Purchase of shares in German resident company
The purchase of shares in a German resident company is generally tax free for the buyer. However, the purchase of shares in a German resident company which directly or indirectly owns property might lead to real estate transfer taxation (RETT) at a flat tax rate of 3.5-6.5% (depending on municipality). RETT liability may be borne by the buyer, depending on the specific circumstances.
German tax residence
A company which has its day-to-day management or registered office in Germany is treated as tax resident in Germany.
Under the Germany-China double tax treaty (DTT), if a company is a resident of both Germany and China, then it is deemed tax resident only in the state in which its place of effective management is situated.
Corporate income tax rate
The current rate of corporation tax in Germany is 15% (plus solidarity surcharge of 5.5% of that amount, resulting in a total rate of 15.825%). Trade tax at approximately 15% (depending on municipality) is also payable.
Equity financing from Chinese resident parent company to German resident subsidiary
The equity financing (i.e. capital contribution) from a Chinese resident parent company to a German resident subsidiary is generally not taxable. Also, tax neutral repayment of capital contributions is generally possible if documentation requirements are fulfilled.
Withholding tax on dividend payments to Chinese parent company
Payments of dividends by a German company are subject to withholding tax (WHT) at a flat rate of 25% (plus 5.5% solidarity surcharge).
The Germany-China DTT provides that WHT on dividends shall not exceed:
- 5% of the gross amount of the dividends if the beneficial owner is a company (however, not a partnership) which holds directly at least 25% of the capital of the company paying the dividends;
- 15% of the gross amount of the dividends where those dividends are paid out of income or gains derived directly or indirectly from immovable property by an investment vehicle which distributes most of this income or gains annually and whose income or gains from such immovable property is exempted from tax; and
- 10% of the gross amount of the dividends in all other cases.
Debt financing from Chinese resident parent company to German resident subsidiary – tax deductibility of interest payments
The German resident subsidiary may be entitled to German corporation tax deductions for interest that it pays in respect of the loan from the Chinese resident parent company.
However, the following German rules may result in tax relief for the interest expense being denied or limited, depending on the circumstances:
- the transfer pricing rules;
- the hybrid tax mismatch rules; and/or
- the thin capitalization rules.
Debt financing from Chinese resident parent company to German resident subsidiary – withholding tax on interest payments
Payments of German-source interest are generally subject to German WHT at 25% (plus 5.5% solidarity surcharge), unless an exemption applies.
Under the Germany-China DTT, WHT on interest shall not exceed 10% of the gross amount of the interest. Where applicable, the Chinese resident parent company must apply to the German tax authority for double taxation relief to reduce the WHT payable in respect of the interest payments.
Intellectual property – withholding tax on royalties paid to Chinese parent company
Subject to certain exceptions, German WHT at 25% (plus 5.5% solidarity surcharge) applies to royalty and other payments in respect of intellectual property including: copyright of literary, artistic or scientific work; any patent, trade mark, design, model, plan, or secret formula or process; and any information concerning industrial, commercial or scientific experience.
WHT applies: (i) to transactions involving a German resident licensee; (ii) where the IP is exploited in Germany; and/or (iii) to any extraterritorial transfer or license of IP rights registered with a German public register (i.e. Deutsches Patent- und Markenamt).
However, relief to reduce the WHT may be available under the Germany-China DTT, which provides that WHT on royalties shall not exceed:
- 10% of the gross amount of the royalties; or
- in certain cases, where payments are consideration for the use of, or the right to use, industrial, commercial or scientific equipment, 10% of the adjusted amount of the royalties (meaning 60% of the gross amount of the royalties), i.e. 6%.
Intellectual property – tax treatment of licence granted by Chinese parent company to German resident company
German Value Added Tax (VAT) may apply to an intellectual property licence to a German licensee.
Intellectual property – tax incentives
There are generally no German tax incentives for corporations for the development of intellectual property.
