Paying business taxes is a necessary part of starting your own business or being a freelancer in Germany. To avoid unexpected costs, entrepreneurs should acquaint themselves with the main types of taxes that businesses in Germany have to pay.
Types of business tax in Germany
If you are self-employed in Germany, you will pay some or all of the following kinds of tax, depending on the type of business you run and your annual turnover:
- Trade tax (Gewerbesteuer)
- Corporation tax (Körperschaftsteuer)
- Income tax (Einkommensteuer)
- VAT (Umsatzsteuer)
- Payroll tax (Lohsteuer - if you have employees)
- Church tax (Kirchensteuer)
Trade tax (Gewerbesteuer)
All commercial businesses in Germany (with the exception of freelance professions and non-profit making organisations) are liable to pay trade tax (Gewerbesteuer). Trade tax obligations commence as soon as business operations begin (for one-person businesses and partnerships) or as soon as the business is entered into the commercial register (for corporations).
Trade tax is a local tax, levied annually and payable to local authorities. Businesses must complete an annual trade tax return (Gewerbesteuererklärung), either on paper or via ELSTER.
Trade tax is calculated on the basis of trade earnings, taking into account any tax-free allowances. These are currently 24.500 euros for one-person businesses and partnerships, and 3.900 euros for all other businesses.
The base rate for trade tax is 3,5%, which is multiplied by a municipal tax rate (Hebesatz) anywhere between 200% and 580%, resulting in a total trade tax rate of somewhere between 7% and 20,3%, depending on location. As a general rule, trade tax is higher in urban areas.
Corporation tax (Körperschaftsteuer)
Corporation tax (Körperschaftsteuer) in Germany is fixed at 15%. Corporations who have their management or registered office in Germany are liable to pay corporation tax. This includes AGs and GmbHs. Freelancers, one-person businesses and partnerships do not have to pay corporation tax.
Corporation tax is also subject to a 5,5% solidarity surcharge (Solidaritätszuschlag), meaning the total tax rate is 15,825% of taxable income (i.e. annual profit).
Income tax (Einkommensteuer)
Instead of paying corporation tax, freelancers, one-person businesses and partnerships in Germany are taxed on their profits via income tax (Einkommensteuer). When you register with the tax office, you will be sent a schedule of tax pre-payments on the basis of your turnover predictions.
At the end of the financial year, you can calculate your actual tax liability by completing an annual income tax return, just as if you were working in Germany as an employee. If your initial predictions were incorrect, you may be required to pay more tax, or entitled to a refund.
VAT (Umsatzsteuer - USt)
Some businesses will have to charge value-added tax (VAT) on some products and services. In Germany, VAT is officially known as Umsatzsteuer (USt), although many people continue to refer to it by its previous name, Mehrwertsteuer or MWSt.
Freelancers and small businesses (Kleinunternehmer) who make less than 22.000 euros in their first year of operation and 50.000 euros per year thereafter, can choose whether or not to charge USt. Charging it means you can also deduct any USt you paid out on business-related expenses, but also means more paperwork. Bear in mind that once you have decided to opt in or out of USt, you are locked into that decision for five years.
If you choose to charge USt, you need to add an additional 19% USt (7% for certain consumer goods and everyday services including food, newspapers, public transport and hotels) on top of your regular fee. You must set this additional money aside, as it needs to be transferred to the tax office on a monthly, quarterly or annual basis, depending on your turnover. At the same time, you can deduct the USt you have spent on business-related expenses (such as equipment or travel expenses) from the amount of USt you owe to the tax office.
If you employ anyone, you must deduct payroll tax from their monthly salaries. This includes taxes and contributions to the social security system, pension plans and health insurance plans.
Church tax (Kirchensteuer)
If your business is affiliated with any religious organisations, you may also be liable to pay a church tax (Kirchensteuer) of between 8% and 9%.
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
- Leasing a workspace (or rent if you have a home office)
- Mobile phone or internet
Tax advisors in Germany
Sorting out your tax affairs can be a headache, especially when you have a business to run and the tax system is unfamiliar to you. To ease your load, you might consider consulting with a tax advisor to help you with your finances. If you are a freelancer, an online service like Sorted can help you prepare and hand in your tax reports under the guidance of a qualified tax consultant.
Start-up grants & Financial incentives for businesses
Looking to make the most of your money? Germany’s government offers a vast array of financial incentives for new businesses to help them get up on their feet. Find out the requirements and see if you qualify.