and customer;

- the supplier’s normal tax identification number and his VAT identification number;
- the date of the invoice;
- a serial number, which uniquely identifies the invoice;
- a description of the goods and services supplied;
- the quantity supplied;
- the date of supply;
- the consideration; and
- the VAT due.
The VAT identification numbers of both parties must be shown on the invoice for the following supplies:

- zero-rated intra-Community supplies (in addition, the invoice must indicate that the supply is zero rated);
- supplies of goods in the framework of intra-Community triangulation (see section 13.4.2.2.);
- work on movable goods; and
- intra-Community transport of goods.
Where services provided by non-resident entrepreneurs are subject to the reverse charge mechanism (see section 13.4.1.2.),
the invoice must state that the customer must account for VAT.
Electronic invoices with an electronic signature are accepted as regular invoices for VAT purposes (section 14(3) of the UStG),
provided that they meet certain requirements.
Invoices received from other entrepreneurs and duplicates of invoices issued must be stored for 10 years (section 14b(1) of the
UStG). If they are stored in paper format, the invoices must be stored in Germany. In electronic format, invoices may be stored
at any place within the European Union, provided that they are directly accessible online.

13.10.3. Records
Entrepreneurs must maintain business records in such a manner that their tax liability can easily be determined (section 14b of
the UStG). These records must contain:

- the agreed consideration for supplies made to and by them;

- details of payments on account;
- computation of the costs which are used as the taxable amount in respect of deemed supplies (see section 13.6.);
- the taxable amount relating to imported goods; and
- the taxable amount relating to intra-Community acquisitions and the tax thereon.
The records must be stored for 10 years (section 14b(1) of the UStG). If stored in paper format, the place of storage must be
in Germany. In electronic format, records may be stored at any place in the European Union, provided that they are directly
accessible online.

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13.10.4. Returns and payment

Where the VAT payable in the preceding calendar year exceeded EUR 7,500, entrepreneurs must file interim VAT returns on
a monthly basis. Otherwise, the interim returns must be filed quarterly. Returns must be filed within 10 days of the end of the
month or quarter (section 18 of the UStG). Provided that they make an advance payment of 1/11 of the total net VAT payable
for the preceding year, entrepreneurs may apply for a one-month extension of the filing deadline. Interim VAT returns must be
filed electronically.
The interim returns must be combined in a yearly VAT return, which must be filed by 31 May of the following year. With effect
from 2011, the yearly VAT return must be filed electronically.
Entrepreneurs making intra-Community supplies of goods must file recapitulative statements (zusammenfassende Meldungen)
containing the VAT identification numbers of their customers and the total value of the goods supplied to them in the reporting
period. The recapitulative statements must be filed electronically on a quarterly basis with the Bundeszentralamt für Steuern,
Hauptdienstsitz Bonn-Beuel (section 18a of the UStG), which is located at:
An der Küppe 1
D-53225 Bonn
With effect from 1 July 2010, recapitulative statements must be filed monthly (until the 25th of the following month) for intra-
Community supplies of goods and triangular trades made. Entrepreneurs, whose turnover does not exceed EUR 50,000 in a
current quarter or in one of the preceding four quarters, may opt to continue filing recapitulative statements on a quarterly basis
(until the 25th of the following month). The threshold of EUR 50,000 was temporarily increased to EUR 100,000 for the period
from 1 July 2010 to 31 December 2011.
In addition, entrepreneurs must also file recapitulative statements for the supply of intra-Community services to taxable persons
(B2B), unless the services are received for non-business-related purposes. The statements must be filed electronically on
a quarterly basis until the 25th of the following month. Entrepreneurs making both intra-Community supplies of goods and
services may also include the intra-Community supplies of services in the recapitulative statements for intra-Community
supplies of goods.
Entrepreneurs making intra-Community supplies or acquisitions of goods are also required to provide statistical information
(Intrastat returns) regarding country of origin, means of transport, etc., if the value of the intra-Community supplies or
acquisitions exceeds EUR 500,000 during a calendar year. For the purposes of the reporting, the value of the supplies and
acquisitions must be determined separately. If the threshold is exceeded in the course of the calendar year, the reporting
obligation is due for the first time in respect of the month during which the threshold was exceeded. Intrastat returns must be
submitted monthly by the 10th day of the month, following the month in respect of which the statistical information must be
provided to the Federal Statistics Office at the following address:
Statistisches Bundesamt
D-65180 Wiesbaden
With effect from 1 January 2019, operators of online marketplaces must keep a record of resident and non-resident suppliers'
German VAT registration certificates or have digital confirmation from the German federal tax authorities of the suppliers'
accurate VAT compliance. Operators also must keep detailed records of any supply of goods which starts or ends in Germany
carried out by resident or non-resident suppliers via their marketplace. Operators must provide the records upon request to the
tax authorities (section 22f of the UStG). In addition to the obligation to keep such records, a liability of online marketplaces
for VAT due not collected by resident and non-resident suppliers, including those not registered with the tax authorities, is
introduced (section 25e of the UStG).