Intra-group transactions – anti-avoidance rules including transfer pricing
Various German anti-avoidance rules may be relevant to intra-group transactions (in addition to the anti-avoidance rules mentioned above in relation to the tax deductibility of interest payments). These include:
- the general anti-abuse rule (GAAR);
- rules relating to the disclosure of tax avoidance schemes (in particular the DAC 6 rules relating to the disclosure of certain reportable cross-border arrangements); and
- the transfer pricing rules.
Sales tax/VAT
German VAT may apply to goods and services provided and received by a business established in Germany, depending on the type of supply.
Typically, a business can offset the VAT it pays on received supplies (input tax) against the VAT it charges on its own supplies (output tax), paying or reclaiming the difference.
Certain supplies, such as some financial services and some supplies of real property, are exempt from VAT. Input tax is not deductible if the relevant supplies are used by the business to make exempt supplies.
The current standard rate of VAT in Germany is 19%. Depending on the nature of the supply, a reduced rate of 7% and a 0% “zero rate” (which allow input tax recovery) may apply instead.
Pillar Two
Germany’s multinational top-up tax (MTT) and domestic top-up tax (DTT) form part of Germany’s implementation of the OECD’s global anti-base erosion rules, which ensure that the effective tax rate (ETR) of the largest multinational groups is 15% in each territory in which they operate. MTT and DTT apply for accounting periods beginning on or after 30 December 2023.
MTT is payable in respect of members of a multinational group (which has at least one group member located in Germany) which are located outside Germany, whereas DTT is payable in respect of qualifying entities which are located in Germany. MTT and DTT apply, broadly, to groups or entities (as applicable) which have revenue in excess of €750m in at least two accounting periods within the previous four accounting periods.
Use of trading losses
A German resident company that has incurred a trading loss in an accounting period (the relevant accounting period) can generally use that loss to reduce its liability to corporate income tax by:
- setting it against total profits from the relevant accounting period;
- setting it against total profits of the 12 months preceding the relevant accounting period (extendable to the previous two years in certain circumstances); and
- carrying it forward to offset future profits of the same trade or future total profits in later accounting periods.
Surrendering losses within group
Profits and losses within a domestic group can be offset by the conclusion of a formal court-registered profit and loss pooling agreement between a parent company and a subsidiary (“Organschaft”). If certain conditions are fulfilled, the annual results of an Organschaft are pooled at the level of the parent.
Payroll taxes relating to employing staff in Germany
In general, the employees of the German resident company who work in Germany will be subject to German income tax (wage tax) and social security contributions on to their employment income and benefits.
The German resident company is responsible for deducting these amounts from employees’ pay and remitting them to the competent local tax authority.
The German resident company will also be liable to pay employer social security contributions in respect of its employees. Broadly, employers are liable to pay the following social security contributions:
- 9.3% pension insurance;
- 1.3% unemployment insurance;
- 8.1% health insurance; and
- 2.3% long-term care insurance.
Tax issues relating to secondees sent from China to German resident company
In general, remuneration paid to a Chinese resident individual in respect of an employment exercised in Germany may be taxed in Germany. However, the remuneration is instead generally taxable only in China if:
- the secondee is not present in Germany for more than 183 days in any 12 month period commencing or ending in the relevant fiscal year;
- the secondee’s remuneration is paid by, or on behalf of, a non-German resident employer ( in accordance with the arm’s length principle); and
- the remuneration is not borne by a permanent establishment or a fixed base which the employer has in Germany.
The German tax authority interpret the term ‘employer’ in this context to mean the ‘economic employer’ rather than the legal one. Therefore, they do not consider the exemption to apply when the German resident company using the secondee’s services bears the cost of the secondee’s salary.
Germany has a reciprocal social security agreement with China but only with respect to the statutory pension insurance and unemployment insurance. This means the secondee’s earnings in Germany will not be liable to German social security contributions for a period of 48 months in this regard.
With respect to the other social security contributions, the secondee’s earnings in Germany will be liable to German social security contributions immediately.
Tax on disposal of shares in German resident company
Germany’s substantial shareholding exemption (SSE) provides that a gain from the sale of shares by a company may not be taxable in Germany if certain conditions are met. Generally, this exemption applies when a company sells a company in which it held more than a 10% equity interest at the beginning of the calendar year.
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