German taxation: Startups & Other matters

Germany one of the backbones of European economy has merged with the world’s latest attempt of 137 nations to check the leak of national taxation to tax havens by adopting in its cabinet meet on 31  March 2021 to have its draft Defence against Tax Havens Act (Steueroasen-Abwehrgesetz). It clearly sends the message of acting against tax evasion, tax avoidance, and unfair competition from tax heavens.

Let me try to explain this welcome development in detail along with its taxation position as on date which will help our young professionals who are in the process of getting employment in Germany, going for advanced education system which will ensure their joining European manpower in high technology, and gain international recognition.

Let us enrich the latest developments from Germany: 

Adoption of the draft Anti-Tax Avoidance Directive Act (Gesetz zur Anti-Steuervermeidungsrichtlinie) on 24 March 2021 with stricter rules to fight aggressive tax planning. The new rules aim to fight tax avoidance- strategies used by multinational corporations.

By fighting “hybrid mismatches” which allow the exploitation of different tax laws on EU member states and tighten the rules on foreign companies.

If the companies attempt to transfer their assets abroad, it will help the tax authorities in Germany to tax capital gains.

Further, the federal cabinet adopted the draft Act Updating Corporate Tax Law (Gesetz zur Modernisierung des Körperschaftsteuerrechts) on 24 March 2021 which improves the tax framework especially for small and medium-sized partnerships and boosting the competitiveness of family businesses.

Some Question and answers about global tax developments which were initiated by Germany. International corporate taxation is a pretty abstract topic. What exactly is being changed?

The recent agreements reached by the international community of 137 nations resulting in new blueprint encompasses two pillars of ensuring all companies pay their fair share of taxation to help finance public goods.

This was possible due to the team of former German Finance Minister Olaf Scholz and French Finance Minister Bruno Le Maire who proposed a global minimum effective tax. It is known as the second pillar of the agreed reform. The aim is to introduce a minimum level of tax, increase the availability to all nations and put stoppage of aggressive tax planning to divert income to tax havens.

Now what about the first pillar of tax reform?

To quote from the website “The “first pillar” will ensure greater fairness in the allocation of taxing rights and tax revenue among the world’s countries. To stick with the pie metaphor, the first pillar is about who gets which piece of the pie. The new rules will ensure greater fairness in the international allocation of tax revenue”

One can easily study the functioning of tech companies which have no factories or branches but amass huge profits from internet sales or from even ad clicks. The first pillar would ensure to pay taxes in the countries where the companies generate profits.

An attempt to shift all profits to tax havens where virtually no business activities take place may fail. What is the minimum tax rate?

The minimum tax rate will be 15%. No company will pay less than that in the end. Let us know the companies that will be affected by the above agreement?

Those who have their group companies in tax havens and getting royalty payments from other tax paying jurisdictions. In fact, almost all high-tech companies have their presence in tax havens to avoid normal payment of tax payments from where they operate.

Lt us talk of Germany. How far will it get benefitted?

Germany will benefit financially from the new rules. The Federal Ministry of Finance has also always watched out to ensure that Germany, with its export-oriented economy, does not lose out when taxing rights are reallocated. Based on current calculations, Germany’s tax revenue will increase because of the minimum tax and the reallocation of taxing rights.

Startups have caught the world by storm and Germany joins the mainstream by offering the best terms for startups. Yes, you learn this as you proceed with my article. You are encouraged to go there and flourish too.

First, the present tax levels there.

Before we unravel the traditional tax levels, let us look at any new development due to the pandemic or any steps taken by tax authorities to introduce draft Act Updating Corporate Tax Law (Gesetz zur Modernisierung des Körperschaftsteuerrechts) on 24 March 2021 which improves the tax framework especially for small and medium-sized partnerships and boosting the competitiveness of family businesses.

How does the above draft help family business?

Let us update ourselves with the latest tax rate and other relevant tax details as under. With progressive tax system, the tax rates for individuals are given below.

German income tax rates 2022

The individual income tax brackets for 2022

Income                              Tax Rate

Less than 9.984 euros      0%

9.985 – 58.596 euros         14% to 42%

58.597 – 277.825 euros     42%

More than 277.826 euros   45%

What about withholding tax?

Withholding or payroll tax is income tax and other contributions one employer withholds from its employers. These are taken out every month from salary payment.

The withholding tax levy comprises a tax on your salary (Lohnsteuer), national insurance contributions, taxes on “benefits in kind”, a solidarity surcharge, and a church tax:

Let us also talk about tax deductions.

To quote from the web site whose reference is given at the end, they are:

“Tax deductions

The German tax system allows for a relatively wide variety of deductions that can reduce your tax liability. You are also able to claim tax credits such as child benefits. Tax deductions are possible for the following types of payments:

Employment expenses (unless already reimbursed by an employer) Relocation expenses

Alimony payments to divorced or separated Charitable contributions to German charities Cost of childcare

Expenses for education or schooling Social security contributions

Church tax

Mortgage interest payments (buy-to-let mortgages only)

In order to benefit from tax deductions, you will need to complete an annual tax return. Many employees in Germany submit one, even if they are not obliged to, to make sure they are not overpaying tax.”