13.10.5. Interest and penalties

In general, the interest and penalty rules applicable to the other taxes (see section 1.11.5.) also apply to VAT. The 1% penalty
for late payment of taxes (see section 1.11.5.) also applies to the monthly or quarterly advance payments based on interim
VAT returns (see section 13.10.4.). In addition, penalties up to EUR 5,000 (section 26a of the UStG) may be imposed if certain
formal requirements are not met. Non-compliance with material requirements may result in imposition of a penalty up to EUR
50,000 (section 26b of the UStG).

13.10.6. Appeals
VAT is a self-assessed tax, which means that, where entrepreneurs file their VAT returns and remit the VAT due to the tax
authorities on time and the returns are correct, the tax authorities do not issue an assessment. Where, after filing a VAT return,

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the entrepreneur discovers that a mistake has been made, the entrepreneur must generally correct the mistake within 1 month
after filing the return.
Where the tax authorities issue an assessment because they consider the entrepreneur’s tax liability to be higher than
that declared through the VAT return, the entrepreneur may object to the assessment within 1 month after receipt. For the
possibilities available to entrepreneurs to object to an assessment after the objection deadline has expired, see section 1.11.3.
If the local tax office rejects the entrepreneur’s objections, the entrepreneur may make a complaint to the tax court (see section
1.11.3.).

13.11. Non-resident taxable persons

Non-resident entrepreneurs are those who do not have their residence, legal seat, place of management or a branch in
Germany.

13.11.1. Registration
Non-resident entrepreneurs must register for VAT purposes and file VAT returns if their supplies are deemed to be made in
Germany, and those supplies are not subject to the reverse charge mechanism (see section 13.4.1.2.). The competent tax
office depends on the entrepreneur’s country of residence. Any Germany tax office will be able to indicate to the entrepreneur
the relevant tax office.

13.11.2. Returns and payment

See section 13.10.4.

13.11.3. VAT refunds

Non-resident entrepreneurs who are registered for VAT purposes in Germany may deduct input VAT through their VAT returns.
Where they are not and do not have to be registered in Germany because:

- they do not make any supplies that are taxable in Germany;

- the supplies that are taxable in Germany are subject to the reverse charge mechanism (see section 13.4.1.2.); or
- the supplies that are taxable in Germany solely consist of zero-rated cross-border transport of goods (section 4(3) of the
UStG) and passengers (section 16(5) of the UStG),
non-resident entrepreneurs are entitled to apply for a refund of input VAT to the Federal Tax Office (section 59 of the UStDV).
The application form must be sent to the Federal Tax Office:
Bundeszentralamt für Steuern
Hauptdienstsitz Bonn-Beuel
An der Küppe 1
D-53225 Bonn
Application forms can be obtained at the same address. The application must be accompanied by the related invoices or
customs documents and documentary evidence showing that the applicant is subject to VAT in the country of residence. The
application must be made by 30 June of the year following the year in which the VAT was incurred. The tax authorities do not
accept applications filed after that date, unless the applicant missed the deadline due to circumstances beyond his control
(section 110 of the AO).
With effect from 1 January 2010, entrepreneurs who are residents of another EU Member State must file an application for
the refund of VAT paid in Germany via the tax office in the Member State where they have their seat or place of residence.
The application must be filed electronically by 30 September of the year following the year in which the VAT was incurred. The
tax authorities do not accept applications filed after that date, unless the applicant missed the deadline due to circumstances
beyond his control (section 110 of the AO).
The period to which the refund application relates must be at least 3 months, but not longer than a calendar year (section 60 of
the UStDV). If the application relates to a period shorter than a calendar year, the claim must be at least EUR 400 (EUR 1,000
if the entrepreneur is located outside the European Union). If the application relates to a whole calendar year, the claim must be
at least EUR 50 (EUR 500 if the entrepreneur is located outside the European Union) (sections 61 and 61a of the UStDV).

