international tax summaries--GERMANY,FEDERAL REPUBLIC OF(1998)(一)

international tax summaries--GERMANY,FEDERAL REPUBLIC OF(1998)(一)

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Some important amendments were made in 1996 with regard to the
valuation of real estate, real estate transfer tax, and inheritance and gift tax. Net wealth tax has been abolished effective January 1, 1997.
  Before 1996, the valuation of real estate, which has an impact on inheritance and gift tax and on real estate transfer tax if no other consideration is available, was based on 140% of the values in the year 1964. Due to the dissimilarity with the valuation of other assets, this was held unconstitutional. The new rules lead to a tax value of 50% to 75% of the actual market value.
  For inheritance and gift tax, the tax classes and rate structure were reorganized. Most of the allowances have been increased, e.g., from DM 250,000 to DM 600,000 for spouses and from DM 90,000 to DM 400,000 for children, and after an allowance of DM 500,000 only 60% of business assets are taxable.
  The tax rate on real estate transfer tax was increased from % to 3.5% of the consideration or the value of real estate.
  The most important changes of VAT relate to chain ransactions and intra-community triangular transactions. These are now treated similar to other EU-member states.
  As of January 1, 1998, trade tax on capital will no longer be imposed.
  The solidarity surcharge will be reduced effective January 1, 1998, to 5.5%.


All income is subject either to income tax (Einkommensteuer) or to corporation income tax (Krperschaftsteuer), depending on whether the income is earned by an individual or company. Furthermore, all business income is subject to municipal trade income tax (Gewerbeertragsteuer). For purposes of the income tax, corporation income tax, and trade tax assessment, it is necessary to distinguish between resident taxpayers and nonresident taxpayers, i.e., between taxpayers who are subject to unlimited tax liability and those who are subject to limited tax liability, respectively.
  German law does not use the expressions resident?and nonresident,but instead distinguishes between:
q    Taxpayers with unlimited tax liability (unbeschrnkte
Steuerpflicht), who are subject to income tax on their orldwide
q    Taxpayers with limited tax liability (beschrnkte
Steuerpflicht), who are subject to income tax on various types of German-source income.
A company is considered to be resident in Germany (i.e., subject to unlimited tax liability) if either its seat?(Sitz) or place of management (Ort der Geschftsleitung) is located in the Federal Republic of Germany. Since a company organized under German law is required to specify in its articles a seat located in Germany, all German companies are resident taxpayers. If a nonresident company (i.e., a company having its seat and place of management abroad) conducts business in Germany through a branch, the nonresident company itself will be subject to tax on branch profits.
  East Germany. With the merger of the former German Democratic Republic into the Federal Republic, the tax system of the Federal Republic has been adopted with some minor exceptions, which aim at encouraging investment in the new Federal States. The following speCIAl rules apply:
q    Special depreCIAtion of up to 50% for both movable and
immovable property (except aircraft and vessels in international trade) are available;
q    Various investment subsidies are granted.
1. Rates
The normal tax rate for corporations subject to unlimited tax liability is 45%. The tax rate is reduced to 30% for distributed profits. In addition, shareholders subject to unlimited tax liability (i.e., resident shareholders) may claim a tax credit against their personal income tax (or corporation income tax) liability equal to the amount of corporation income tax paid by the company on the distributed profits.
  A solidarity surcharge of 7.5% is effective as of 1995. The rate of 7.5% will be reduced to 5.5% effective January 1, 1998. It is based on the assessed corporation income tax after deducting the imputed tax credit attached to dividends received from German companies. The tax rates for retained earnings and for distributed profits are therefore 48.375% and 32.25%, respectively. The surtax will also be imposed on withholding taxes, but tax treaty limitations will be respected.
  Corporations can distribute tax-exempt foreign profits if the recipient is another corporation without incurring additional tax. In this case, there is no tax on distributed profits and the recipient has no taxable income. However, withholding tax will be levied.
2. Local Income Taxes
There are no state or provinCIAl income taxes. However, the municipal authorities impose a trade tax based on business income (see Overview).
Though this business income is based on profits, the profit figure is subject to a few specific adjustments for the purposes of trade tax. Every municipal authority determines its own tax rate valid for its area. The trade tax burden may thus be anywhere from approximately 15% to 25% (tax allowances not considered) of business income. Trade taxes are deductible from taxable income.
3. Capital Gains Taxes
There is no speCIAl provision for taxing capital gains of a German corporation with unlimited tax liability. Profits from the sale of goods and services of all kinds are generally taxed at the normal rate.
Under certain circumstances, the profit obtained from the sale of land, buildings, fixed assets with a long useful life, ships, and shares in corporations can be offset fully or partly against the purchase price or the manufacturing costs of new goods.
  If a corporation with unlimited tax liability sells a participation of at least 10% in a foreign corporation, the gains are tax-exempt as long as the dividends of the foreign company would be tax-exempt in Germany under a tax treaty.
  The profit resulting from the liquidation of a corporation is taxed as if it had been earned in the ordinary course of business. This rule, however, does not apply if certain assets are transferred to another legal entity in exchange for an interest in this entity. For example, the exchange of shares is not subject to tax if the shares are comparable in function and value. In the case of a reorganization, the rules of the Transformation Tax Act (Umwandlungsteuergesetz) provide
for significant tax relief. Under these rules, in the case of a merger of legal entities, hidden reserves need not be taxed if t is ensured that the reserves are taxable in the hands of the acquiring corporation. In the case of a contribution of a sole proprietorship, an independent part of an establishment, an interest in a partnership, or an interest in a corporation in exchange for shares, the parties may choose any value between book value and fair market value for the transferred assets. Hence, the parties are given some degree of flexibility about where they want to tax hidden reserves and step up the tax basis.
  Under the provisions of the EU Merger Directive, which have been adopted as German law, cross border mergers, divisions, the exchange of shares, and the transfer of sole proprietorships or independent divisions of an enterprise are allowed and are subject to tax relief if companies of two or more Member States are involved.
  Foreign corporations with limited tax liability in Germany are liable to corporation income tax on profits from the sale of shares in German corporations if no double taxation convention is applicable and the foreign corporation has more than a 25% interest in the German company. Profits derived from the disposal of immovable assets, functional units (Sachinbegriffen), or certain rights are subject to income or corporation tax liability if the sale is made by a corporation comparable to a German corporation or by other legal entities obliged to keep books under the commerCIAl code.
4. Branch Profits Taxes
Foreign corporations maintaining a permanent establishment in Germany are subject to limited tax liability on the income received from the permanent establishment. The corporation tax rate is normally 42% but is currently 45.15% due to the solidarity surcharge in these cases. Additionally, trade income tax is payable.
5. Foreign Tax Reliefs
The double taxation conventions concluded by Germany provide in many cases for foreign income to be exempt from German taxation; in other cases, income taxes paid abroad can be credited against German tax.  There are also tax credit provisions in national tax law; for example, a corporation is entitled to a tax credit for foreign taxes that correspond to the German corporation income tax against German corporation income tax liability on income from the foreign country (per-country limitation). In the event that such a credit is not
possible, foreign tax may be deducted in determining income; such deduction is also possible on application but not if the payment was only notional under double taxation treaty provisions.
  If the foreign income is a dividend paid by a foreign company of which the domestic corporation has held at least 10% of the capital for the 12 months preceding the balance sheet date, income taxes paid by the foreign corporation with respect to the dividend can upon application be creditable, provided the income of the foreign corporation falls within certain categories, which may be broadly defined as an active trade or business (indirect tax credit).
  There are further tax reliefs; e.g., for investment abroad, a lump-sum payment of German corporation income tax on foreign income is possible if certain prerequisites are met.
7. Payment of Taxes
Income tax returns must be filed on completion of a tax year (calendar year), and the due date generally is May 31 of the following calendar year. After the return has been reviewed by the tax authorities, a notice of assessment is issued (which is usually provisional and subject to tax audit). The assessed tax generally is payable within one month after the issue of the assessment.
  Quarterly prepayments are required against anticipated tax
liability, which generally are based on the last assessment.

