Worldwide Tax Summaries--GERMANY（1999-2000）(part1)（一）
Worldwide Tax Summaries--GERMANY（1999-2000）(part1)（一）
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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.
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.
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.
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.
General/In principle, conformity between book and tax reporting is required. However, major differences between the two can arise, such as where accruals or write-downs are made in the legal accounts but are not accepted for tax purposes.
Inventory valuation/Inventories are normally valued at the lowest of actual cost, replacement cost and net realizable value. However, any write-downs below actual cost must be for specific reasons. If specific identification of the inventories is not possible, valuation at either standard or average cost is acceptable. The LIFO method is usually acceptable for tax purposes, provided it is also applied in the legal accounts. Theoretically, FIFO is unacceptable unless its assumption
accords with the facts. In practice, this condition is often fulfilled.
Capital gains/Capital gains (and losses) are taxed as part of ordinary business income (or losses). It is possible to postpone the taxation of part or all of the gains on real estate where the gain is offset against the cost of replacement items.
Intercompany dividends/Dividends are taxed as normal income for
corporation tax purposes, with a tax credit being granted for the full underlying (30%) imputation tax and the 25% withholding tax. For trade tax purposes, dividends are tax exempt if the shareholder held at least 10% of the company's shares at the beginning of the calendar year in which the
dividends are received.
Foreign income/Except as discussed below, income received by German corporation from foreign sources is included in taxable income for corporation tax purposes unless a tax treaty provides for exemption. Double taxation is avoided by means of foreign tax credits or, at the trxpayer's option, by a deduction of the foreign taxes as an expense. Dividends received by a German corporation on an investment of 10% or more in a foreign corporation in a treaty country are almost always exempt. If they are (or in some case even if they are not), the capital gain on the sale of the investment is also exempt, although a proposed change in the law would make a corresponding loss nondeductible.
Ireespective of any tax treaty, taxable income for trade tax purposes is reduced by income or dividends included therein that flow form a foreign branch, a foreign partnership or a shareholding of at least 10% in a foreign company. Generally, undistributed income of foreign subsidiaries is not taxed in Germany.
Antiavidance rules are in force with respect to subsidiaries in low-tax countries in certain lines of business.
Stock dividends/Usually, a declaration of stock dividends (by converting reserves to capital) by a company will not lead to taxable income for the shareholder or to other tax effects. Subsequent capital reductions will, howver, be treated as cash dividends in most circumstances. The major exception to this general rule arises where the company still holds pre-1977 retained earnings (taxed under a different system) on its books
at the time of the capital increase.
Depreciation and depletion/Depreciation is normally calculated by either the straight-line or the declining-balance method over the anticipated useful life. With the exception of certain buildings, the declining-balance method may be used at present only for movable fixed assets, and the annual rate may not exceed three times the rate that would have applied under the straight-line method and may not be more than 30%. The residual value of the asset is taken into account only if it is material, while gains on a sale are treated as normal business income. In addition to normal depreciation, special epreciation is deductible for tax purposes in certain limited circumstances. Tax depreciation must be reflected in the legal accounts. In addition to depreciation on the straight-line and declining-balance bases, other methods are allowed, including depreciation based on output or depreCIAtion (depletion) based on the gradual exhaustion of the investment in a mine.
Net operating losses/At the taxpayer's option, losses for corporation tax purposes may be carried back and offset up to the amount of DM10 million against taxable income of the preceding two years. Remaining losses are carried forward without time limit. For trade tax purposes, only the loss
carryforward is available. Proposed legislation seeks to phase out the carryback by 2001.
Payments to foreign affiliates/A German corporation can claim a deduction for royalties, management service fees and, within limits, interest charges paid to foreign affiliates, provided such amounts are at arm's length. Detailed provisions define this. The limits on interest paid to affiliates are basically debt/equity ratios of 3:1(9:1 for German holding
companies) on fixed-interest loans and 1:2 on finance provided for a consideration based on profits or similar criteria. These debt/equity ratios do not apply to trade tax. A proposal to reduce these fixed-interest debt/equity ratios to 1:1 for all companies is under discussion. The same proposal would altogether disallow profit-reated interest paid to an affiliate.
Taxes/All taxes and duties borne are deductible except for corporation tax itself.
A german entity may pool profits and losses with its German subsidiaries if the mutual business and organizational links are so close that the group effectively constitutes a signle business (Organschaft). If an Organschaft exists, pooling of results for trade tax purposes is automatic; for corporation tax, cout registration of a formal prafit pooling agreement is a further requirement.
Inward investment and capital investment/There are no longer any significant incentives available for new projects. Capital investment in manufacturing, and in certain other activities of smaller businesses, in the former East Germany can qualify for a 105 investment grant. A qualifying project must be completed by December 31,2001 or, in some cases, by December 31,2004. A 5% investment grant may be claimed for qualifying capital investment in the former East Germany if completed during 1998. Expenditure in 1998 on qualifying fixed assets in the same
region is also eligible for 40% special depreCIAtion, provided the investment is completed in that year.
Holding companies/The main speCIAl provision for holding companies is the 9:1 related party debt/equity ratio (as opposed to 3:1 for operating subsidiaries). However, this distinction may be abolished in the near future.
Investment in foreign subsidiaries/Incentives for investment in foreign subsidiaries include the following.
1.Tax exemption of capital gains on the sale of significant foreign investments.
2.Deduction of expenses relating to foreign investments unless overed by tax-free foreign-source income received in the same year. However, this incentive is likely to be severely curtailed in the near future.
3.Onward distributions of tax-free foreign-source income are free of corporation tax in the hands of the corporate recipient.
Other incentives/There are no other generally applicable significant incentives. However, local authorities may offer facilities on favorable terms, such as the provision of cheap land on industrial estates.