Körperschaftsteuer: German corporation tax explained in plain English

Contents

• What is Körperschaftsteuer (corporation tax)?
• Who has to pay corporation tax in Germany?
• What is the corporate tax rate?
• How is taxable income calculated?
• Is there a corporation tax allowance?
• How do losses affect corporation tax?
• When and where do you pay corporation tax?
• Summing up corporate income tax in Germany 

What is Körperschaftsteuer (corporation tax)?

Körperschaftsteuer (corporation tax) in Germany is a tax on the income of certain legal entities. In particular, these include:

• Kapitalgesellschaften (limited liability companies, e.g. the AG, GmbH, or UG),
• Stiftungen (foundations); and
• Vereine (associations).

Like Gewerbesteuer (trade tax), corporation tax is a business tax and is supplemented by other types of tax that entrepreneurs pay on their income from business activities.

What is the acronym for corporation tax in Germany?

In most cases, Körperschaftsteuer (corporation tax) is simply abbreviated as KSt. In the past, KöSt was also commonly used as an abbreviation.

Who has to pay corporation tax in Germany?

Who has to pay corporation tax is regulated by the KStG (Corporation Tax Act), which is closely based on the EStG (Income Tax Act). Section 1 of the KStG states that the following are subject to corporation tax:

• Kapitalgesellschaften (corporations/incorporated companies) such as the AG, GmbH & the UG (haftungsbeschränkt)
• Genossenschaften (cooperatives) incl. European cooperatives
• Mutual insurance and pension fund associations
• Other juristische Personen (legal entities) under private law
• Vereine (associations), Anstalten (institutions), Stiftungen (foundations) & other special-purpose assets under private law without legal capacity
• Legal entities under public law with businesses of a commercial nature

Limitation and exemption from corporation tax

In principle, these legal entities are subject to unlimited corporate income tax liability. However, there are exceptions, as the KStG (corporate income tax act)  distinguishes between different types of taxation:

• Unlimited corporation tax liability, which applies to all worldwide income (§ 1 KStG)
• Limited corporate tax liability, where only certain income is subject to corporate tax (§ 2 KStG)
• Exemption from corporation tax (§ 5 KStG)

Legal entities whose registered office or headquarters is in Germany are subject to unlimited corporation tax. Foreign corporations whose registered office or place of management is not in Germany pay corporation tax only on their domestic income (i.e. income earned in Germany). Non-profit corporations with charitable or religious purposes, professional associations and political parties are exempt from corporation tax.

When is a corporation liable for corporation tax?

Corporations such as GmbHs are liable for corporation tax even before they are entered in the Handelsregister (commercial register), i.e. before they are legally formed. In the period between the resolution to set up the company and its registration in the commercial register, every corporation exists as a pre-corporation and has the status of in Gründung (in formation). The pre-corporation is treated as a single entity with the resulting corporation. As a result, the liability for corporate income tax begins with the formation of the pre-corporation, i.e. from the notarisation.

What is the corporate tax rate?

The Steuersatz (tax rate) is 15% nationwide and is calculated on distributed and undistributed profits. The tax base is the profit made by the company or corporation during the financial year.

Since corporations have to prepare a Bilanz (balance sheet) including a profit and loss account, the profit shown in the balance sheet is the basis for calculating the KSt. However, the taxable income may differ from this.

How is taxable income calculated?

The calculating corporation tax is based on the Handelsbilanz (commercial balance sheet). From this, the corporation tax is determined by means of various tax adjustments.

Tip: It’s enough to record the differences between handelsrechtlicher Gewinn (profit under commercial law) and steuerrechtlicher Gewinn (profit under tax law) outside the commercial balance sheet. It is not necessary to prepare a separate tax balance sheet.

Below we’ll go through the instructions to help you find out what your taxable income is.

Verdeckte Gewinnausschüttungen: What are hidden distributions?

Income must not be artificially influenced by verdeckte Gewinnausschüttungen (hidden contributions). Any hidden capital movement distorts the tax base. For example, if a shareholder concludes contracts with his GmbH that secure an excessive director’s salary or the payment of excessive rent, this is a hidden profit distribution. The reverse is also true: if a managing director waives her salary or repays a loan she has granted to the GmbH, the latter has received hidden contributions. In both cases, the Finanzamt (tax office) interprets the cash movements as hidden and taxes them retroactively.