9. Rates
All resident individuals are taxed on their worldwide income (i.e., unlimited liability). Generally, an individual is treated as resident in Germany if he or she has a permanent residence in or is physically present in Germany for more than six months in any one calendar year or for at least six consecutive months in two calendar years. Individuals who are not resident in this sense can be treated as residents on application if at least 90% of their overall income is taxable in Germany or not more than DM 12,000 is subject to tax outside of Germany in the fiscal year.
  Income tax is levied on taxable income above DM 12,365 or DM 24,730 for married couples. The tax rate increases progressively up to a maximum of 53%. Additionally, a surtax of 7.5% of the tax assessed has to be paid. If distributed profits are part of the income, a surtax paid by the corporation on these profits can be credited against the individual tax burden. The effective marginal income tax rate of German business income (e.g., income from a sole proprietorship or a
German partnership) is 47% for individuals. The following income tax table is an abbreviated summary of the tax rates (which does not reflect surtax).

    Taxable      Amount of       Percent       Marginal Tax Rate
    Income        Tax    of Income    on Next DM 1,000

    DM 20,000      DM 2,039       10.55%         27.3%
    30,000      4,857       16.40         29.0
    40,000      7,857       19.76         30.7
    50,000      11,040       22.13         32.5

    Taxable      Amount of       Percent       Marginal Tax Rate
    Income        Tax    of Income    on Next DM 1,000

    60,000      14,422       24.04         34.8
    70,000      18,048       25.78         37.8
    80,000      21,976       27.47         40.9
    90,000      26,208       29.12        43.9
    100,000      30,743       30.74         46.9
    120,000      40,751       33.96         53.0

Married couples may elect to pay tax on their combined income (joint filing). In computing the tax liability, the tax payable on half the combined income is doubled.
  Capital gains earned by individuals through the sale of a business, an interest in a partnership, or shareholdings of ore than 25% qualify for a reduced tax rates up to a total capital gain of DM 15,000,000.
10. Local Income Taxes
Income from a business establishment in Germany is subject to trade income tax (see item 2). There are no other state or provinCIAl income taxes. However, there is a so-called church tax imposed by the major religious communities. Members of such communities, subject to unlimited tax liability (including foreigners), are required to pay this tax at a rate of up to 9% of their income tax payable. The tax is deductible from taxable income and is collected by the tax authorities.
11. Capital Gains Taxes
Capital gains are subject to tax if assets employed in a business of a s

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