Value-added tax (VAT)
Proceeds of sales and services effected in Germany are subject to VAT under the common system of the European Union at the standard rate of 19% (7% on certain items, such as food and books). The taxpayer generally is entitled to deduct the VAT charged on inputs from that payable on outputs.
VAT is administered by the tax office responsible for the corporation tax assessment of a company. It is based on preliminary VAT returns filed monthly or quarterly by the tenth day of the following month (monthly for new businesses or where the tax payable in the previous year was more than EUR 7,500) drawn up on the basis of the actual transactions during the filing period as shown in the books of account. A permanent filing extension of one month is available against an advance payment of one-eleventh of the total net tax due during the previous year. Otherwise, payment is due when the return is filed.
Legally, VAT is an annual tax. Each taxpayer must file an annual return for each calendar year, regardless of the actual accounting date for the business. If the annual return does not agree with the total of the monthly or quarterly returns, the tax office can be expected to ask for a detailed explanation.
Customs duties are levied under a common system on imports into the European Union. The rate is set at zero on most imports from EU candidate countries and on many imports from countries with which the European Union has an association agreement.
For manufactured products from other countries, the rates generally lie within the range of 0% to 14%. The basis is the import value of the goods and thus includes uplifts for royalty or other payments associated with their use but not apparent from the transit documents.
The EC also sets ‘countervailing’ duties from time to time on specific imports from specific countries in order to counter dumping attempts. The countervailing duty rate is set to fully absorb the dumping margin and is therefore usually much higher than 14%.
Excise taxes on fuel, electric power, and some other products are not a compliance issue for businesses other than dealers in bonded goods, although they can be a significant additional cost factor for business users. These excise taxes also have an environmental element in as much as the rates are set to discourage excessive use of pollutants. However, an air passenger duty is the only tax on pollution as such. Energy producers (such as power stations) can claim a refund of the excise tax borne in the cost of the energy products used in the production process.
There are no taxes on wealth or capital employed. There is a minor local authority tax on property, but the effect of this is partly offset by an additional trade tax deduction.
The only significant German stamp tax is the real estate transfer tax (RETT) on the consideration on conveyances of German property. The rate varies by province; in 2018, the rate is 3.5% for property in Bavaria and Saxony; 4.5% in Hamburg; 5% in Baden-Württemberg, Bremen, Lower Saxony, Mecklenburg-Western Pomerania, Rhineland-Palatinate, and Saxony-Anhalt; 6% in Berlin and Hesse; and 6.5% in Brandenburg, North Rhine-Westphalia, Saarland, Schleswig-Holstein, and Thuringia.
This tax is also levied on indirect transfers from the acquisition of at least 95% of the shares in property-owning companies. This applies to shares of the shareholder throughout the corporate chain. A tightening of the rules for levying RETT in connection with a share transfer is now envisaged and being intensely discussed (e.g. lowering the 95% threshold).
In general, RETT is calculated based on the value of the consideration. Where RETT is triggered due to a restructuring, unification of shares, change of partners in a partnership, or in cases where a consideration does not exist, the tax base is determined based on the valuation principles applied for inheritance tax purposes.
Under certain conditions, German RETT is not levied on direct or indirect transfers (without the payment of consideration) in the course of a corporate reorganisation under the laws of a member state of the European Economic Area (EEA), provided at least 95% of the ultimate interest in the property remains unchanged for five years before and after the transaction (group privilege).
In a decision of 30 May 2017, the Federal Fiscal Court referred a case to the ECJ and asked the ECJ for a preliminary ruling on the question as to whether the group privilege constitutes illegal state aid according to European State Aid Rules. Should the group privilege constitute illegal state aid according to Art. 107 para. 1 TFEU, the group privilege may no longer be applied until the European Commission decides upon its compatibility with the Internal Market. In his opinion on the case, Advocate General Henrik Saugmandsgaard Øe argues that the regulation does not constitute state aid within the meaning of Art. 107 para. 1 TFEU. The decision of the ECJ must be awaited.
Employers are required to pay employee remuneration under deduction of the income tax due. The amounts deducted are paid over to the tax office at regular, usually monthly, intervals. The actual deductions are calculated from the gross pay, taking the employee’s marital, family, and other personal circumstances into account. The necessary personal details can be downloaded from a government database. For the employee, the payroll tax deduction is a prepayment on the income tax due after filing one’s annual income tax return. As such, the payroll tax is a WHT and not a financial burden on the employer. However, employers are required to deduct the correct amounts and are thus exposed to the risk from a later tax audit assertion of under-deduction, especially as there are often legal or practical impediments to recovery from the employees after the event. The administrative effort involved is also far from insignificant.
Social security contributions
All employers are required to account for social security contributions on wages and salaries paid, up to set monthly limits. There are four separate types of insurance: for old-age pensions, unemployment benefits, health care, and invalidity care. Employees regularly earning more than EUR 59,400 in 2018 (EUR 60,750 in 2019) can opt out of the health and invalidity insurances if they take out appropriate coverage with a private insurance company. The pension and unemployment insurances are compulsory for all employees. The upper monthly salary limit is EUR 6,500 in 2018 (EUR 6,700 in 2019) (EUR 5,800 in 2018 [EUR 6,150 in 2019] in the eastern part of Germany) for the pension and unemployment insurances and EUR 4,425 in 2018 (EUR 4,537.50 in 2019) for the health and invalidity insurances. Currently (2018), the rates are as follows:
- Pension insurance: 18.6%, of which the employee’s share is one half.
- Unemployment insurance: 3.0% (reduction planned to 2.5% in 2019), of which the employee’s share is one half.
- Health insurance: 14.6%, of which the employee’s share is one half. The health funds may levy a supplement.
- Invalidity insurance: 2.55% (3.05% in 2019) (plus a surcharge of 0.25% in some cases), of which the employee’s share is one half.