Income from shareholdings

Dividends and gains from the sale of shares in other companies are only taxed at a flat rate of 5%. Dividends from Streubesitz (free-float) holdings (less than 10%) are exempt.

Zinsaufwendungen: Interest expenses

The deduction of Zinsaufwendungen (interest expenses) is limited by the interest cap – this limits the deductibility of interest expense as a business expense.

Transfer of shares

When Anteile (shares) in a corporation are transferred, any tax loss carry-forwards are lost either proportionally (transfer of more than 25% of the shares within five years) or completely (transfer of more than 50% of the shares).

To find out how to correctly calculate and pay tax on the profits of a corporation, read this article using the example of a GmbH.

Teileinkünfteverfahren (TEV): What is the partial income procedure?

The Teileinkünfteverfahren (partial income procedure), or TEV for short, concerns the taxation of income from shareholdings in corporations in Germany. Shareholders can opt for the TEV as an alternative to regular taxation through capital gains tax. This is how the partial income system works:

Shareholders of a corporation pay tax on 60% of their profit distributions at their personal income tax rate. 40% of the profits are tax-free. (Previously, 50% of such income was tax-free and was called the Halbeinkünfteverfahren which translates to half-income procedure)

Whether the choice of the TEV results in tax savings must be assessed on a case-by-case basis, as a change in taxation method is only possible by application. More information and examples of the TEV can be found here.

Körperschaftsteuer-Freibetrag: Is there a corporation tax allowance?

Yes, but with restrictions. Certain landwirtschaftliche Genossenschaften (agricultural cooperatives) and Vereine (associations) can claim an allowance of €15,000. Associations that don’t distribute profits can claim an allowance of €5,000. However, this cannot be higher than the corporation’s profit, and the allowance deduction cannot result in a loss.

How do losses affect corporation tax?

Under certain conditions, corporations can offset their losses against their profits. For example, if you make a loss with your GmbH, the GmbH can use it as a loss carry-forward or loss carry-back. In this way, you can reduce your profits and thus your tax burden in another (later or earlier) tax period. Only 60% of losses can be deducted from a Sockelbetrag (base/basic amount) of one million euros. The basis for loss deduction is regulated in § 10 EStG.

Verlustvorträge vs. Verlustrückträge: Are losses carried forward & losses carried back treated differently?

If Verlustvorträge (loss carryforwards) and Verlustrückträge (loss carryback) coincide in the same assessment period, the loss carryforwards are deducted from the profit first and then the loss carrybacks. A loss carryback is limited to one year. This means that losses can only be carried back to the previous tax year. They are offset against profits in that period when they are claimed. Losses can be carried forward to future assessment periods for an unlimited period of time.

How much tax do companies have to pay in Germany?

Körperschaftsteuer (corporation tax) is only one component of company taxation. The UG, GmbH and AG also pay Gewerbesteuer (trade tax) and Solidaritätszuschlag (solidarity tax). This means that their profits are taxed at a total rate of just under 30%. Here is an example:

Total taxation of the profits of limited liability companies in Germany

How is corporation tax calculated in Germany?

Körperschaftsteuer (corporation tax) is calculated on the pre-tax profit, possibly after deducting the salary of the director. The example in the next section illustrates this: If you have a taxable profit of €100,000, you will pay 15% corporation tax, i.e. €15,000.

Corporation tax vs. sole trader tax: Which is more favourable?

15% corporation tax sounds rather low. Especially when compared to the personal Einkommensteuer (income) tax that sole proprietors have to pay. In isolation, this is true. But taken as a whole, the tax burden of Einzelunternehmen (sole proprietorships) is often lower than that of limited liability companies.

In the below example, the tax burden is calculated on a company profit of €100,000. The example uses an average business tax rate of 361% and an income tax rate of 32%.

Conclusion: Under certain circumstances, the tax burden of a sole proprietorship can be lower than that of a GmbH for the same profit – even though the Einkommensteuer (income tax) is actually higher than the Körperschaftsteuer (corporation tax). In principle, it is not possible to say which legal form is more favourable from a tax point of view, as the rates of trade tax, income tax and other factors must always be taken into account on a case-by-case basis.

