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Germany Income Taxes and Tax Laws Last updated May 2005 The German tax system has undergone a comprehensive reform in the year 2001. This reform applies to taxation in the years 2001 - 2005 and is intended, in principle, to ease the actual rate of tax for both individuals and companies. Taxation of an individual's income is progressive. In other words, the higher the income, the higher the rate of tax payable. In 2005 the Germany tax rates for an individual are 15% - 42%. In addition to regular tax, there is a municipal trade tax that is imposed by the municipality. Reduced tax rates or exemptions are granted to persons with certain classes of income. The standard rate of corporate tax in 2005 is 25%. There is a reduced rate for part of a corporation's income. An additional tax has been imposed to help the merger of the two Germanys. This is "solidarity tax" which is 5.5% of the normal rate payable. The tax is levied on corporations and individuals, subject to the conditions specified in the law. Income Tax for an Individual An individual is liable for tax on his income as an employee and on income as a self-employed person. An individual who meets the test of a "permanent resident" of Germany will have the tax calculated on his income in Germany and from overseas. A foreign resident who is employed in Germany pays tax only on income earned in Germany. To be considered a German citizen, a test must be met of either a life centered in Germany or a continuous stay of 6 months in Germany during two tax years. A partnership is not a separate body for tax purposes. The income from the partnership is divided between the partners who will then each pay their tax as an individual on their share according to their share in the partnership. An employer is obligated to deduct the tax payable, income tax and social security immediately on a monthly basis from income earned as a wage. A self-employed person must prepay income tax that will be offset on filing an annual return. The advance payment is determined on the basis of the return made for the previous year. In the event of a new business, the advance will be calculated on the basis of estimates made by the owner of the business. The advance payment is made once every three months. Certain payments, as specified below, are deducted from taxable income. Germany individual income tax rates ,2005 Tax % Tax Base (EUR) 0 Up to 7,664 15% 7,665-52,152 42% 52,153 and over Note: The rates are before solidarity tax,all individuals,and business tax- for business income. Corporate Tax The basic corporate federal rate of tax in Germany is 25%. A "business tax", payable to the municipality, is added to the tax. A company that operates in a number of cities pays business tax according to the location of its employees in the various cities. Taxable income for the purposes of "business tax" may be adjusted for purposes of calculating the basis on which "business tax" is payable. "Business tax" is an allowable expense for purposes of calculating the income on which corporation tax is payable. Types of Companies / Partnerships The following forms of incorporation are customary in Germany: A Limited Liability Company (with the suffix GMBH) - One person is sufficient to set up the company. - a minimum registered share capital ,as defined by law.- At least one quarter of the capital must actually be invested. - At least one quarter of the capital and no less than an amount defined by law must actually be invested. - Management is in the hands of one or more directors according to the Articles of the company. - In a company with more than 500 employees, it is compulsory to appoint a "supervisory committee". - The GMBH form of incorporation is the most popular in Germany, This is true as well for foreign investors who are setting up a branch in Germany. - The company's liability is for the amount of the capital only. A Stock Company (with the suffix AG) - A minimum of five people is required to set up the company. - The minimum registered share capital - is defined by law. - At least one quarter of the capital must actually be invested. - Management is in the hands of the majority of the directors. - The shareholders' meeting will appoint a "supervisory committee". - The company's liability is for the amount of the capital only. A Regular Partnership (with the suffix OHG) - All the partners are jointly and severally liable for the obligations of the partnership. - The profit from the partnership is not taxed as from a separate body. The profits of the partnership are divided among all the partners according to their shares in the partnership, other than in instances in which the partnership agreement determines otherwise. A Limited Partnership(with the suffix KG) - The liability of the partners is limited to the amount of their investment in the partnership. - At least one of the partners is liable for the obligations without any limit to the amount. CAPITAL GAINS Capital Gains (Individual) Profits from the sale of private real estate that has been held for more than 10 years, or from the sale of securities that have been held for more than 12 months is exempt from tax. Capital gains from the sale of real estate that was used to invest in the purchase of alternative real estate is exempt from tax, subject to certain conditions. Sale of a holding when the percentage of the investment is less than 1% is exempt from tax. On the other hand, when the percentage of the holding is in excess of 1%, tax is payable on 50% of the profit. Capital Gains (A Company) The standard rate of tax for a company is 25%. A capital gain from the sale of real estate that is invested within 4 years in the purchase of alternative real estate is tax exempt subject, to certain conditions. According to the tax reform, 95% of a capital gain from the sale of shares in a foreign company is exempt from tax. The sale of shares between German companies is exempt from tax. Dates of Reporting and Payment: The tax year in Germany ends on December 31. Advance payments for income tax are paid according to the following: An individual - An individual whose income is from a salary only does not have to file an annual return. The employer, who deducts tax from the employee, transfers the tax immediately to the tax authorities every month. - An individual who is self employed is obligated to make 4 quarterly advance payments. - An individual who is self employed is obligated to file a return by the end of the month of May. A limited company - It is compulsory to submit the financial statements by the 31st May following the tax year. - During the year, the company must make 4 quarterly advance payments on the 10th of the months of March, June, September and December. The balance of the tax payable must be paid within 30 days of receipt of an income tax assessment. - A fine of 1% per month is payable on arrears in payment of the tax balance. DEDUCTION OF TAX AT SOURCE Taxation of Employees: The employer is obligated to deduct tax at source from an employee and to make additional contributions to social security. Social Security: An employed person - The employer and employee each make an equal payment. The social insurance covers pensions, unemployment and nursing insurance. There is an upper limit of the salary on which national insurance is payable. Income in excess of the limit is exempt from national insurance. Other deductions: Deductions must be made from the following payments as follows: Dividend - The normal deduction is 21.1% (for either a resident or a non - resident) A dividend paid by a German branch to a European Union parent company when recipient's holding is in excess of 25% is exempt from deduction at source. A dividend received by a German company from subsidiary companies is exempt from deduction at source. Royalties - The tax to be deducted at source if the payment is to a non - resident is 21.1%. Interest - The standard rate of tax deducted at source is 0%. Comments: Deduction at source for overseas residents is subject to theDouble Taxation Prevention Treaty.
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