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
income and trade tax purposes by forming a tax group ( Organschaft ). The controlled subsidiary must enter into a profit-and-loss transfer agreement (PLTA) with a controlling parent. Such PLTA must be entered into for a minimum duration of five years and must actually be performed (profits transferred to and losses compen - sated by the controlling parent) throughout this period. Since 2022, Germany has allowed certain partner - ships to be “treated as” a corporation for corporate income tax purposes, based on a “check the box” system. 9.4 Tax on Sale or Other Dispositions of FDI Tax Exemptions The following tax exemptions apply. Foreign corporations Capital gains received by foreign corporations from: • the disposal of shares in German corporations (participation of 1% or more within the past five years) are 95% exempt from corporate income and trade tax (100% tax exemption if the shareholder does not have a German permanent establishment/ representative); • interest in a German tax-resident (deemed) trading partnership are subject to corporate income tax (currently 15.825%), unless such partnership has no permanent establishment/representative in Ger - many – the profits are also taxed at the partnership itself for trade tax purposes (approximately 8% to 20%); and • the disposal of assets with a German nexus are subject to corporate income and trade tax if the applicable DTT assigns the right to tax to Germany (eg, for German situs real estate). Foreign individuals Capital gains received by foreign individuals from: • the disposal of shares in German corporations (1% or more within the past five years or shares held as business assets) are subject to taxation at 26.375% flat rate or at regular rates with 40% of the gains exempt, leading to a maximum tax rate of 28.5% plus church tax, if any (under an applicable DTT, such gains are usually tax exempt); however,
provided that 50% of the corporation’s assets consist of real estate, Germany imposes taxes irrespective of any participation threshold and is usually not prevented from doing so under a DTT; and • interest in a German tax-resident (deemed) trad - ing partnership and assets with a German nexus are subject to income tax (maximum 47.475% plus church tax, if any) if an applicable DTT assigns the right to tax to Germany (eg, in the case of a German permanent establishment/representative or real estate), and the profits are also subject to trade tax, with a credit at the level of the individual partner. Real Estate Transfer Tax Transactions in which real estate is transferred are subject to real estate transfer tax (RETT). RETT also applies if 90% or more of a corporation or a partner - ship with German real estate is directly or indirectly transferred to/unified in the hands of one acquirer. Real estate in partnerships or corporations can also become subject to RETT if 90% or more of the interest in such partnership or the shares in such corpora - tion are transferred within ten years to new partners/ shareholders (turnover provision), whereby the turno - ver provision for corporations provides for an exemp - tion for stock exchange transactions in shares of listed companies within the EU/European Economic Area (EEA). RETT rates range from 3.5% to 6.5% (depend - ing on the state in which the real estate is located). Share Deals Share deals are in general exempt from VAT, but the seller has the right to opt for VAT. Asset deals are gen - erally subject to VAT unless they qualify as a transfer of a going concern ( Geschäftsveräußerung im Ganzen ) – in which case, the transfer is not subject to VAT at all. There are no stamp taxes in Germany. 9.5 Anti-Evasion Regimes German tax law includes various anti-avoidance rules – notably, as follows. • The general anti-avoidance rule – tax laws cannot be circumvented by abusive arrangements, which are understood as arrangements with no sound economic reason, that do not serve any economic
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