When and where do you pay corporation tax?

As with personal income tax, you make advance payments of the corporation tax that is likely to be due. As per § 37 EStG, these advance payments are due on 10 March, 10 June, 10 September and 10 December. After you have prepared your Jahresabschluss (annual accounts) or Steuerbilanz (tax balance sheet), you do your Körperschaftsteuererklärung (corporation tax return).

Note: tax authorities now only accept returns in electronic form, i.e. online.

If you have paid too much corporation tax with the advance payments, you will receive a refund from the tax office; if you have paid too little, you will have to make an additional payment. The deadline for filing corporation tax returns is 31 May of the following year. Your tax adviser can extend this deadline to 31 December of the following year at the latest.

How do you prepare the corporation tax return?

As of 2016, there is no longer a separate Körperschaftsteuererklärung (corporate income tax return) and Feststellungserklärung (assessment return). As of 2017, the data relating to the determinations to be made are declared in the Anlagen (annexes) to the Körperschaftsteuererklärung (corporate income tax return).
A corporate income tax return consists of the following parts:

• Mantelbogen KSt 1
• Anlage GK
• Anlage ZVE
• Anlage WA

It is mandatory to submit the complete handelsrechtlicher Jahresabschluss (commercial annual accounts – the German version the annual financial statement) with the Körperschaftsteuererklärung (corporate income tax return). The new Annex GK plays a central role in determining taxable income. Let’s break down how to complete it below:

• In line 11, enter the Jahresergebnis (annual result) from the Steuerbilanz (tax balance sheet) or the result from the Handelsbilanz (commercial balance sheet) after adjustments as per § 60 para. 2 EStDV.
• Investitionsabzugsbeträge (investment deductions) are considered in lines 38 to 44.
• A Gewinnausschüttung (hidden profit distribution) is entered on line 45 and a hidden contribution by a Gesellschafter (shareholder) in line 62 or 63.
• Zu den nicht abziehbaren Aufwendungen (Zeilen 49 bis 61) gehört unter anderem auch die Körperschaftsteuer (Zeile 50).
• In lines 49 to 61, keep in mind that nicht abzugsfähige Ausgaben (non-deductible expenses) include, among others, Körperschaftsteuer (corporate income tax) (line 50).
• Enter information regarding an Auslandsbezug (foreign connection or element that has a connection to the law of a foreign state) in lines 75 to 80.

How do you handle a corporation tax refund?

Sometimes the actual income reported in the Körperschaftsteuererklärung (corporation tax return) is lower than forecast. As a result, you’ve overpaid corporation tax. You now have a corporation tax credit at the tax office and will receive a refund from the tax office. The amount of the refund is shown on the corporation tax return that you receive after filing your tax return.
To pay the refund, the tax office uses your Geschäftskonto (business bank account) or whatever bank account it has on file. However, the corporation tax refund usually relates to the previous year’s accounts, which have already been closed. So how can you post the refund of the corporation tax credit?

In this case, you would post the refund to SKR 3, for example, as follows

1. KSt: 11111 (Finanzamt) an 2204 (Körperschaftsteuererstattungen für Vorjahre)
   Corporation tax: 11111 (tax office) to 2204 (corporation tax refunds for previous years).
2. Solidaritätszuschlag: 11111 (Finanzamt) an 2209 (Solidaritätszuschlag für Vorjahre)
   Solidarity surcharge: 11111 (tax office) to 2209 (solidarity surcharge for previous years)
3. Geldeingang aus der Erstattung: 1200 (Bank) an 11111 (Finanzamt)
   Cash receipt from refund: 1200 (bank) to 11111 (tax office)

Summing up corporate income tax in Germany

• Corporate income tax is an income tax on the profits of corporations, i.e. UGs, GmbHs and AGs, and other limited liability companies.
• It amounts to 15% of the taxable profit.
• It’s just one of the taxes that corporations have to pay in Germany.
• Corporate income tax for the current tax period is paid quarterly in advance. A corporation tax return must be filed at the end of the financial year. The tax office uses this to calculate the exact amount of tax for the previous year.