United States-Germany Tax Treaty
Quick Summary. Located in Central Europe, Germany has the largest economy of all European nations. Germany is a federal parliamentary republic with legislative power exercised by the Bundestag and Bundesrat. It government is founded in its 1949 constitution, the Grundgesetz. Germany is comprised of 16 provinces with a capital at Berlin.
Effective July 1, 2020, Germany has implemented information exchange provisions pursuant to the EU-Directive (DAC 6 – (EU) 2018/822) for mandatory automatic exchange of information related to cross-border arrangements. Germany has introduced legislation to adopt in German law EU Anti-Tax Avoidance Directive (EU-ATAD – (EU) 2016/1164 and ATAD II – (EU) 2017/952), a measure that introduced controlled foreign corporation (CFC) rules and hybrid mismatch rules.
Under the German corporate income tax (Körperschaftsteuer), Corporate residents are taxed on their worldwide income. Non-resident corporations are generally subject to taxation on German-source income. Germany also imposes a trade tax (Gewerbesteuer), which combines a uniform tax rate and municipal rate based upon the location of the taxable entity’s permanent establishment.
As of January 1, 2020, Germany has increase the income ceiling for required pension insurance contributions. German residents are subject to tax on worldwide income. Non-resident individuals are generally subject to tax on German-source income.
U.S-Germany Tax Treaty
Germany is a member of the European Union (EU), the United Nations (UN), NATA, the G&, G20, and OECD.
- Convention between the United States of America and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on income and Capital and to Certain Other Taxes, together with a related Protocol, signed at Bonn on August 29, 1989.
- Technical Explanation of the Convention and Protocol between the United States and the Federal Republic of Germany signed on August 29, 1989
- PROTOCOL AMENDING THE CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE FEDERAL REPUBLIC OF GERMANY FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND CAPITAL AND TO CERTAIN OTHER TAXES, SIGNED ON 29th AUGUST 1989
- technical explanation of the Protocol signed at Berlin on June 1, 2006 (the “Protocol”), amending the Convention between the United States of America and the Federal Republic of Germany for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital and to certain other taxes, and the related protocol, signed at Bonn on August 29, 1989
Currency. Euro (EUR).
Common Legal Entities. Joint stock company (AG), limited liability company (GmbH), general and limited partnership, sole proprietorship, and branch of a foreign corporation.
Tax Treaties. Over 95 tax treaties. Signed the OECD multilateral instrument (MLI) on July 7, 2017.
Corporate Income Tax Rate. 22.825-32.825%.
Individual Tax Rate. Progressive rates from 14-45%.
Corporate Capital Gains Tax Rate. 22.825-32.825%.
Individual Capital Gains Tax Rate. Varies.
Corporate residency. Corporations are resident if they maintain their registered office or effective place of management in Germany.
Individual residency. Individuals are resident if domiciled or if they have a habitual abode (more than six months) in Germany. Can be presumed if individual has permanent accommodation, regardless of actual use.
Royalties. Residents: 0% Nonresidents: 15.825%.
Transfer Pricing. Transactions between related persons must be in accordance with transactions that would have been agreed upon by independent third parties dealing at arm’s length. Germany applies the authorized OECD approach.
CFC Rules. Passive income of subsidiaries in low-tax jurisdictions will be attributed to German shareholders that hold more than 50% of the subsidiary. Jurisdictions with effective tax rates of less than 25% are considered low tax.
Hybrid Treatment. General anti-hybrid rules based on the EU ATAD2 must be enacted into German tax law with effect as from 2020. Rules already exist in connection with dividends received and certain “double-dip” structures.
Inheritance/estate tax. 7-50%.
National Income Taxes
Germany imposes a national income tax on individuals and companies. In addition, German municipalities impose a business tax on the income of local commercial establishments. The German tax year is the calendar year, although businesses may adopt another year with the permission of the tax authorities. Taxpayers conducting a business are required to maintain their records using the accrual method of accounting. German tax law has a strong anti-avoidance provision that allows tax authorities to disregard for tax purposes any legal construct they view as inappropriate toward achieving the desired economic result sought by the taxpayer.
