Germany: Taxation of Foreign Investment in Germany
Germany has the largest economy in Europe. Along with the developed infrastructure, investors will also benefit from the advanced technology that will ease integration in many industrial sectors, and the highly specialized as well as educated workforce. In terms of the taxation of foreign investment, the taxation system in Germany is very competitive compared to other EU member states.
Common types of German holding companies are Limited Liability Company and Joint Stock Company; for foreign entities investing in Germany, they may choose holding companies in the form of Subsidiary, Branch Office and Partnership. Amongst these, Limited Liability Company is most favorable due to minimal share capital investment requirement of 25,000 Euros.
Shareholders are taxed separately in Germany. The distinction is made between shareholders as individuals and shareholders as legal entities. At individual level, the shareholder is required to pay a flat rate tax on dividends of 25% and an additional solidarity surcharge of 1.37%. In case of partnerships with individuals and German-resident partners as shareholders, 40% of the dividends is tax-exempted. For dividend income from shares held by another corporation, 95% of the dividend is tax-exempted if the shareholding is 10% or more.
Generally, the German withholding tax including solidarity surcharge on dividends paid by the holding corporation is 26.37%. In cases which Double Taxation Agreement (DTA) applies, the withholding tax rates are reduced in accordance with the respective DTA.
The capital gain resulting from a transfer or sale of shares of a German corporation is 95% tax-exempted if the seller is a corporation; and 40% tax-exempted if the seller is an individual that holds or has held 1% or more of the shares within the last five years or holds the shares as business assets. If the seller is a partnership, the tax exemption depends on the whether the partner is an individual or corporation.
Recently, new regulation is proposed in respect of the capital gain from the sale of shares received by a corporation i.e. the 95% tax exemption only applies if the shareholding is 10% or more, in line with the requirement on exemption of dividend income received by a corporation. Therefore, foreign investors with shareholding of less than 10% may re-structure their investments to mitigate this exposure before the new regulation come into force. Apart from the competitive taxation system, there is no discrimination between national and foreign investors with regards to company registration in Germany. In addition, foreign investors can also buy and own properties in Germany without the risk of being expropriated.
