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.
In response to the COVID-19 pandemic, the VAT rates were temporarily reduced from 19% to 16% (standard rate) and from 7% to 5% (reduced rate on certain goods and services) in the period between 1 July and 31 December 2020 in order to stimulate the economy. Further, the VAT rate on meals (excepting beverages) provided in restaurants and through other catering services were temporarily reduced from 19% to 5% for services provided between 1 July and 31 December 2020 and to 7% for the period until 30 June 2021.On 3 February 2021 the coalition parties agreed a further extension of the reduction of the VAT rate on meals provided in restaurants and through other catering services to 7% until 31 December 2022.
VAT is generally administered by the tax office in the district where the taxable person operates one's business, wholly or predominantly; for taxable persons established abroad, the responsible tax office depends upon the taxable person’s country of establishment. As a general rule, preliminary VAT returns are filed on a monthly or quarterly basis by the tenth day of the following month (e.g. monthly for new businesses or where the VAT payable in the previous calendar year exceeded EUR 7,500). The taxpayer may be relieved from the obligation to file preliminary returns if the VAT payable in the previous calendar year did not exceed EUR 1,000. A permanent filing extension of one month is generally available against an advance payment of one-eleventh of the total net tax due during the previous year. Otherwise, payment is due by the tenth day of the following month as well.
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 sum total of the annual return does not agree with the total of the monthly or quarterly returns, the tax office can generally be expected to ask for a detailed explanation.
For taxable persons established abroad providing telecommunications services, radio and television broadcasting services, and electronically supplied services, different rules on VAT returns may be applicable under certain conditions (Mini-One-Stop-Shop). In accordance with the implementation of the Digital VAT Package the Mini-One-Stop-Shop procedure was broadened from 1 July 2021 onwards to a One-Stop-Shop (OSS) taxation procedure applicable to further services and distance sales from taxable persons established abroad and an Import-One-Stop-Shop procedure was implemented with respect to specific distance sales where the goods are shipped from a country outside the EU to a private individual in the EU.
There are additional reporting obligations in certain cases, particularly in cases of cross-border intra-EU supplies of goods and services to other taxable persons.
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 15%. 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 European Commission (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 15%.
A challenge for many companies is the increasingly IT-based customs processing and the increased focus of the customs authorities on an internal control system.
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 2020 the rate is 3.5% for property in Bavaria and Saxony; 4.5% in Hamburg; 5% in Baden-Württemberg, Bremen, Lower Saxony, Rhineland-Palatinate, and Saxony-Anhalt; 6% in Berlin, Hesse, and Mecklenburg-Western Pomerania; 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 share transfers is currently being discussed by the German Parliament (inter alia, lowering the 95% threshold to 90%). The legislative procedure was expected to be concluded in the first half of 2020, but is currently still pending.
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).
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 withholding tax (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 64,350 in 2021 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 7,100 in 2021 in the western part of Germany and EUR 6,700 in 2021 in the eastern part of Germany for the pension and unemployment insurances and EUR 4,837.50 in 2021 for the health and invalidity insurances. Currently (2021), the rates are as follows:
- Pension insurance: 18.6%, of which the employee’s share is one half.
- Unemployment insurance: 2.4%, 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 (1.1% on average).
- Invalidity insurance: 3.05%, of which the employee’s share is one half. In certain cases, there is a surcharge of 0.25%.