Income Tax for Businesses and Corporate Tax

1.)  Income Tax     2.) Corporate Tax

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1.)  Income Tax

Who is subject to income tax?

Every physical person and private partnership are subject to income tax. This also includes minors, and elderly people. They all fall under the same rules. Sometimes it might be a good idea to share income – especially with minors. This will be able to use the statutory set-offs.
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How high is income tax?

Taxable income starts at € 7,664 with 16% income tax and leads in brackets up to approx. 48% starting € 52,152.
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How is the taxable business income to be determined?

The general principle income taxation in Germany is based on the individual performance. Your world-wide income will generally be taxed in Germany but double taxation agreements will usually prevent you from paying taxes in Germany and at home.
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2.)  Corporate Tax

What constitutes a corporation in German tax law?

Corporation tax is a particular type of income tax for juristic persons, associations and funds/estates (§1 KStG. Just like income tax for private persons, the corporation tax belongs to the direct taxes and is a personal tax, which cannot be deducted from the income. Subjects for corporate tax are:

• joint stock company (Aktiengesellschaft, AG),
• limited liability corporation (Gesellschaft mit beschränkter Haftung, GmbH)
• association (Verein, e.V.).
• partnership companies (Partnerschaftsgesellschaft, PartG, "... & Partner")
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So my GbR will be also subject to corporate tax?

No, certainly not. Corporations are associations based on the membership of persons; they are organized on a membership basis and exist independent of the change of the individual members. The legal form corporation is a legal person, whose "body" exists of individual natural or other legal persons. A GbR is mixture exactly between a corporation and a legal entity at all. This is also true for an oHG.
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When is my company subject to German taxation?

Tax liability applies to corporations, which have either their management or registered office within Germany. Subjects, which have neither their management nor their registered office within Germany, have a limited tax liability with their domestic income.
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How do we determine the taxable income?

Taxable income is based on the result of the commercial accounting in accordance to the Commercial Code and corrected by Income Tax Act. What is deemed income and what deductible is determined by the Income Tax Act. In addition, there are some special regulations of the corporate income tax act that must also be considered. In particular, constructive dividends (verdeckte Gewinnausschüttungen = vGA) must be taken into consideration. The basis of taxation for corporation tax is - just as for income tax – the taxable income, which has been accrued within the fiscal year.
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How are the partners or shareholders of a corporation taxed for their dividends? I heard of a half-income method. Does this mean that the partner’s income will be halved and the fiscal authority pays half of the tax bill?

Smart alec!  When the profit leaves the corporation to be distributed to a physical person, the half-income method applies. On the level of the shareholders, the prior corporate tax burden of distributed profits is taken into consideration by the fact that only half of the dividends are included to compute the taxable income for this person’s income tax return (so-called half-income method, Halbeinkünfteverfahren). Profits from the sale of shares are also subject to the half income method.
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