CORPORATE TAXES
SIGNIFICANT DEVELOPMENTS
In November 1998 the government announced a fundamental tax reform package to be implemented in stages by the year 2002. The first measures, involving a modest reduction in personal income tax rates, were enacted at the end of 1998. The next steps to be taken will reduce the standard rate of corporation tax from 45% to 40%. At the same time, however, it will
significantly curtail (in some cases, eliminate altogether) loss provisions and asset write-downs. Indirect taxes on fuels and energy will be increased. It is planned to enact these measures into law by the end of March 1999, in many cases with effect retroactively to January 1.
Tightening of the rules on inward and outward investment is another part of this package, but this may not be effective until sometime after January 1,1999.
Finally, a complete reorganization of the German system of tax on business profits is foreseen for the year 2002. The new model has not been worked out in detail, but the broad objective is to subject all business profits to a uniform profits tax of 35%, regardless of the legal form of the business or its distribution policy. This "business profits tax" would replace the present corporation and trade taxes. It is possible that this final stage of the reform will be broken down into separate steps.
The immediate conclusion is that the overall German tax burden on business profits is likely to decline over the next few years. This will be partly compensated for by extending the basis of assessment, but this compensation is more likely to result in a significant additional burden on foreign investors investing through Germany than on those investing withing the country. A coureent precondition of all medium-and long-term
tax planning involving germany is that it should be as flexible as possible, since it will have to cope with changes in both circumstances and the law.
TAXES ON CORPORATE INCOME
Corporation tax (Korperschaftsteuer)/German business profits are subject to two taxes, corporation tax and municipal trade tax. Corporation tax is levied under a split-rate imputation system at the following rates.
%
Companies incorporated under German law:
Profits distributed to stockholders…………………… 30
Undistributed profits…………………………………… 40
Branches of foreign corporations:
On total profits…………………………………… 40
The total amount of corporation tax due is subject to a surcharge of 5.5% (the solidarity levy).
Trade tax (Gewerbesteuer)/The effective rate varies by location from just under 12% to 20.5% (around 20% for most large cities). This tax is deductible as an expense for corporation tax.
CORPORATE RESIDENCE
A corporation is resident in Germany for tax purposes if either its place of incorporation or its place of central management is in Germany. If the corporation is resident by reference to its German central management only but is incorporated abroad, the German tax authorities will usually seek to ignore the corporate form and tax the profits of the entity as though
it were an unicncorporated association, i. e., at 40% with no relief for distributions and no imputation credit for the German shareholders.
OTHER TAXES
Value-added tax/Proceeds of sales and services effected in Germany are subject to value-added tax at the standard rate of 16% (7% on certain transactions). The taxpayer is generally entitled to offset against the value-added tax payable the amount of such tax charged by suppliers or paid on imports. Taxes on fuel, electric power, insurance, and some other
products and services are not a compliance issue for most businesses, although they can be a significant additional cost factor.
BRANCH INCOME
Both corporation tax and trade tax are imposed on the taxable income of a foreign company's German branch. While the trade tax rates are the same for branches and resident German companies, corporation tax in the case of a German branch is levied at flat rates, normally 405 (42.2% including the
supplementary levy), with no reduction for distributions. The withholding tax on dividend distributions by German companies is not imposed on profits transferred by a German branch to its foreign head office.
INCOME DETERMINATION
General/In principle, conformity between book and tax reporting is required. However,
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