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.
The temporary reduction of the VAT rate from 19% to 7% on meals (excluding beverages) provided in restaurants and through other catering services, originally introduced in response to the COVID-19 pandemic, has been extended (presumptively) until 31 December 2023, against a background of increasing inflation. Furthermore, to temper the effects of increased energy costs for private households, the supply of gas and heat via the respective grids are subject to the reduced VAT rate from 1 October 2022 until 31 March 2024.
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 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, as a general rule, 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.
With effect from 1 July 2021, the previous 'Mini-One-Stop-Shop' for telecommunication services, broadcasting services, and electronically supplied services by taxable persons established abroad (e.g. to private individuals) was replaced by a 'One-Stop-Shop' (OSS) taxation procedure. This procedure,which generally allows for a single registration in the EU for the supplies covered by the OSS, is applicable to certain distance sales and to cross-border services from taxable persons to certain customers including, but not limited to, private individuals. In addition, an 'Import-One-Stop-Shop' procedure was implemented with respect to specific distance sales where the goods are shipped from a country outside the European Union (e.g. to a private individual in the European Union). If OSS procedures are applied, different rules for VAT returns are applicable.
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. This includes, by way of example, the comprehensive and ambitious trade agreement which the European Union concluded with New Zealand on 30 June 2022.
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 attempts at dumping. The countervailing duty rate is set to fully absorb the dumping margin and is therefore usually much higher than 15%.
In terms of customs valuation, the eagerly awaited ruling of the German Supreme Tax Court (17 May 2022 /VII R 2/19) in the Hamamatsu case was issued. While the relevant ECJ ruling (C-529/16) had already raised questions of implementation, associated companies that declare a transfer price as the basis for customs valuation are now facing severe problems, as the dicta of the Supreme Tax Court can partly be interpreted in many ways.
A challenge for many companies is furthermore that customs processing is increasingly becoming IT-based customs and moreover the customs administration are increasingly focusing on internal control systems. In the context of digitisation on the part of the German customs administration, several ATLAS releases were published in 2022; in particular, the new customs application ATLAS-IMPOST (for simplified import customs declarations of small consignments) was made available in Germany in 2022, and (further) certifications for the applications ATLAS AES 3.0 (export) and ATLAS 9.1 (import and NCTS) have also been introduced and are scheduled to be completed by 16 June 2023.
Since the beginning of the conflict between Russia and Ukraine, not only political representatives, but also companies and the general population have been increasingly concerned. On 23 February 2022, new EU sanctions were imposed against Russia and Belarus and against persons and organisations significantly involved, and have been further tightened during the year. This represents a major challenge for many economic operators, especially since sanction violations can result in fines or even criminal penalties; in addition, customs measures such as the suspension/withdrawal of the customs permit are to be feared. In order to comply with the sanction regulations, many companies had to improve the control of operational processes, as well as having to clearly define personnel responsibilities and audit standardised processes.
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 per se. 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. In the area of both refunds and taxation, reforms are being introduced in the coming year, meaning that both the basis for refunds and, in particular, the tax rates on special energy products will have to be reviewed. The system will give preference to sustainable energy products in the future. Details will become available next year.
Besides the air passenger duty and environmental elements in excise taxes, there are no environmental taxes, as such, in Germany.
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; from 2022 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. Please note that effective as of 1 January 2023, the RETT rate for Hamburg and Saxony will be raised to 5.5%.
This tax may also be levied on the direct or indirect transfers of at least 90% of the shares in property-owning companies or the interest in property owning partnerships (so-called "share deals") to new shareholders/partners within a ten year period. This applies to shares/interests of the shareholder/partner throughout the chain of participation. Further an (economic) "unification" of 90% of the shares/interest in a property owning corporation/partnership can also give rise to a taxable event.
In any case of a transfer of German real property or a transfer of real property-owning companies subject to RETT, the tax authorities have to be notified. While notification requirements are in general fulfilled by the responsible notary if German real property is transferred, there are special notification obligations for the parties involved if shares in a real property-owning company are transferred. Missing a timely notification may result in penalties and under - certain circumstances - even to a substantial additional tax burden.
In general, RETT is calculated based on the value of the consideration. Where RETT is triggered due to a restructuring, transfer of shares in a corporation or interest in a partnership of at least 90 %, or in cases where no consideration exists, the tax base is determined based on the valuation principles applied for inheritance tax purposes.
Subject to 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 interest of the controlling entity in the parties involved in the reorganisation 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 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 an income ceiling (monthly limits). There are five branches of social security insurance: pension insurance, unemployment benefits, health care insurance, and nursing care insurance and work accident insurance. All branches are compulsory fo all employees. However, employees regularly earning more than EUR 66,600 in 2023 can opt out of the health and nursing care insurances if they take out appropriate coverage with a private insurance company. The pension and unemployment contributions are capped by monthly upper salary limits: EUR 7,300 in 2023 in the Western Federal States of Germany and EUR 7,100 in 2023 in the Eastern Federal States of Germany respectively and EUR 4,987.50 in 2023 (both West and East) for the health and invalidity insurances.
From 1 January 2023, the rates are as follows:
- Pension insurance: 18.6%, of which the employee’s share is one half.
- Unemployment insurance: 2.46%, of which the employee’s share is one half.
- Statutory health insurance: 14.6%, and an individual supplement of each statutory health insurance (1.6% on average) of which the employee’s share is one half.
- Statutory nursing care insurance: 3.05%, of which the employee’s share is one half. There is a surcharge of 0.35% for employees without children.
- Private health and nursing care insurance: rates depend upon the individual contractual arrangements.
- The contribution regarding accident insurance is determined by the accident risk involved in the particular job and is only paid by the employer.
Windfall tax (EU energy crisis solidarity contribution)
The new EU energy crisis contribution is to apply to EU enterprises and establishments active in the oil, natural gas, coal and refinery sectors, which, in the relevant taxation periods 2022 and 2023, generate at least 75 percent of their annual turnover through business activities in the sectors of extraction, mining, refining of petroleum or the manufacture of coke oven products. It will be levied in addition to any taxation charged under the Income Tax Act or the Corporate Tax Act. The tax rate of 33% will be applied on the assessment basis which is calculated as the positive difference between (i) the taxable income for the relevant tax period calculated according to income or corporation tax regulations, and (ii) 1.2 times the average taxable income arising in the financial years beginning after 31 December 2017 and ending before the first tax year of the EU energy crisis solidarity contribution (i.e. 2018 to 2021 if the financial year is the calendar year).