What about annual tax return to be filed by taxpayers?

Annual tax return (Steuererklärung)

At the end of the financial year (which in Germany runs from January to December), any taxpayer submits a tax declaration to the Federal Central Tax Office to make sure you have been paying the correct amount of tax. In case of excess tax payment already, one gets tax refund. The tax office is entitled to charge more after studying the tax return.

Where to file tax return?

One can complete the forms on paper and submit them to the tax office, or do them using the online tax office system ELSTER (Elektronische Steuererklärung).

Let us do talk about business taxes.

Business taxes

If one is self-employed in Germany, some or all of the following kinds of tax, depending on the type of business, and the annual turnover are to be paid:

Trade tax (Gewerbesteuer) Corporation tax (Körperschaftsteuer) Income tax (Einkommensteuer)

VAT (Umsatzsteuer)

Payroll tax (Lohsteuer – if you have employees) Church tax (Kirchensteuer)

My earlier article in taxguru.in completely covers details of above taxes like statistical information, various details of their application etc.

What are the business deductions?

Self-employed workers in Germany are able to reduce their overall taxable income by deducting a large number of work-related expenses. This includes payments for:

Travelling or commuting Training

Equipment

Leasing a workspace (or rent if you have a home office) Car

Mobile phone or internet

What about start ups in Germany, and do they get any benefits?

To promote research, innovation and investment, numerous grants, loans and financial incentives are available for anyone wishing to start a business in Germany.

Public funding in Germany can broadly be divided into four main groups:

Direct grants Public loans Public guarantees Equity capital

One can infer from the words, “direct grants” that amounts received under this item is nonreturnable.

These grants are intended to offset initial set-up costs, promote research and development, or help build a company’s workforce.

The GRW (Gemeinschaftsaufgabe “Verbesserung der regionalen Wirtschaftsstruktur” – Joint Task for the Improvement of Regional Economic Structures) is a major investment programme

offers grants to businesses in the manufacturing and service industries to cover a proportion (up to a maximum of 40%) of costs during the establishment phase. This includes:

Capital expenditures (e.g., new buildings, equipment, or machinery) in the first three years

Personnel costs of newly created jobs, in the first two years.

Maximum proportion of investment costs reimbursed under GRW are as under:

What about public loans?

Entrepreneurs in Germany can also access publicly subsidized programmes, provided by development banks, which offer loans at low-interest rates. There are two levels of public loans:

National public loans

The KfW (Kreditanstalt für Wiederaufbau – “Reconstruction Credit Institute”), the federal government’s development bank, has a number of financing options open to entrepreneurs, both German and foreign. The Entrepreneur Loan (Unternehmerkredit) finances up to 100% of eligible costs, up to a maximum of 25 million euros.

What about state loans?

Federal state public loans

Alongside the loans offered by the KfW, each German federal state has its own development bank, which provides loans of up to 10 million euros to small and medium-sized enterprises (SMEs). With clear emphasis of availability for any one either from German or otherwise, the scope is wide and enticing.

Some more interesting facts for industries to establish, maintain, and flourish:

Public guarantees are a scheme adopted by the German government to encourage commercial banks to offer loans to companies.

Public guarantees can cover up to 80% of the loan amount, usually up to 1,25 million euros, over a period of fifteen years. Throughout the loan period, the borrower pays an annual fee, proportional to the outstanding amount borrowed.

What about equity capital? Various public sources, on both a national and a regional level, provide equity capital for new businesses in Germany.

The amount up for grabs is large: in 2016, more than 934 million euros of venture capital was invested in new companies based in Germany. Maximum investment for start up under technology sector is 2 million euros for High-tech Grunderfonds, 10 million Euros for Coparion, KFW Capital for 25 million Euros etc.

If one has lost the joband are receiving unemployment benefit, he/she is entitled to a start-up grant to take up self-employment. Job centres also offer seminars and courses to help one to prepare for running own business.

Conclusion

There is hardly any change about German taxation except that like others in the world, the approach has undergone sea change to offer startups a new horizon, lead the world to fight tax havens by motivating 137 nations together, help the small and medium/large size industries with substantial benefits to face the most unpredictable pandemic, and move with time to a new year of prosperity. Like any forward- looking civilized nation, it got affected by tax havens which have wrecked the world of civilized nations with total diversion of income though the grunt of hard work is done by these nations only to keep the industries moving. I am happy that it is one of the pioneers to bring around 137 nations on board for a new tax world where a minimum tax rate of 15% will be collected from big companies having 750 million dollars income per year and small nations too will get the benefits.