Tax & Law in Germany

Germany has a variety of taxes and laws - as you probably heard - which have to be followed, but on the other hand this
provides a secure basis and environment to you, where you can build up your successful business in Europe. Firstly, all those
regulations may confuse you in the beginning, therefore it is usual in Germany to consult an tax advisor, who is leading you
through the world of taxes and regulations and will manage the paper work for you, so you can fully concentrate on your
business opportunities.

Germany offers potential foreign business people many opportunities for investment. A special point to note in this context is that there are no specific investment laws in Germany. Foreign investors are treated in exactly the same way as German ones. The following are likely to be the preferred possibilities for investment:

  • Formation of a business enterprise, either wholly owned by the investor or together with domestic or foreign partners
  • Acquisition of an existing company
  • Acquisition of shareholdings in companies
  • Formation of a joint venture
  • Endowment of a company, branch or production plant with capital assets or by granting subsidies or loans.

Especially since the reunification of Germany, the need for investment has risen enormously. This is reflected in a tangible increase in the volume of capital imported from other countries.

Labour and residency law for foreigners

Law concerning foreigners
Foreigners who intend to take up gainful employment in the Federal Republic of Germany require the following:

  • a residence permit to work as a self-employed person,
  • a residence permit and in some cases a work permit to become employed.

The various legal regulations which apply to employed people from EU member states or from contracting states of the agreement on the European Economic Area (EEA) and from other countries must be taken into consideration in each case.

EU citizens
Citizens of EU member states and EEA states enjoy unlimited freedom of movement in the Federal Republic of Germany and do not require a work permit from the Department of Employment to conclude a contract of employment. Employees looking for work do not require a residence permit from the foreign residents office until three months after their arrival, although they do require a valid passport or passport equivalent. Once a person is employed, a residence permit is issued for at least five years unless the person in question applies for a residence permit of shorter duration. Employees from EU member states and EEA states are legally entitled to a residence permit.

Non-EU citizens
Employees from non-EU or non-EEA states require a residence permit to start work in the Federal Republic of Germany and usually (employees) a work permit too, unless some other agreement between the two countries is in force.

Residence permit
The residence permit usually must be obtained before entering the Federal Republic in the form of a visa from the relevant official representative of the Federal Republic of Germany in the home country.
People from non-EU or non-EEA states are not automatically legally entitled to a residence permit. If a positive decision is made, the residence permit is normally issued for one or two years and can then be extended. An unlimited residence permit is only granted in exceptional cases.

Right to reside
A distinction must be made between the residence permit and the right to reside. The latter can be issued to foreigners who have legally been in the country for at least five years and who have become integrated into the economic and social life in the Federal Republic.
The right to reside cannot be regionally limited. It is valid for an unlimited period of time.
Self-employed people or people working in comparable employed positions (e.g. free professionals, independent agents) as well as

  • members of the executive body legally representing the operation of a legal entity (Chairman of the Board/managing director of incorporated companies) or
  • partners and managing directors with power of attorney of companies other than incorporated companies (OHG, KG, BGB company) as well as
  • executives to whom a general or full power of attorney (power of representation) has been issued do not require a work permit in accordance with the principles of freedom of trade.

Work permit
Apart from a few exceptional cases, foreign employees from non-EU member states or non-EEA states, on the other hand, require a permit from the Bundesanstalt f眉r Arbeit (federal employment office) to start a job in the Federal Republic of Germany (Swiss employees are accorded the same treatment as EU and EEA citizens). A work permit is issued after a residence permit has been granted.
There is no legal entitlement to a work permit.

Illegal occupation
Employers who illegally employ foreign employees without the necessary work permit can be charged very heavy fines.
In the event of repetition, an employer can be imprisoned for up to five years.

Please check website of German Institute Taipei for detailed information about visa.

 

Taxation

General
Everything having to do with taxation, including the procedures involved and all modifications, is laid down in the Fiscal Code (Abgabenordnung). In it the duty of the taxpayers to submit tax declarations is specified. Thus, for example, a foreign company which operates a branch in Germany must prepare a corporate income tax, local trade tax and turnover tax (VAT) declaration for each calendar year and submit them to the responsible inland revenue office.

Personal income tax
Personal income tax is paid only by natural persons, sole proprietors as well as partners of a partnership, providing their liability for income tax is unlimited. Tax is calculated according to the taxable income within one calendar year. It results from the total income minus certain personal expenses and a tax allowance which amounts 7,235 EUR for singles and 14,471 EUR for married taxpayers. The income tax scale increases according to income with a top income tax rate of 48,5% applicable from a taxable income of EUR 55,008 for single persons. For married taxpayer this threshold is EUR 110,016.

With effect from 1 January 2004 the personal allowance will be increased to EUR 7,426/ EUR 14,853 and the minimum tax rate will be reduced to 17%. The maximum tax rate will be deduced to 47%.

With effect from 1 January 2005 the personal allowance will be increased to EUR 7,664/ EUR 15,329 and the minimum tax rate will be reduced to 15%. The maximum tax rate will be deduced to 42%.

The tax reductions until 2005 will provide a total relief of EUR 36.5 billion.

