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Taxes on Income and Profit

On an international level, Germany follows the concept of limited and unlimited liability to direct taxes: individuals having their residence or one (of several) habitual abodes in Germany are liable to German direct taxes without limitation: i.e. the world wide income irrespective of its sources is taken into account for taxation; the same is true for legal entities e.g. GmbH and AG established in Germany.

To a very large extent, the resulting double taxation is grossly reduced or even totally avoided by unilateral and by bilateral methods. Germany has concluded "conventions on the avoidance of double taxation and tax evasion" (tax treaty) with a large number of countries all over the world. Although all the tax treaties are heavily influenced by the OECD-model-agreement, they vary slightly in each particular case. Unfortunately, some tax treaties show significant differences to the model-agreement, in particular the tax treaties with Switzerland and the United States. In most cases, double taxation is avoided by allocating the right to impose income tax on a particular source of income to one or other of the contracting states; unfortunately, Germany has reserved the right to take such income into account for the calculation of the applicable tax rate on such income that is taxable in Germany: Thus, the progressive German tax rate can play its role on a comparatively lower amount of income taxable in Germany. Obviously, the effect of this rule can be disregarded in cases where the income taxable in Germany is already taxed at the highest possible rate of 48,5 %, from 2001 onwards.

Very few tax treaties provide for the income tax paid abroad being credited against the proportionate part of German income tax due on the respective amount of income derived from that other state.

The unilateral methods to avoid double taxation comprise the same two methods as mentioned above, but are applicable only in cases where no tax treaty has been concluded.

The term taxes on income and profit comprises

  1. in the case of individuals
    1. Income Tax
    2. PAYE / Wage Tax
    3. Church Tax
  2. in the case of legal entities
    • Corporation Tax
  3. in the case of business establishments
    • Trade Tax
  4. for all taxpayers, individual or corporate
    • Solidarity Surcharge

There is no Capital Gains Tax as such; however,

  1. in the case of legal entities: the difference between the selling price and the book value is always part of the taxable profit;
  2. in the case of individuals: the difference between the selling price and the cost of acquisition is liable to income tax as a part of miscellaneous income (secc. 22, 23 Income Tax Act "income from speculative deals") only, if the sale occurs
    1. within 12 months after the acquisition of movable property, and
    2. within 10 years after the acquisition of immovable property, or
    3. prior to the acquisition.

In all other cases, the capital gains are not taxed.

It is noteworthy that the wealth of private and business associations and partnerships provided by German law is not liable to income or corporation tax as such; however, the proportionate share of profit is directly attributed to the individual or corporate associate or partner, and increases its taxable profit.

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Taxes on income and profit: