GERMANY LAW AND PRACTICE Contributed by: Daniel Möritz, Jan Bonhage, Hendrik Bockenheimer, Carl-Philipp Eberlein, Markus Ernst, Matthias Rothkopf, Christoph Wilken and Alexander Rang, Hengeler Mueller
ic growth in Germany, the German legislator decided that the 15% tax rate will be reduced by 1% per year, starting in 2028 at 14% and ending in 2032 at 10%. Corporations with German permanent establish - ments are also subject to trade tax. The basis is the net income plus/minus certain additions/deductions. The tax rate depends on the multiplier of the local municipalities at the place of business. Effective rates range from approximately 8% to 20%. (Deemed) trading partnerships’ profits are subject to (corporate) income tax at the level of the partners. For partners subject to corporate income tax, see the foregoing. For individuals, the income tax rate is up to 47.475%, plus church tax (if any); there is a prefer - ential regime for dividends/capital gains (26.375% flat rate or 40% tax exempt). Profits of (deemed) trading partnerships are also sub - ject to trade tax at the level of the partnership if and to the extent that business activities are performed in Germany. Trade tax can be credited against the income tax of individuals (but not corporations) up to a maximum trade tax rate of 14%. 9.2 Withholding Taxes on Dividends, Interest, Etc Dividends Dividends distributed (including hidden profit dis - tribution) are subject to withholding tax at a rate of 26.375%. Interest Payments Interest payments are generally not subject to with - holding tax, except for interest paid by banks/financial institutions and on certain instruments such as con - vertibles or profit participation rights and in crowd- lending situations. If interest payments lead to the lim - ited tax liability of foreign investors in Germany (eg, if capital assets are secured by domestic real estate), tax offices can additionally order a withholding. Relief German tax-resident investors can credit withhold - ing tax against their final tax liability within their tax assessment. Foreign tax-resident corporations can request a refund of two fifths of the taxes withheld
at the Federal Central Tax Office ( Bundeszentralamt für Steuern ). Furthermore, foreign tax residents may be entitled to a full or partial refund under an appli - cable DTT or the EU Parent-Subsidiary Directive. All refunds are, however, subject to strict German anti- treaty/directive-shopping limitations and relief is only possible to the extent that one of the following condi - tions is met: • the shareholders of the entity claiming the refund would have been entitled to the same relief had they received the payment directly; • the source of the income has a significant connec - tion to a genuine economic activity carried out by the foreign recipient; • obtaining a tax advantage is not the main purpose of interposing the foreign recipient; or • the foreign recipient is a publicly traded company listed on a recognised stock exchange. 9.3 Tax Mitigation Strategies Usual tax-planning strategies for high-tax jurisdictions such as Germany (eg, utilising tax deductions for inter - est and/or royalty payments or loss carry-forwards) are subject to the following limitations, in particular. • The interest-ceiling ( Zinsschranke ) limits the deductibility of interest to 30% of the borrower’s tax-adjusted EBITDA with a de minimis of EUR3 million net interest expense, a standalone excep - tion and a debt/equity ratio test. • The royalty-ceiling ( Lizenzschranke ) limits the tax deductibility of licence or royalty payments to foreign related parties that benefit from preferential regimes with a tax rate of less than 15% (“Patent Box”). However, a draft amendment currently still in the legislative process provides for the abolition of the royalty ceiling from the 2025 assessment period onwards. • Any payment to a shareholder or related person is subject to an arm’s length test and might be treated as hidden profit distribution. • In the event of a change of ownership (more than 50% to one acquirer), the loss trafficking rules may result in the forfeiture of loss carry-forwards. German tax-resident parents and subsidiaries can consolidate their profits and losses for corporate
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