Germany

Germany taxes its corporate residents on their worldwide income. However, most DTTs exempt income attributable to a foreign permanent establishment (PE). Non-residents with PE or property income are taxed by assessment on German-source income; those earning royalties and dividends are taxed by withholding at source. Interest paid abroad is, in most cases, free of German tax altogether.

German business profits are subject to two taxes, corporation tax and trade tax.

Corporation tax (Körperschaftsteuer)

Corporation tax is levied at a uniform rate of 15% and is then subject to a surcharge of 5.5% (solidarity surcharge). This results in a total tax rate of 15.825%.

Trade tax (Gewerbesteuer)

The trade tax rate is a combination of a uniform tax rate of 3.5% (base rate) and a municipal tax rate (Hebesatz) depending on where the PEs of the business are located. Currently, municipalities with at least 80,000 inhabitants currently levy trade tax at a rate of between 8.75% (Hebesatz of 250%) and 20.3% (Hebesatz of 580%).

The basis for this tax is the adjusted profit for corporation tax purposes: in particular, 25% of all financing costs over 200,000 euros (EUR), including the implicit financing costs in leasing, rental, and royalty payments, are added back to taxable income.

If the basis for the two taxes is identical (unlikely in practice), the overall burden on corporate profits earned in Munich would be approximately 33%. In Frankfurt, the burden would be 32%. In Berlin, it would be 30%.

Global Anti Base Erosion Proposal – Pillar Two in Germany

Germany implemented the Directive (EU) 2022/2523 on ensuring a global minimum level of taxation (Pillar Two) through the so-called Minimum Taxation Directive Implementation Act (Mindestbesteuerungsrichtlinie-Umsetzungsgesetz) in December 2023. The German rules on Pillar Two (Mindeststeuergesetz) closely follow the OECD Model Rules, the Directive (EU) 2022/2523, and other publications (in particular the Administrative Guidance as of February and July 2023) of the OECD. The Administrative Guidance as of December 2023 and June 2024 have not yet been implemented. However, both Guidances are expected to be implemented by the end of the year 2024. The Top-Up Tax according to the German rules on Pillar Two is levied as an independent tax next to the income or corporate income taxes. The rules also include safe harbour rules as well as a Qualified Domestic Top Up Tax (Nationale Ergänzungssteuer). The German Income Inclusion Rule (Primärergänzungssteuer) is to be applied for business years commencing after 30 December 2023 onwards, and the Undertaxed Profit Rule (UTPR; Sekundärergänzungssteuer) is to be applied in principle for business years commencing after 30 December 2024 onwards. Like the OECD Model Rules, the German Mindeststeuergesetz applies to domestic constituent entities of multinational enterprise groups with consolidated revenues of at least EUR 750 million in at least two of the four preceding years.

Windfall tax (EU energy crisis solidarity contribution)

The 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% 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).