The Corporate income tax is mandatory for all corporations such as the public limited company (AG) or limited liability company (GmbH).
The tax rate is a uniform 15% on the taxable company profits. Corporate income tax is payable both for retained and distributed profits.
If a German subsidiary takes profit distributions to its foreign parent company (dividend payment), a 25 per cent capital gain tax is to be paid in principle.
In the case of an existing double taxation agreement (DTA) between the Federal Republic of Germany and a foreign country, the capital gains tax can be paid according to the agreements made in the respective DTA. In general, dividends payment are taxed by a DTA with a reduced tax rate of only 5%, 10% or 15%. There is also the possibility of exemption from capital gains tax.
The capital gains tax deducted in Germany (so-called withholding tax) can also be credited to the foreign tax liability of the foreign parent company. Therefore, there is no effective double taxation. Again, the respective provisions are listed in the corresponding double taxation agreements.
If the creditor of the corporation is a foreign corporation, then 2/5 of the capital gains tax paid would always be refunded irrespective of whether a DTA exists or not.
Within the EU, dividends payment between a domestic subsidiary and a foreign parent company are tax-exempt as from a 10% participation.
Profits distributed to private shareholders are subject to a withholding tax of 25%. The withholding tax is paid directly at the source, i.e. by the debtor of the dividend or the custodial body and transferred to the tax office.
The so-called solidarity surcharge will be added to the corporate tax.
The solidarity surcharge is a special tax introduced in 1995 in connection with the financing of the German reunification. It must be paid by both capital and private companies.
The solidarity surcharge amounts to 5.5% of the corporate tax or income tax rate, i.e. 5.5% of the 15% corporate tax, i.e. 0.825% for corporations. The corporate tax and the solidarity surcharge thus adds up to 15.825%.
For a dividend payout of 100,000 Euros the corporation tax is 25 percent = 25,000 Euros. Of the remaining 75,000 euros, the company transfers withholding tax of 20 percent, i.e. a further 15,000 Euros to the tax authority before the payout is made to the shareholder.
However, this withholding tax counts as an advance payment for the shareholder's income tax once the dividend has been paid out, and therefore added again when the shareholder's income tax is calculated.
Of the remaining 75,000 Euros to be assessed after the dividend payment, only 50 percent = 37,500 Euros are subject to income tax, the other 37,500 Euros are tax-free. Assuming the income tax rate to be 35 percent, this would lead to income tax of 13,125 Euros on the taxable half.
This is then offset against the withholding tax of Euro 15,000 deducted before the dividend payment, resulting in a tax rebate of 1,875 euros from the tax authority. Ultimately, therefore, the shareholder receives an amount of 61,875 euros after the German income tax has been deducted.