Tax and Private Clients

German tax for businesses and families: an overview

German tax law is extensive, technical and closely intertwined with company, employment and succession law. For businesses, the main taxes are corporate income tax and trade tax on profits, VAT on supplies, wage tax withheld from employees' salaries, withholding taxes on dividends and certain payments abroad, and real estate transfer tax on property transactions. For individuals and families, income tax, inheritance and gift tax, and the taxation of investment income matter most. The tax authorities are organised at the level of the federal states, with the Federal Central Tax Office responsible for international matters such as withholding tax relief, and disputes are decided by the Finance Courts and the Federal Fiscal Court (BFH).

Tax considerations shape almost every business decision: the choice of legal form, the structure of an acquisition, the financing of a group, the location of functions, employee participation programmes, the succession in a family business. Because tax is so closely connected to the legal structure, our lawyers work with clients' tax advisers and auditors to integrate tax structuring into transactions and reorganisations, to draft tax provisions in contracts, and to represent clients in disputes.

This pillar page gives an overview of German tax for companies, investors, entrepreneurs and private clients, and links to our detailed pages on corporate and transaction tax, international tax and transfer pricing, tax audits, disputes and tax criminal law, succession planning and inheritance tax and foundations, trusts and family offices.

The legislative landscape changes constantly. Annual tax acts adjust rates, allowances and anti-avoidance rules; EU directives on minimum taxation, transparency and VAT require implementation; and the case law of the Federal Fiscal Court, the Federal Constitutional Court and the Court of Justice of the European Union regularly changes the interpretation of existing rules. Tax positions that were sound a few years ago may need review, and structures should be built with enough flexibility to adapt, for example through clauses in contracts that allocate the risk of changes in law.

The tax administration also changes. Tax offices increasingly rely on digital data: electronic filing, standardised audit data, e-invoicing and automatic exchange of information with other countries give auditors a detailed picture of a company's transactions before an audit begins. Companies with clean data, consistent processes and good documentation are better placed both to avoid disputes and to win them.

The main German taxes at a glance

The figures in the table are the starting points. Each tax has its own base, exemptions and anti-avoidance rules, and the interaction between them, for example between corporate income tax, trade tax and the taxation of distributions to shareholders, determines the overall burden. Municipal multipliers for trade tax differ widely, so the overall burden on corporate profits varies by location.

Corporate and transaction tax

Corporations pay corporate income tax at 15% plus the solidarity surcharge, and trade tax at a rate that depends on the municipality, giving a combined burden that typically lies between about 23% and 33%. The federal corporate income tax rate will fall by one percentage point per year from 2028 to reach 10% from 2032 (§ 23(1) KStG). Dividends and capital gains from shares received by corporations are 95% exempt, interest deductions are limited by the interest barrier, and tax losses are forfeited if more than 50% of the shares are transferred within five years, subject to exceptions. Fiscal unities allow profits and losses to be combined within a group.

Transactions raise specific German tax issues: real estate transfer tax on share deals in property-owning companies, the preservation or loss of tax losses, the step-up in asset values in asset deals, the tax treatment of management participation, VAT on asset deals, and tax indemnities. Reorganisations can often be carried out tax-neutrally under the Reorganisation Tax Act, subject to holding periods. Our page on corporate and transaction tax explains these rules in detail, and our pages on mergers and acquisitions and private equity show how they are applied in deals.

VAT and e-invoicing

VAT is levied at a standard rate of 19% and a reduced rate of 7% for certain goods and services (§ 12 UStG). Businesses can deduct input VAT on their purchases, so VAT is mainly a compliance and cash-flow issue for them, but errors can be costly.

Germany is introducing mandatory electronic invoicing in B2B transactions: an electronic invoice must be issued in a structured format that allows electronic processing (§ 14(1) UStG), and transitional rules allow paper or other electronic formats for transactions until the end of 2026 and, for smaller businesses or under certain conditions, until the end of 2027 (§ 27(38) UStG). Businesses must already be able to receive structured electronic invoices and should complete their system changes in time.

Partnerships and transparent entities

Partnerships such as the GmbH & Co. KG are transparent for income tax purposes: their profits are allocated to the partners and taxed at the partners' level, whether they are individuals or corporations. Trade tax, however, is levied at the level of the partnership, and individual partners can credit part of it against their income tax. Partnerships can opt to be taxed like corporations, which may be attractive where profits are retained. The choice between a partnership and a corporation therefore depends on whether profits are distributed or retained, on the partners' residence and on succession planning.

Wage tax, social security and employee equity

Employers must withhold wage tax and social security contributions from salaries and pay them to the tax office and the social security agencies. The employer is liable for wage tax that it fails to withhold, and managing directors can be personally liable and criminally responsible for unpaid contributions. Benefits in kind, company cars, bonuses, severance payments and equity awards each have their own rules. Employee share programmes benefit from an annual tax-free amount and, for qualifying start-ups and SMEs, from a deferral of taxation under § 19a EStG; virtual share plans are taxed as salary when paid. Assignments of employees to and from Germany raise additional questions of tax residence and social security coverage.

Investment incentives

Several incentives reduce the tax burden on investment. Declining-balance depreciation of up to three times the straight-line rate, capped at 30%, is available for movable fixed assets acquired or produced between 1 July 2025 and the end of 2027 (§ 7(2) EStG). A research allowance under the Research Allowance Act grants a tax credit for qualifying research and development expenses, which is paid out even to companies without taxable profits. Special depreciation rules apply to certain assets, such as newly built residential rental buildings. Investors should take these incentives into account in budgeting and when choosing the timing of investments.

Real estate taxes

Real estate is subject to several taxes. Real estate transfer tax applies to acquisitions of German property and, under the share deal rules, to transfers of 90% or more of the interests in property-owning companies within ten years, at rates set by each federal state. Property tax is levied annually by the municipalities on the basis of values determined under the reformed property tax rules, with several states using their own models. Rental income is subject to income or corporate income tax and, for commercial landlords, potentially to trade tax unless the extended deduction for pure property management applies. Capital gains on private real estate held for more than ten years are tax-free for individuals. See our page on real estate transactions.

Customs, excise and energy taxes

Importers and manufacturers deal with customs duties under the EU Union Customs Code and with excise duties on energy, electricity, alcohol and tobacco. Energy-intensive companies can benefit from reliefs and refunds under the energy and electricity tax rules, subject to conditions such as energy management systems. Customs and excise disputes are decided by the customs authorities and the Finance Courts, and errors can lead to administrative and criminal proceedings similar to those for other taxes.

International tax and transfer pricing

International groups and investors face additional German tax rules. Dividends paid by German companies to foreign shareholders bear withholding tax of 25% plus solidarity surcharge, which can be reduced under treaties or the Parent-Subsidiary Directive, provided that the anti-treaty-shopping rule in § 50d(3) EStG does not deny relief.

Activities in Germany can create a permanent establishment and German tax liability. Transactions between related parties must meet the arm's length standard and be documented, and documentation must be produced within 30 days of a request. German shareholders of low-taxed foreign companies with passive income are subject to the controlled foreign company rules, and large groups are subject to the global minimum tax. See international tax and transfer pricing.

Tax audits, disputes and compliance

Companies in Germany are audited regularly, larger groups often continuously. Audit findings lead to amended assessments that can be challenged by objection within one month and then before the Finance Courts. An objection does not suspend payment, so suspension must be applied for separately. Incorrect returns must be corrected without delay once an error is recognised, and intentional errors can lead to criminal investigations, with voluntary disclosure as a way to avoid punishment under strict conditions. A tax compliance management system helps to prevent errors and to demonstrate that an error was not intentional. See tax audits, disputes and tax criminal law and our page on white-collar crime and corporate defence.