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Information in English about refunds can be obtained through an Information Hotline (tel. +49-2284 060, http://
www.bzst.bund.de).

13.11.4. VAT representatives

Non-resident entrepreneurs who exclusively make zero-rated supplies in Germany and are not entitled to a VAT refund (see
section 13.11.3.), may appoint a tax representative for the purposes of complying with their administrative obligations in
Germany (section 22a of the UStG). To that end, the tax representative must obtain a formal proxy from the non-resident
entrepreneur.

14. Miscellaneous Indirect Taxes

14.1. Capital duty
Germany does not levy a capital duty on the formation or the increase/decrease of capital.
However, the formation as well as the change of the capital of a company require a notarial deed and registration in the
Commercial Register (Handelsregister). This triggers fees depending on the amount of share capital involved (see Business
and Investment - Country Surveys for the stock company and the limited liability company).

14.2. Transfer tax

14.2.1. Immovable property
The following transactions are subject to the real estate transfer tax (Grunderwerbsteuer) (section 1 of the GrEStG):

- the acquisition of immovable property and any other legal transaction which provides the right to become the owner of the
immovable property (section 1(1) of the GrEStG);
- an exchange of immovable property, e.g. for shares in a contribution to a company, a merger, a division, etc. (section 1(1) of
the GrEStG);
- the grant of a long-term lease with building rights (Erbbaurecht) (section 1(2) of the GrEStG);
- the transfer of 90% (95% before 1 July 2021) of the shares in a company which holds immovable property and the transfer
of shares in such a company which leads to a 90% (95% before 1 July 2021) shareholding (directly or indirectly) (section
1(3) of the GrEStG);
- a substantial change in the partners of a real estate holding partnership (a change of 90% (95% before 1 July 2021) in the
partners is treated as substantial) if the change in the partners occurred over the last 10 years (5 years before 1 July 2021)
(section 1(2a) of the GrEStG). Both direct and indirect transfers of partnership interests are taken into account; and
a change in the shareholder structure (direct or indirect) of a corporate entity owning real estate is to be established within
10 years, with more than 90% of the shares transferred to new shareholders (section 1(2b) of the GrEStG).
With effect from 1 January 2010, intra-group transfers of immovable property in the course of a merger, division or asset
transfer in accordance with the Reorganization Tax Law are exempt from real estate transfer tax, provided the transfer takes
place between a controlling company and one or more controlled companies. A company is treated as a controlled company if
90% (95% before 1 July 2021) of its shares are continuously held directly or indirectly by the controlling company for a period of
10 years (5 years before 1 July 2021) before and after the transfer (section 6a of the GrEStG).
Immovable property includes land and buildings, but not machinery and equipment affixed to the site.
The following transactions are exempt from the real estate transfer tax (section 3 of the GrEStG):

- a transfer by inheritance or by an inter vivos gift (because they are subject to inheritance or gift tax);
- a transfer of immovable property between spouses, civil partners (with effect from 1 January 2011) and their direct line
relatives;
- a transfer of property whose value is less than EUR 2,500; and
- a transfer of immovable property between a partnership and its partner, generally to the extent of the partner’s participation
(sections 5 and 6 of the GrEStG).

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The conversion of a partnership into a company and vice versa is not subject to the real estate transfer tax. Because the entity
simply changes its legal form and not its identity, a transfer of immovable property from one entity to another is not assumed.
The rate of tax is 3.5% (4.5% in Hamburg; 5% in Baden-Württemberg, Bremen, Niedersachsen, Rheinland-Pfalz and
Sachsen-Anhalt; 6% in Berlin, Hessen and Mecklenburg-Vorpommern; and 6.5% in Brandenburg, North Rhine-Westphalia,
Saarland, Schleswig-Holstein and Thüringen (section 11 of the GrEStG)). The tax is assessed on the consideration paid for the
immovable property. The tax base, however, is the value of the immovable property if no consideration is paid, e.g.:

- if the immovable property is transferred in the course of a reorganization (merger, division, contribution);
- if the tax is due because of the transfer of 90% (95% before 1 July 2021) of the shares in a real estate holding company; or
- if there is a unification of shares (the holding of 90% (95% before 1 July 2021) of the shares) in one hand.
The value is determined on the basis of section 138(2)-(4) of the Valuation Law (Bewertungsgesetz). The value is normally
determined as a multiple of the average rent obtainable for the immovable property. If an average rent cannot be determined
(which is often the case for plants, etc.), the valuation is subject to a special valuation procedure (section 8 of the GrEStG).
Notaries, courts and public offices as well as the parties involved must notify the competent tax office within 2 weeks of the
transfer of immovable property (sections 18 and 19 of the GrEStG). The levy of real estate tax is further guaranteed by the fact
that the new owner is registered in the real estate registry only if the competent tax office confirms that the tax has been paid.
Generally, all the parties to the transaction are jointly liable for the real estate transfer tax, even if the agreement specifies
which party pays the tax (usually the purchaser) (section 13 of the GrEStG). The tax authorities generally try to follow the
agreement, but they may hold the other parties liable if the party assessed does not meet his obligations. The three main
exceptions are:

- if the tax arises due to the unification of shares in one hand, the acquiring party is liable for the tax;
- if the sale occurs by force at a public auction, the highest bidder (purchaser) is liable; and
- if the tax is due because of a substantial change in the partners of a partnership, the partnership is liable.
14.2.2. Shares, bonds and other securities
Germany does not levy transfer taxes on shares, bonds or other securities.

14.3. Stamp duty

Small fees are usually due upon registration of transactions in the Commercial Register (Handelsregister). This concerns
mainly the formation of a company, a change in the capital and reorganizations.

14.4. Customs duty

Customs law includes legal and administrative provisions that govern cross-border movement of goods. In the European
Union, customs law is harmonized and applies only to movements of goods between the European Union and third countries.
Customs duties, as well as other indirect taxes (e.g. VAT), are imposed on the import of goods into the EU Customs Union.
The EU Customs Union consists of the EU Member States, as well as the areas of Akrotiri and Dhekelia (in Cyprus) and
Monaco (in France). Until 31 December 2020, the Channel Islands, the Isle of Man and the United Kingdom were also part of
the EU Customs Union. After that date, due to the United Kingdom’s full departure from the European Union, the movement of
goods between these jurisdictions and the European Union is governed by customs procedures and formalities. In general, EU
customs rules and facilitations continue to apply to goods entering and leaving Northern Ireland.
Andorra, San Marino and Turkey have separate customs agreements with the European Union.
The basis for calculating the customs duty is the customs value, which is generally the sum of the price paid for the goods
and any related insurance and shipping costs. A percentage (tariff), which depends on the type and origin of the good being
imported, is then applied to the customs value to determine the customs duty payable. The applicable tariff can be found in the
integrated customs tariff database of the European Union (TARIC), which has its legal basis in the Regulation on the tariff and
statistical nomenclature and on the Common Customs Tariff (87/2658). For more on customs duty valuation, see below.
EU customs legislation comprises the Union Customs Code (2013/952), the Regulation on the tariff and statistical
nomenclature and on the Common Customs Tariff (87/2658), the Regulation Setting Up a Community System of Reliefs from