Company taxes
The income from a business is, in accordance with the Income Tax Act (EStG), usually the profit to be determined by the annual financial statement. Foreign entrepreneurs who intend setting up a company in Germany, must determine this profit - like German companies - in accordance with the regulations of the commercial and tax provisions.
This also applies to one-man companies, partnerships and incorporated companies as far as they are obliged to create accounts and a balance sheet (opening and closing balance sheet, profit and loss statement).
Limited and unlimited partnerships, as companies, do establish their profit, but are not liable as such to pay income tax. Only the partners are liable to pay personal income tax on their dividends.

Wage tax is a special form of income tax. It is only collected from income resulting from work carried out as an employee. The employer is obliged to retain the due wage tax, which can be calculated from the wage tax table, and must then pay it to the relevant tax office. The employer is personally liable for this.
This scheme also applies to business entities of foreign companies within the Federal Republic. The level of wage tax can be taken from the relevant wage tax table.

Capital gains tax is also a special form of income tax. It is levied on certain income from capital. The company distributing dividends is obliged to retain and forward the due capital gains tax for the account of the creditor of the income.
Profits (dividends) from shares, shares in companies with limited liability and co-operatives are subject to tax.
The tax rate is 20, 30 or 35% of the gross amount and depends on the type of income. The retained capital gains tax is set off against the personal or corporate income tax debt of the person receiving the income. If dividends are paid to foreigners, the amount of capital gains tax depends on the regulations of the double taxation agreement.

The income of corporate legal entities (e.g. joint stock companies and GmbH) is subject to corporate income tax. The tax rate has been set at 25% since 2001. Since 2002, shareholders only need to tax half of the dividends of an incorporated company as part of their income tax (half-income procedure). Offsetting individual income tax against corporation tax is no longer possible from the tax year 2002.

There is a general exemption on dividends for divided payments from one incorporated company to another. Profits from a sale of shares in incorporated companies are generally tax-free for incorporated companies.

A 5.5% solidarity surcharge has been levied since 1 January 1995 as an extra charge on wage tax, income and corporation tax. There are special regulations for low-income earners and to avoid multiple charges with corporate income tax. The assessment basis for the solidarity surcharge on income and corporate income tax is reduced by the amount of corporation tax that can be set off, to avoid income being taxed more than once with the solidarity surcharge in the case of a dividend payment.

Every commercial undertaking in Germany is subject to trade tax. Commercial undertakings subject to tax liability include businesses resident abroad operating permanent offices within Germany. Trade tax is charged by the local authorities. The trade tax consists of two components - operating profit and trading capital. The trade tax debt is calculated from the operating profit (the income) and trading capital (net assets apart from real estate) using - on a scale for natural persons - tax assessment figures (approx. 5% of the operating profits and 0.2% of the trading capital) and an assessment rate stipulated by the individual local authorities (between 300% and 500%). First, the operating profit for natural persons and partnerships is reduced by a tax-free amount of EUR 24,000 (for companies and entities of public law by a tax-free amount of EUR 3,750).

When calculating trade tax in accordance with the trading capital, a tax-free amount of EUR 60,000 (but at most half of the trading capital) must be taken into consideration. The tax rates in accordance with the operating profit and trading capital are combined to form the standard tax rate.

Capital gains tax
Capital gains tax is also a special form of income tax. It is levied on certain income from capital. The company distributing dividends is obliged to retain and forward the due capital gains tax for the account of the creditor of the income.
Profits (dividends) from shares, shares in companies with limited liability and co-operatives are subject to tax.
The tax rate is 20, 30 or 35% of the gross amount and depends on the type of income. The retained capital gains tax is set off against the personal or corporate income tax debt of the person receiving the income. If dividends are paid to foreigners, the amount of capital gains tax depends on the regulations of the double taxation agreement.

Value added tax (VAT)
Value added tax (turnover tax) is basically payable on every supply of goods or services made by a business in return for payment in the territory in which the tax applies. As well as goods and services, also own consumption and the import of goods from non-EU countries are subject to this tax. The purchase of goods from within the Community is also subject to VAT, provided such purchase is effected in return for payment in Germany.
The value added tax is in principle always owed by the party supplying the goods or service. The only exception is in the case of intra-Community purchases, where for practical reasons the VAT must be remitted by the purchaser.
Value added tax is levied at every stage of business, i.e. from initial delivery by the producer of goods up to final delivery to the consumer/end purchaser.

However, after determination of the nominal amount of tax by applying the tax rate to the relevant sum, the amount of value added tax actually payable is then adjusted by deducting the VAT already invoiced by previous suppliers to the company concerned. This system of prior VAT deduction means that businesses can purchase goods and services virtually without tax, so that in effect only the amount of turnover arising from their own added value is taxed. Only when goods or services leave the sphere of business - i.e. in most cases on passing to the end user - does the tax actually become effective. Also VAT, which has to be paid on the import of goods, is deductible as prior tax, as is the tax on goods purchased from other Community countries.

Under the German Turnover Tax Act, there are two rates of tax valid in this country: the general rate of 19% and a reduced rate of 7%.
Most sales are subject to the general rate of VAT. The reduced rate applies in particular to the supply, own consumption and import of nearly all foodstuffs, with the exception of beverages and restaurant sales. There are some special provisions that give relief to smaller firms.
No VAT is charged, among other things, on export deliveries and on the contract processing of goods intended for export, on intra-Community deliveries, on the granting of credits, on the letting or leasing of land and property, or on sales in the medical and social sphere.