Private clients, succession and foundations

For entrepreneurs and wealthy families, German tax planning centres on inheritance and gift tax. Rates in tax class I, which covers spouses, children and grandchildren, range from 7% to 30%, with allowances of EUR 500,000 for spouses and EUR 400,000 per child that are available again every ten years. Business assets, including shareholdings of more than 25% in corporations, can be exempt by 85% or, under the optional regime, 100% if payroll and retention conditions are met over five or seven years (§ 13a ErbStG). Succession must also respect compulsory portion claims and the succession clauses in the company's articles. See succession planning and inheritance tax.

Family foundations can hold a family business across generations, preventing fragmentation. They are taxed as corporations, their endowment is taxed in the tax class of the most distant beneficiary, and their assets are subject to substitute inheritance tax every 30 years. Charitable foundations, double foundations, family holding companies and family offices are further tools, and foreign trusts and foundations are subject to specific German tax rules. See foundations, trusts and family offices.

Individuals moving to or from Germany

Individuals who become resident in Germany are taxed on their worldwide income at progressive rates, with investment income generally subject to a flat tax of 25% plus solidarity surcharge. Individuals who leave Germany while holding at least 1% of a corporation can be subject to exit taxation on unrealised gains, with options for deferral in certain cases. German nationals who move abroad remain subject to extended inheritance tax liability for five years. Moves should therefore be planned with German tax advice, especially for entrepreneurs holding company shares.

Conversely, individuals moving to Germany should review their foreign structures, such as trusts, foundations and holding companies, before becoming resident, because German rules on controlled foreign companies, foreign family foundations and investment funds can attribute foreign income to them from the first day of residence. Pension arrangements, stock options vesting after the move and the timing of the move within the year can also have significant effects.

Tax in restructuring and insolvency

Restructurings raise specific tax issues. Debt waivers by creditors create taxable income for the debtor, which can be exempt as restructuring gains under conditions, so that a restructuring is not jeopardised by the tax on the waiver itself. Debt-to-equity swaps, the forfeiture of tax losses on changes of ownership, and the tax treatment of transfers to new entities must be analysed in advance. In insolvency, tax claims arising from the administrator's activities are estate liabilities, while earlier claims are ordinary insolvency claims. Tax authorities are often significant creditors and participate in plan votes, so early contact with the responsible tax office can be important for the success of a plan.

German tax in practice: working with advisers

In Germany, tax advice is provided by tax advisers (Steuerberater), auditors and lawyers. Lawyers typically focus on the structuring of transactions and reorganisations, the drafting of tax clauses in contracts and corporate documents, tax disputes and tax criminal law, while tax advisers handle compliance, returns and accounting. Effective German tax planning requires coordination between these professions and with the company's own tax function. Early involvement of tax considerations in transactions, reorganisations and succession plans avoids costly corrections later and helps to secure binding rulings where certainty is needed.

Boards carry responsibility for tax compliance. Managing directors are personally liable for taxes not paid as a result of their intentional or grossly negligent breach of duty, and supervisory boards must monitor the company's tax risk management. Documenting the allocation of tax responsibilities, the processes for preparing returns and the procedure for correcting errors protects both the company and its directors.

• Integrate tax structuring into transactions from the first term sheet.
• Review the effects of the falling corporate tax rate on valuations and deferred taxes.
• Prepare systems for mandatory B2B e-invoicing.
• Align succession plans, articles and wills with inheritance tax relief conditions.

How TRW & Co helps

We advise companies, investors, entrepreneurs and families on German tax as it affects their legal structures and transactions, working with their tax advisers and auditors. We structure acquisitions, disposals, financings and reorganisations, draft tax indemnities and tax provisions in corporate documents, and obtain binding rulings. We represent clients in tax audits, objections, Finance Court proceedings and tax criminal investigations. For entrepreneurs and families we design succession plans, foundations, holding structures and family constitutions with the inheritance tax rules in mind. To discuss a tax question, please contact us.