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- Corporation tax (KSt ) is a tax on the income of legal entities, particularly corporations.
- Corporate income tax regulations are set out in the German Corporate Income Tax Act(KStG) and the German Corporate Income Tax Implementation Ordinance(KStDV).
- The uniform corporate income tax rate is 15%, plus 5.5% solidarity surcharge, resulting in an effective tax burden of 15.825%.
- Special consideration is given to the tax treatment of dividends, 95% of which are tax-free in order to avoid multiple taxation.
- Current topics include the reform of corporate taxation and the global minimum tax for large multinational companies.
- Corporate income tax influences companies' choice of location, particularly in an international context.
- Companies must observe the complex regulations of corporation tax law and adapt their tax planning accordingly.
Definition and legal basis:
Corporation tax (KSt) is a tax on the income of legal entities, in particular corporations such as GmbHs and AGs. It is regulated in the Corporation Tax Act (KStG) and is the counterpart to income tax for natural persons. As a joint tax, it flows equally to the federal and state governments. In addition to the KStG, the Corporation Tax Implementation Ordinance (KStDV) also forms the legal basis.
Corporation tax is part of the German tax system and was introduced in 1920 with the Erzberger tax reform. Since then, it has undergone numerous changes, with the most significant reforms taking place in 1977 (introduction of the imputation method) and 2001 (transition to the half-income method, later the partial income method).
Taxable person and tax base:
Corporate income tax is primarily payable by corporations, cooperatives, associations, foundations and other legal entities under private law as well as commercial enterprises of legal entities under public law. The assessment basis is the taxable income, which is determined in accordance with the provisions of the Income Tax Act and the Corporation Tax Act. All income is deemed to be income from business operations.
Taxable income is determined in several steps:
1. Determination of the net profit/loss for the year in accordance with commercial law
2. Correction for tax additions and deductions
3. Consideration of losses carried forward and carried back
4. Deduction of allowances (e.g. for certain non-profit corporations)
Tax rate and calculation:
The corporate income tax rate is a uniform 15% of taxable income. In addition, the solidarity surcharge of 5.5% of the corporation tax assessed is levied, resulting in an effective tax burden of 15.825%. The calculation is made by multiplying the taxable income by the tax rate. Advance payments must be made quarterly and are credited against the annual assessment.
It is important to note that corporation tax is only part of the overall tax burden on companies. There is also trade tax at municipal level and, in the case of distributions to natural persons, capital gains tax or income tax at shareholder level.
Special features and current developments:
A special feature of corporation tax is the tax treatment of dividends and capital gains from investments. In principle, 95% of these are tax-free in order to avoid multiple taxation. Since 2008, the partial income method has applied to dividends to natural persons, under which 60% of distributions are subject to income tax.
Other important aspects of corporation tax are
1. consolidated tax group: allows several companies to be combined for tax purposes
2. Loss offsetting: Rules on the use of loss carryforwards, in particular after a change of shareholder (Section 8c KStG)
3. Interest barrier: Limitation of the deduction of operating expenses for interest expenses
4. Relocation of functions: Rules on taxation when corporate functions are relocated abroad
Current developments include the discussion about a possible reform of corporate taxation, the introduction of a global minimum tax for large multinational companies and the adaptation of corporate tax law to the increasing digitalization of the economy.
International aspects:
In an international context, corporation tax plays an important role in companies’ choice of location and in cross-border investments. Germany’s corporation tax rate is in the middle of the European range, with the overall tax burden including trade tax being in the upper range.
Important international aspects are:
1. Double taxation agreements to avoid multiple taxation
2. EU directives, e.g. the Parent-Subsidiary Directive on tax-free dividend transfers
3. Transfer pricing regulations for intra-group transactions
4. Add-back taxation for low-taxed foreign intermediate companies
Corporation tax is a central element of corporate taxation in Germany and has a significant influence on investment decisions and the competitiveness of the location. Its structure and further development therefore remain an important topic in the economic and tax policy debate. Companies, especially internationally active groups, must carefully observe the complex regulations of corporate tax law and align their tax planning accordingly.
