First of all, it must be clarified, before the questions of corporate tax law, what corporate tax per se is at all. The corporation tax is the tax that is incurred on the profit of corporations, such as the GmbH or the AG. This means that natural persons, i.e. sole proprietorships or partnerships, do not have to pay this tax. According to Section 1 (1) KStG, this includes the following legal entities:
- Cooperatives including European cooperatives
- Mutual insurance and pension fund associations
- Other legal entities under private law
- Associations, institutions, foundations and other special-purpose assets under private law that have no legal capacity
- Businesses of a commercial nature by legal persons under public law.
Each of these legal persons is obliged to pay taxes without restriction. In addition, there is also a limited tax liability for legal persons, whereby this relates to domestic income, of companies that are NOT domiciled in Germany.
The legal basis of corporation tax is the corporation tax law – KStG for short and the corporation tax ordinance – KStDV for short.
For example, there is a tax exemption for certain legal entities in accordance with Section 5 of the KStG, whereby these are essentially public companies, such as development banks or public-law scientific and research institutions.
In principle, corporate income tax is 15% of the taxable income – the company’s profit and is calculated on the income of the taxpayer minus the exemptions according to § 24 and § 25 KStG. For legal persons with unlimited tax liability, all income is deemed to be income from commercial operations in accordance with Section 8 (2) of the KStG. Paragraph 24 of the KStG provides for an allowance of 5,000 euros, which can be deducted from the income of taxable corporations, associations of persons or assets. For the taxable cooperatives as well as taxable associations whose activities are exclusively limited to the operation of agriculture and forestry, an allowance of 15,000.00 euros is provided in accordance with § 25 KStG.
If the profits are not distributed to the shareholders, then this tax rate remains: There is no progression here as with income tax. In addition, the solidarity surcharge must be paid on the corporate income tax.
If the profits are distributed to the shareholders, this leads to a double tax burden, because in this case the company pays 15% corporation tax on the profits and the shareholders also have to pay taxes on the profits distributed to them. So that this double tax burden can be kept within limits, only 50% of the dividends that are distributed are taken into account when determining the total income of each partner. This is then the half-income method.
The tax return: corporation tax
With regard to corporate income tax, the tax return must always be submitted to the responsible tax office by April 30 of the following year. In individual cases, the deadline for filing the tax return may be extended and those who are represented in the tax return even have longer time to submit the tax return.
Corporate tax prepayment
For every quarter – March 10th, June 10th, September 10th & December 10th – corporation tax has to be paid in advance to the tax office. The amount of the advance payment depends on the most recent winnings. After the end of the financial year, the advance payment of corporation tax will be offset against the existing tax liability.
Important! Care should always be taken to ensure that you have sufficient funds to pay corporate tax. If the financial year goes better than expected, it is advisable to set aside the money for the back tax payment in the current year and for the higher corporation tax advance payments in the following year.
Determination of profits and corporate income tax
According to definitionexplorer.com, a corporation not only has to pay corporation tax to the tax office, it is also obliged to keep accounts in accordance with the German Commercial Code (HGB). Through this accounting obligation, the taxable profit is determined by the preparation of a balance sheet and the profit and loss account (business asset adjustment). Here, an income-surplus calculation, as with a partnership, is not sufficient and must (cannot) be used.
Loss or Distribution of Profits
If there is a profit distribution to the shareholders, then they have to pay a withholding tax of 25%, whereby they can then offset against the income tax if necessary. However, if there is a loss in the course of the financial year, this can be offset against the company’s profit to reduce taxation in the following years (loss carryforward).
The problem of double taxation
The payment of corporation tax, i.e. the taxation of the profits of a corporation and the additional taxation of the shareholders in the event of a profit distribution, can lead to double taxation (see above). For example, there is a double tax burden for domestic tax matters – that is, if the corporation and also the shareholder are taxable in Germany. If there is a cross-border situation – e.g. the corporation is based in France & the shareholder is domiciled in Germany – then the term double taxation applies in this case.
The classic system
Here, there is a deliberate repeated taxation of the same tax situation. This means that the profits of the corporation are fully subject to corporation tax and the subsequent distribution of profits is subject to income tax. These systems are rarely found around the world and are mostly combined with very low corporate tax rates.
At the international level, the systems that reduce or avoid a pre-load on profit distributions at the corporation level are more common. This is done through a tariff reduction in taxation at the shareholder level.
One more way
There is also another way of avoiding a double burden. This consists in offsetting the corporation tax that was paid by the corporation in whole or in part against the income tax. However, this system has no future within Europe, as it must be designed across borders in order to be compatible with European law (it must also be possible to offset it against foreign corporation tax). Countries such as France, which still use the crediting procedure, will change their system in the next few years.