Corporate income tax (KSt) taxes the profits that legal entities make. It represents the counterpart to income tax for natural persons. Corporate income tax applies not only to corporations, but also to institutions and foundations.

• Corporate income tax in Germany is 15 percent.
• Corporate profits are taxed at different rates internationally.
• In addition, taxation can take place in various ways.

Double burden

In Germany, the deliberate double taxation applies to profits. The company must first pay corporate income tax on its profits. If the profits are then distributed to shareholders, these profits are taxed again, in the case of a dividend payment at 25 percent.

The amount of corporate tax

Short for CIT by abbreviationfinder, the level of corporation tax is well below the progression of income tax: In Germany it is 15 percent plus a five percent solidarity surcharge. In total, the profits of a legal person are burdened with 15.825 percent.

Tax system in Germany: tariff reduction

The taxation of corporate profits is not standardized internationally. In addition to different tax rates, there are also different approaches.

The tariff reduction, common in Germany, provides either a flat rate of tax rates or partial relief through lower taxation. Shifts in profits within a group are often tax-exempt.

Systems without a tariff discount

The shareholder has to pay tax in full on the distribution received. If a corporation pays profits to another corporation, taxes are often no longer due.

Full credit systems

These systems avoid double taxation on cross-border payments or double taxation on domestic payments. Shareholders, and thus beneficiaries of distributions, can offset the corporation tax paid against their personal income tax.

Partial credit systems

These work in the same way as the full credit systems, but have the restriction that only a certain percentage of corporate tax can be offset against personal income tax.

Dividend exemption procedure

This form applies to payments in some countries in Germany and waives any further, additional taxation of dividends paid by the shareholders.

CORPORATION

Basically, a corporation is a legal person. The basis is the partnership agreement, which has the corporate purpose and the common goals of the shareholders as its content. The definition of a corporation, a corporation under private law, can be found in the heading of the second section of the third book of the Commercial Code.

• A corporation is a legal person with legal capacity, party capacity and criminal capacity.
• The most common legal forms of a corporation in Germany are the stock corporation (AG) and the limited liability company (GmbH).
• The shares of an AG can easily be traded, shares of a GmbH can only be transferred with the consent of the shareholders by means of a notarial contract.

The characteristics of a corporation

The legal forms of a corporation are clearly defined. The following types are permitted in Germany:

• The stock corporation, AG – under European law SE
• The partnership limited by shares, KGaA
• The limited liability company, Ltd.
• The entrepreneurial company, UG

A foreign corporation is not a corporation under the Commercial Code and therefore cannot be founded in Germany.

The characteristics of the corporation

A corporation is distinguished from a partnership by its hard criteria. These include:

• A legal person with legal capacity, party capacity and criminal capacity. The inventory is independent of the members.
• The foundation takes place in several stages. The partnership agreement is followed by the notarial certification of the articles of association and the entry in the commercial register.
• There are rules for raising and maintaining the share capital.
• A corporation can also be managed and represented by non-shareholders.
• Decisions are based on the distribution of the shareholder’s capital as part of the decision-making process.
• In contrast to a partnership, the shareholders are no longer to be seen as debtors to third parties after the contribution has been made.

Differences between GmbH and AG

The share of a GmbH can only be transferred by a notarial contract and requires the consent of the shareholders. A share, on the other hand, unless it is a registered share with restricted transferability, is a bearer security and can be bought or sold by anyone at any time. While in a GmbH the managing director (s) are responsible for the company, in an AG the board of directors takes on these tasks. Managing directors can be restricted in the exercise of their activities by the shareholders. The general meeting, as the controlling body of the board, can only pass resolutions at the request of the board.

Differences in corporations according to the Commercial Code

The Commercial Code distinguishes between three size classes for corporations: small, medium-sized and large companies. This classification is important because it influences the disclosure requirements in connection with the annual financial statements. Section 267 of the German Commercial Code (HGB) regulates the classification based on the number of employees, sales volume and total assets.