Individuals resident in Germany are subject to tax on their worldwide income. Gross income is divided into several categories, including employment income, self-employment income, business income, and investment income. In computing gross income, resident taxpayers aggregate their income from the various categories. Losses incurred in one category generally may be used to reduce income in other categories; however, some losses, such as those from tax-advantageous investments, may be offset only against income within the same category. Losses arising from foreign operations may be offset only against income within the same country. For all taxpayers, except for low income earners, a solidarity surcharge is imposed.
Dividends, interest, and royalties are subject to regular income tax. A withholding tax is levied on payments of dividends, and a withholding tax is levied on payments of interest. For resident taxpayers, these withheld taxes may be credited against the final income tax liability. Only 50 percent of gross dividends are taxable for purposes of computing the final income tax liability. Consequently, residents can generally recoup the over-withholding of dividend income.
Capital gains arising in the course of a business are generally treated as income, and thereby are fully taxable. Rollover rules for replacement assets may mitigate this tax burden. Capital gains derived from private transactions are generally tax free. However, capital gains from shares held as private assets are included in taxable income if the shares have been held for less than 12 months or if they amount to a substantial participation, which is defined as the ownership of at least one percent of the share interest in that corporation during the five-year period preceding the sale; generally, only 50 percent of the gain from shares is subject to tax. Gains from the disposal of private-asset real estate held less than 10 years are includible as ordinary income unless the property was used exclusively by the taxpayer in the year of sale and for the two preceding years.
The corporate income tax is applied to stock corporations, limited liability companies, and various incorporated associations and foundations. However, the provisions for the individual income tax are also of significance for corporate entities because their income is determined according to the rules for the business income of individuals. Thus, taxable income of corporations generally is gross income less business expenses, including organizational expenses, interest, royalties, and amortization of fixed assets.
Germany overhauled its corporate tax system in 2001, replacing its imputation system with a classical system. Corporate entities resident in Germany are generally subject to tax on their worldwide income at a flat rate. The additional solidarity surcharge also applies to corporate income tax, thus raising the tax rate.
A corporate entity is considered to be a resident of Germany if it has its statutory seat or principal place of management in Germany. Corporate shareholders receive a deduction for dividends received, regardless of the holding period, the extent of the share interest in the distributing company, or whether the interest is in the shares of a domestic or foreign corporation. A similardeduction generally is available for a corporation’s capital gain from the sale of shares in another corporation. Resident corporations may claim a foreign tax credit for foreign withholding taxes with respect to dividends, interest, and royalties received from abroad.
Under the corporate tax law, there is an annual cap on all interest deductions incurred by a German business, regardless of whether interest is paid to related or unrelated parties. The changes provide for the disallowance of excess net interest expense, which is defined as the sum of interest income and expenses that exceeds an amount equal to 30 percent of the taxable income before interest income and expenses and tax depreciation (“taxable EBITDA”). For purposes of the excess net interest expense, depreciation also includes deductions for low-cost investment items.
A municipal business tax (trade tax) is collected by municipalities on all commercial establishments. The tax is imposed on the profits (income) of the establishment. For purposes of the U.S.-Germany tax treaty, the municipal business tax is treated like an income tax.
Inheritance, gift, and wealth taxes
Germany imposes a tax upon the transfer of property by inheritance or by gift. The rate of tax is graduated and varies with the nature of the relationship between the transferor and the transferee.
Social security taxes are used to finance social insurance programs. Compulsory contributions towards old-age pension, long-term care, and unemployment insurance are levied.
Germany imposes a value added tax (“VAT”) on the consumption of goods and services. Although the VAT is levied at each stage of the economic chain, it is ultimately borne by the final customer. The VAT due on any sale is a percentage of the sale price less all the tax paid at the preceding stages. A reduced rate applies to certain goods and services. Goods and services exported outside the EU are wholly exempt from the VAT.
Tax Treaty Network – International Tax Attorneys
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