1. Turnover tax
The turnover tax is a consumer tax, which makes it a so-called ´item in transit´ for the business. This means that the business person charges the customer a sales tax on goods and services which are liable for this tax and pays it to the tax authorities. In addition, goods and services for one’s own consumption are taxed. Sales tax is currently 19% of the net amount on the bill. A reduced sales tax of currently 7% applies to certain goods and services.
The turnover tax only taxes the “added value” of a particular good or service. Tax law draws a distinction between turnover tax as an input tax, which has to be listed separately on bills/invoices, and turnover tax which is contained within turnover (Value Added Tax). The sales tax payable to the tax authorities is calculated as the difference between value added tax and input tax. Example:
VAT (contained in one’s own invoices)
- input tax (listed separately as sales tax on the supplier’s invoice)
= turnover tax due
The turnover tax due arises at the point in time when performance is made. It has to be paid to the tax authorities even if the customer pays later. This can lead to liquidity problems. If your annual turnover is no higher than 500,000 euros or if you are exempt from bookkeeping duties or if you are working as a freelancer, you can apply to have your turnover tax due only when payment has been made.
Your advance turnover tax declaration is usually due on a quarterly basis by the 10th of the subsequent month. In the following cases, your turnover tax declaration will be due for every single month:
· During the first two years of your newly founded business. After that you are required to submit your advance turnover tax declaration on the regular (quarterly) basis.
· Your total turnover tax paid for the last year adds up to more than 7.500€.
· If yor last year´s tax refund exceeds 7.500€ you can opt for a monthly submission.
If your total turnover tax paid for the last year adds up to no more than 1.00€ you can apply for an exemption from the obligation to submit any advance turnover tax declaration at all
It is best to discuss this with the tax office responsible for your tax affairs. You will also be given the necessary forms there
2. Income tax (wages and salaries)
As a rule income tax, just like sales tax, does not burden the company. This is referred to as an item in transit. As the owner of the business you do not need to withhold wages and salaries tax in respect of yourself. But of course, you will have to reveal your own wages when submitting your private tax declaration. Income tax will then be deducted accordingly. However, as soon as you employ people you have to pay wages and salaries tax. So that you can deal with this deduction of tax properly, your staff must produce an electronic tax card (the online tool “ELSTER online” is used for that). This does not include staff that work on a freelance basis. The information entered on the tax card, e.g. tax group, number of children helps to determine the amount of tax due. The wages and salaries tax must be withheld by the employer. As an employer you are also required to run a salary account for each employee. This account must also contain the documentation necessary for the calculation of wages and salaries tax.
The wages and salaries tax that is withheld is usually reported and paid every month to the tax office using an electronic (wages and salaries) tax return form (Lohnsteueranmeldung). Small businesses can do this tax return on a quarterly or annual basis. You have to submit the relevant documentation to the tax office either monthly, quarterly or annually by the 10th of the subsequent month, but at the very latest by the 15th of that month.
3. Flat-rate taxation
It is possible to make a flat-rate taxation payment in the case of low-wage or short-term employment. Further information about this can be obtained from your local ministry of finance.
4. Income tax
Only natural persons, are liable for income tax. This does not apply to joint stock companies such as a limited liability company. As the owner of a commercial enterprise or as a partner in a partnership you are liable to pay income tax on the income realised by the commercial activity of the business. The person liable for tax is not the business but the owner or the partner within a partnership. Small businesses can show their profit by means of a relatively straightforward surplus income calculation. Usually you can draw up this list of company income and expenditure yourself without difficulty. It becomes more complicated when your company is entered in the commercial register. Apart from opening balances and tax balance sheets, you are then required to produce a detailed profit and loss account. In this case you should seek the help of a professional accountant or tax adviser.
All of the costs involved in preparing the setting up of your company, e.g. seminar costs, brochures and travel expenses are tax deductible. So keep all your receipts!
5. Corporation tax
Corporation tax is the income tax of juristic persons such as a limited liability company. The basis for assessment is taxable income, which is determined on the basis of a balance sheet comparison. Company profits are taxed at a uniform corporation tax rate of 15% plus the solidarity surcharge (which adds up to a total tax rate of approximately 15,825%) irrespective of whether the profits stay within the company or are paid out. At the level of the shareholder the dividend that is paid out is subject to capital returns tax. If shares are hold by the company itself only 60% of the dividends paid out are subject to tax (Teileinkünfteverfahren).
6. Trade tax
All commercial enterprises are subject to trade tax. This tax is a tax on trade earnings, which means that a company’s profit is taxed. The concept of profit is not the same in trade tax law as it is in corporation tax law. For the assessment of trading profit in the case of sole proprietorships and partnerships all payments to the partners (salary, interest on partners’ loans etc.) are counted as part of the profit.
7. Double taxation agreement (DBA)
How your business profits in Germany are dealt with in taxation terms depends on whether you establish permanent business premises or not. It is necessary here to comply with the double taxation agreements that exist.
Germany has entered bilateral double taxation agreements (DBA) with most countries. These agreements ensure that an item liable for tax is not simultaneously taxed to its full extent in both countries. It is established in nearly all DBAs that a foreign branch with its own turnover and profit must be taxed in the country in which the branch is located. In Germany it is necessary for the business to be registered with the office for the registration and supervision of trades. Then German turnover and profit are taxed as is common in Germany. The taxes paid in Germany are in many cases deductible in the foreign country. There is no obligation to pay tax in Germany if the business located here is a representative office involved in promoting the company or creating contacts and the business deals are made in the foreign country where the company is based.
In accordance with the DBA you can be relieved in whole or in part from tax deductions if you receive salary payments, dividends and certain other capital gains from abroad. This is often achieved by using a tax refund procedure.
For further information please contact us.