Germany is probably renowned for having one if not the most complicated tax law. This is amplified by the constant introduction of new provisions, a multitude of rulings by the Federal Finance Court and a constant stream of new decrees released by the Federal Ministry of Finance. In this report a brief overview shall be given on the taxation of corporations in Germany under the regulations currently in force as the tax regime is crucial for the structuring of investments in Germany.

General information – lowering of the corporate tax rate
A German corporation (AG or GmbH) is subject to corporation tax in Germany. From 2001 until 2007, distributed and retained income was taxed at a uniform rate of 25 percent. Since 2008, profits are subject to a corporation tax rate of 15 percent. In addition, corporations have to pay a so called solidarity surcharge which is calculated with 5.5 percent on corporation tax. Based on a corporation tax rate of 15 percent, solidarity surcharge amounts to effectively 0.825 percent. Corporations are also subject to trade tax which amounts to an average rate of 14 percent. The overall tax burden for corporations in Germany therefore amounts to around 30 percent. Basis of assessment for corporation tax is in principle the profit and loss as determined by the commercial financial statements.

Tax free receipt of dividends and capital gains
Dividend income and capital gains derived from the sale of participations in other corporations are in principle exempt from corporation tax and trade tax. Whereas for corporation tax purposes no minimum participation is required, the exemption of dividend income for trade tax purposes requires a minimum shareholding of 15 percent. Several anti-abuse rules have to be considered. Expenses directly connected with participations in corporations are in principle tax deductible. However, five percent of the dividends received from and the capital gains realised with these participations are deemed non deductible business expenses and are thus subject to tax. This results in an actual tax rate of 1.5 percent (30 percent of five percent).

Withholding tax on capital investment
The distribution of dividends is subject to a withholding tax of 25 percent plus solidarity surcharge (totalling effectively to 26.375 percent). In case the dividend is paid to an EU-corporation and the Parent-Subsidiary-Directive applies, the German corporation may refrain from retaining the withholding tax entirely on the conditions that it has requested a certificate of exemption from the German Federal Tax Office. In case such certificate was not issued before the time of the distribution, the shareholder can reclaim the withheld tax.

Loss carry forwards – a precious asset
Since 2004, the utilisation of loss carry forwards for corporation tax and trade tax purposes is limited. Up to a taxable income of k€1,000, loss carry forwards can be utilised without any restrictions. The taxable income exceeding k€1,000 can only be reduced by loss carry forwards to the extent of 60 percent of the exceeding taxable income. The remaining loss carry forwards can be carried forward indefinitely. However, in case of a change of a shareholder, a termination of business, its sale or reorganisation measures, loss carry forwards can be lost. This provision has been a severe problem for the recapitalisation of corporations in the financial crises. Therefore legislation has tried to lessen the impact of the provision for particular cases by creating exemptions of this rule. However, there is a substantial amount of uncertainty on when those exemptions and the preferential treatment which preserves the loss carry forwards apply. The tax authorities generally take a very restrictive view.

Thin capitalisation
For business years beginning after May 31, 2007, the thin capitalisation rules have been replaced by a new regime called interest barrier. According to the interest barrier, interest expenses exceeding the interest income are considered tax deductible up to 30 percent of the earnings before interest, taxes and depreciations. However, the interest barrier does not apply (and therefore all interest expenses will be considered deductible) if one of three exceptions is given. The most important exception is a threshold amount of k€3,000. However, if the interest expenses exceeding the interest income amount to k€3,000 or more, the full amount is subject to the interest barrier. Interest expenses, which are not considered deductible, can be carried forward to subsequent years without any timing limitations.

Hemmelrath & Partner – company profile
A professional partnership of lawyers and tax advisors, Hemmelrath & Partner Rechtsanwälte Steuerberater offer tailored solutions for decision makers. The firm advises companies on all aspects of their daily business and is particularly renowned for providing first-class advice on restructurings, conversions and corporate transactions, in particular in cross-border contexts. Such transactions have become more and more complex over the years.
Hemmelrath & Partner’s tax practice covers all aspects of tax law and assists its clients, both companies and individuals, on their national and international tax issues. Their tax expertise and independence allow Hemmelrath & Partner to provide their clients with innovative and high end tax advice, targeted at its clients’ needs and expectations, both on a country by country basis and globally. Over the years Hemmelrath & Partner have developed a genuine expertise in the structuring of cross border real estate funds, and are thus able to propose, from the structuring and the investment phase up to the elaboration of an exit strategy, tax optimised and secured solutions by taking into consideration each type of vehicle specificities (closed-ended and open-ended funds, REITs, listed and non listed real estate companies, etc.).

Hemmelrath & Partner are one of the founding members of Marccus Partners, a combined international practice of lawyers and tax advisors in France, Germany, Italy and Spain who share the same values of quality, independence, responsibility and integrity. Marccus Partners have been elected Cross Border Law Firm of the Year at the ACQ Global Awards 2009 in London and have also been awarded the price of Entrepreneurial Firm in the section of Up and Coming Firms 2009 at the 8th Legal Trophies Ceremony in Paris. Furthermore, Hemmelrath & Partner have been awarded Best Corporate and Commercial Team Germany 2010 by World Finance.