Germany has the best economy, thus a good hub for many foreign investors. There is a promising market for anyone who wants to start a business there. However, you need to be conversant with tax requirements in Germany before starting any business. This will ensure your smooth business running and will save you from landing into trouble with the German authorities. When you want to start trading in Germany, liaise with the finanztreff app to keep yourself updated with financial news. There are frequent changes and fluctuating developments in the financial world, and thus it is crucial to get updated. You should also be keen on the changes in business laws and taxation in Germany. If you are self-employed in Germany, you will pay taxes for sole proprietorship and partnership, but corporations are taxed differently.

Payable Tax

Trade taxes target businesses and their genuine earning capacity. Payable tax is imposed on the earnings made by a business, regardless of the personal circumstances of any of the firm owners, as a non-personal tax. This distinguishes trade tax from personal taxes such as income tax and corporation tax, based on a natural or legal person’s existence or economic performance. As a result, the tax is imposed on a specific object, called the commercial process. Trade tax applies to all enterprises operating in Germany. Businesses are considered to be operating in Germany if they have a permanent presence there. Sole traders and commercial partnerships are examples of businesses (as defined by the Income Tax Act). A corporation’s actions are always considered to be full-fledged business operations. Trade tax does not apply to agricultural and forestry firms, freelance labor, and other forms of self-employment. Profits from businesses are subject to the tax. This refers to a company’s profits as determined under the Income Tax Act or Corporation Tax Act for trade tax purposes.

The amount of tax payable

The ‘base tax amount’ is the starting point for calculating trade tax. This is calculated by multiplying the firm’s profits by 3.5 percent (the basic tax rate). Individuals and partnerships are eligible for a € 24,500 tax-free allowance. The tax office is in charge of calculating tax bases and assessing and dividing the base tax amount. The municipality in which the business’s permanent establishments are kept has the authority to levy the tax. If a company has locations in many municipalities during the tax collection period, the base tax amount must be shared between them. The wages paid by the company are commonly used as a criterion for dividing up the assets.

VAT in Germany

The value-added tax (VAT) system in Germany is comparable to that in other EU nations. It’s no surprise that the German VAT Act reflects the VAT Directive of the European Union. Germany’s standard VAT rate is 19%, while the unified reduced rate (food and newspapers) is 7%. VAT was reduced to 16 percent and (reduced rate) 5 percent for the second half of 2020 as part of a larger tax relief package. The time when the service is provided, not when the invoice is given, is crucial. Many services, such as renting an apartment or purchasing a home, are VAT-free. If you are a business or an entrepreneur, you may be able to refund VAT paid if certain criteria are met. The small entrepreneur’s rule allows small businesses to avoid invoicing VAT if their annual revenue does not exceed EUR 22,000 (as of FY 2020). However, they cannot claim input VAT on their suppliers’ invoices.

Real Estate Transfer Tax

The real estate purchase in Germany is VAT-free; however, it is subject to real estate transfer tax (RETT, Grunderwerbsteuer). RETT is levied at a rate ranging from 3.5 percent to 6.5 percent on the agreed value (typically the purchase price), depending on where in Germany (in which Bundesland) the real property is located. RETT is normally borne by the purchaser, as stated in the notarized purchase agreement. As a result, the buyer typically receives the RETT assessment from the tax authorities. RETT must be paid within one month after receiving such notice to avoid fines and penalties.

Germany’s economy provides investors with an opportunity to start any legal business due to its ready market. The large population of Germany makes it suitable for business growth. However, before starting any business, it is advisable to be conversant with business regulation rules and tax laws that govern entrepreneurship. Adhering to business regulations and tax laws keeps your business on the safe side to avoid clashes with the concerned authorities.