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.A temporary reduction of the VAT rate on meals (excepting beverages) provided in restaurants and through other catering services from 19% to 7% stays in force 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 to certain persons such as private individuals, different rules on VAT returns may be applicable under certain conditions (Mini-One-Stop-Shop). In accordance with the implementation of the eCommerce VAT Package the Mini-One-Stop-Shop procedure was replaced from 1 July 2021 onwards by a One-Stop-Shop (OSS) taxation procedure applicable to further services and distance sales from taxable persons to certain customers including but not limited to private individuals 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 for example 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.
In addition, the finalisation of Brexit has given rise to major customs-related issues. Despite the Agreement on Trade and Cooperation between the EU and the United Kingdom (TCA), the withdrawal of Great Britain has resulted in particular in clearance difficulties, questions regarding the correct EORI number, but also problems with the tariff classification of goods and, notably, questions in the area of origin of goods and preferences.
Furthermore, through 2021, the Covid 19 pandemic will continue to result in a number of special regulations in the area of customs law. In particular, taxpayers who are directly and not insignificantly negatively affected by the Covid 19 pandemic can continue to apply to their main customs office for a (follow-up) deferral of all claims arising from the tax relationship using a simplified procedure. Furthermore, based on Regulation DVO (EU) 2021/111, a licensing requirement exists in principle with regard to the export of vaccines against SARS-associated corona viruses (of the SARS-CoV species) of CN code 3002 20 10, regardless of their packaging. With respect to medical supplies, new CN codes (e.g., SARS-CoV-2 vaccines) and TARIC subheadings have been created in part to facilitate trade flow crossings.
Electricity, fuels, gas and oil-based heating fuel are subject to special excise taxes in Germany, specifically the electricity tax and the energy tax. Electricity and energy taxes have a strong environmental element, being designed, inter alia, to encourage and expand the use of green energy, improve our carbon footprint and reduce the production and use of pollutants. They are usually imposed on the manufacturer, importer, or provider and then passed through to the purchaser. In the case of self-consumption, the producer may be eligible for tax exemption. The relevant legislation foresees numerous instances for tax relief, tax reductions or even a tax exemption.
Next to those regulations referring to energy/electricity there are numerous other excise tax regulations (alcohol, tobacco, coffee e.g.) in place. Also for these the possibilities of tax relief, tax reductions or tax exemption may apply.
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 2021 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% (from 1 July 2021: 90%)of the shares in property-owning companies. This applies to shares of the shareholder throughout the corporate chain. In May 2021 a law amending the Real Estate Transfer Tax Act (RETTA – Grunderwerbsteuergesetz) was finally enacted and will enter into force on 1 July 2021. The law provides for a tightening of the regulations on levying of RETT in the case of share transfers. The law provides, inter alia, for a taxation in the event of a direct or indirect transfer of at least 90% of the shares in corporations owning real estate to new shareholders within a ten year period (Sec. 1 (2b) RETTA-new) and for a lowering of the 95% limit to 90% in the event of changes in the shareholder structure of a partnership, in the event of a unification of shares and in the event of an economic unification of shares. Further, the wait-and-see period in Sec. 1 (2a) RETTA (transfers of shares in real estate-owning partnerships to new partners) is extended from five to ten years.
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%.