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Customs Duty (2009/1186) and various international agreements. The Union Customs Code (2013/952), supplemented by the
Union Customs Code Delegated Act (2015/2446) and the Union Customs Code Implementing Act (2015/2447), replaced the
Community Customs Code (92/2913) Community Customs Code (92/2913) with effect from 1 May 2016. Some transitional
arrangements still apply and are included in the Union Customs Code Transitional Delegated Act (2016/341) and the Union
Customs Code Work Programme (2019/2151).
A trader importing goods into the European Union must register with the EU customs authorities and obtain an Economic
Operators Registration and Identification (EORI) number. A trader established in the European Union must register in the EU
Member State of establishment. Third-country traders are required to request an EORI number in the EU Member State where
they intend to first file an entry summary declaration. The EORI number is valid for customs purposes throughout the European
Union and must be used in the communication with the customs authorities. A single EORI number across the European Union
is efficient for economic operators and customs authorities, but also for statistical and security purposes.
Importation of goods from outside the European Union constitutes a taxable transaction for customs duty purposes. The
establishment of customs duties takes into account three factors: (i) the customs value of the goods; (ii) the applicable customs
tariff; and (iii) the origin of the goods. Customs duties are calculated by applying the customs tariff to the customs value. The
customs value of imported goods is based on the transaction value method, which is the price actually paid or payable for the
goods when sold for export to the EU customs territory. The transaction value must be increased by certain expenses (e.g.
cost of transport, insurance of the imported goods, loading and handling charges associated with the transport of the imported
goods to the place of introduction into the EU customs territory and, under certain conditions, royalties and licence fees), and
is reduced by certain deductions. If the transaction value cannot be determined, alternative methods must be applied in order
to establish the customs value, namely (in order): the value of identical goods, the value of similar goods, the deductive value,
the computed value and the fall-back value method. Each of these methods may be used, but only where the previous method
is inadequate for purposes of determining the customs value (i.e. the deductive value method may only be used if the value of
similar goods method is not adequate).
The person liable for import duties is the person who files the customs declaration or on whose behalf the declaration is filed by
a representative. The declarant (or representative) must be established in the EU customs territory. Customs law permits both
direct and indirect representation. Where several persons are liable for one customs debt, they are jointly and severally liable
for that amount.
There are two main payment schemes for customs duties: immediate payment and deferred payment. In general, import duties
must be paid within the period prescribed by the customs authorities, which may not exceed 10 days following notification to
the debtor of the customs debt. The obligation to pay import duties may be deferred for a 30-day period upon request if certain
conditions are met.
The Union Customs Code (2013/952) provides for three customs procedures: (i) release for free circulation, (ii) special
procedures and (iii) export. Special procedures are simplification measures allowing traders to benefit from the suspension or
lower rate of customs duties and include four categories: (i) transit (external and internal), (ii) storage (customs warehousing
and free zones), (iii) processing (inward and outward processing) and (iv) specific use (end-use and temporary admission).
Regarding transit, under the external transit procedure, non-EU goods may be moved from one point to another within the EU
customs territory without being subject to import duties or commercial policy measures. Under the internal transit procedure,
EU goods may be moved from one point to another within the EU customs territory and pass through a country or territory
outside that customs territory, without any change in their customs status.
As for the storage procedure, customs warehousing allows the storage of non-EU goods without subjecting them to import
duties or other commercial policy measures. Goods may be stored in public and private warehouses. Public warehouses
are available for use by any person, whereas private warehouses are reserved for use by persons authorized to operate the
warehouse.
Under the inward processing procedure, non-EU goods may be used in the EU customs territory in one or more processing
operations without being subject to import duties or other commercial policy measures. The outward processing procedure
allows EU goods to be temporarily exported from the EU customs territory in order to undergo processing operations. The
processed products resulting from those goods may be released for free circulation with total or partial relief from customs
duties.
Lastly, under the temporary admission procedure, non-EU goods intended for re-export may be subject to specific use in the
EU customs territory, with total or partial relief from import duty. Under the end-use procedure, goods may be released for free
circulation under a duty exemption or at a reduced rate of duty on account of their specific use.

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Companies having the status of Authorized Economic Operator (AEO), as provided under the Union Customs Code
(2013/952), are able to take advantage of customs simplifications and/or benefit from facilitations relating to security and safety.
They are also given a more favourable treatment in respect of customs controls, such as fewer physical and document-based
controls.

14.5. Excise duty

Excise taxes (Verbrauchsteuern) are levied on mineral oil, tobacco, beer and distilled alcohol.
Excise taxes are non-recurring taxes payable by the seller, normally the producer, manufacturer or importer releasing the
commodity to the public for the first time. The tax base may be weight, volume or sales price. Exports are not taxed.
An appropriation for internal business use is treated as a sale. Excise taxes are costs passed on to the customer. Imports
subject to excise tax are taxed by the federal customs authority, and the duties are payable in addition to customs duties and
import VAT at the time the imported commodity is cleared through customs.

14.6. Other
Germany levies a tax on insurance premiums (Versicherungsteuer). The general tax rate is 19%, but a rate of 22% applies to
fire insurance, including insurance against losses arising from the cessation of production due to fire (section 6 of the VersStG).
The insurance tax applies if either the insured is a German resident at the time the premium is paid or the insured object is
situated in Germany when the insurance contract is concluded (section 1 of the VersStG).
Exemptions from the insurance tax exist mainly for reinsurance contracts, life insurance, pension insurance, health insurance
and unemployment insurance (section 4 of the VersStG).
The taxpayer is the insured person, but the insurance company is liable for the tax. The tax arises at the time the premium
is paid. The taxpayer can also choose to include premiums in the tax base which have been invoiced but not yet paid. The
insurance company must file a return monthly by the fifteenth day after the close of the month (quarterly, if the total insurance
tax in the preceding calendar year did not exceed EUR 6,000). Within the same deadline, the insurance company must settle
the tax with the local tax office.

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