GERMANY Law and Practice Contributed by: Michael Best, Gerald Herrmann and Jannis Lührs, POELLATH
2.9 Other Notable Taxes Incorporated businesses are generally subject to VAT; however, they are usually able to claim input VAT as well. The general VAT rate is 19%, but a reduction to 7% and even to 0%is available for some products and services. 3. Corporations and Non-Corporate Businesses 3.1 Form of Closely Held Local Businesses Closely held local businesses are mostly structured as limited liability companies (GmbH) or as limited part - nerships with a limited company as general partner (GmbH & Co. KG). 3.2 Individual and Corporate Rates If an individual professional intends not to retain the profits of the corporation but instead to pay them out by way of salary or dividends, they face an overall tax burden of up to 48% (plus church tax if applicable). In the case of dividends, this is split into two levels: corporate/trade tax at the level of the corporation (at approximately 30%) and an individual tax at a flat rate (26.375% on the remaining 70%). Therefore, there is no benefit besides a tax deferral. 3.3 Restrictions on Retention of Earnings by Closely Held Corporations There are no measures in place to prevent closely held corporations from accumulating earnings for invest - ment purposes. The retained earnings of corporations are taxed at the standard tax rates (approximately 30%). 3.4 Taxation of Individuals on Shares in Closely Held Corporations There are no special taxation rules for closely held corporations; the general rules apply (see 3.5 Taxa- tion of Individuals on Shares in Public Corporations ). 3.5 Taxation of Individuals on Shares in Public Corporations Where shares are part of the private assets of an indi - vidual, dividends are taxed at a flat tax rate of 25% with an additional 5.5% solidarity surcharge, resulting in a final valid tax rate of 26.375% (plus church tax if
applicable). Capital gains on the sale of shares are also taxed at this flat tax rate if the individual’s stake is below 1%. For the determination of the total taxable income from dividends/sale of shares, a lump sum of EUR1,000 is deducted generally. The “partial-income procedure” (taxation of only 60% of proceeds at the progressive tax rate) is applicable if the stake equals or exceeds 1%, resulting in a maxi - mum tax rate of approximately 28.5% (plus church tax if applicable). If the stake is below 1%, there are several restrictions regarding the offset of losses from capital gains– for example, only gains of the same kind of income may be offset. If the stake equals or exceeds 1%, there is no restriction regarding the offset of 60% of the losses from the sales of shares with other type of normal income (and for investment income under certain cir - cumstances). If the shares are part of the individual’s business assets, the flat tax rate of 26.375% (plus church tax if applicable) is replaced by the personal tax rate for both dividends and capital gains. However, only 60% of dividends for capital gains are taxed and only 60% of operating costs are deductible, resulting in a tax burden of approximately 28.5% (plus church tax if applicable). The same rules apply for shareholdings in not publicly traded corporations. 4. Taxation of Inbound Investments 4.1 Application of Withholding Taxes The withholding tax (WHT) is principally levied on dividends at a rate of 26.375% (including a solidarity surcharge, plus church tax if applicable). Corporations with limited tax liability may request a reimbursement of 40% of withheld tax so that the tax burden effec - tively amounts to 15.825% (including a solidarity sur - charge) and is therefore equal to the tax burden for German corporations. EU corporations that are subject to a limited tax liabil - ity benefit from the Parent-Subsidiary Directive, under
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