Corporate and Transaction Tax

Corporate tax in Germany: the essentials

Corporate tax in Germany consists of two main layers. Corporations such as the GmbH, AG and SE pay corporate income tax (Körperschaftsteuer) at a federal rate of 15% plus the solidarity surcharge of 5.5% on the tax amount, and trade tax (Gewerbesteuer) levied by the municipality in which the business operates. The trade tax base rate is 3.5% of the trade income, multiplied by the municipal multiplier (Hebesatz) (§ 11 GewStG), so the combined burden typically lies roughly between 23% and 33% depending on the location. Partnerships are transparent for income tax purposes, but they are subject to trade tax themselves.

A major change is on the way. Recent legislation reduces the corporate income tax rate in annual steps: 15% for assessment periods up to 2027, 14% in 2028, 13% in 2029, 12% in 2030, 11% in 2031 and 10% from 2032 (§ 23(1) KStG). Trade tax is not affected, so the overall burden will fall by five percentage points over five years. In addition, a temporary declining-balance depreciation of up to three times the straight-line rate, capped at 30%, is available for movable fixed assets acquired or produced after 30 June 2025 and before 1 January 2028 (§ 7(2) EStG).

This page explains the structure of corporate taxation, the treatment of dividends and capital gains, interest deductions, tax losses and their forfeiture on share transfers, real estate transfer tax in share deals, tax-neutral reorganisations and tax due diligence. It is written for CFOs, heads of tax, investors and their advisers. International aspects, such as withholding taxes, controlled foreign companies and transfer pricing, are covered on our page on international tax.

Corporate tax: income tax and trade tax

Corporations resident in Germany (with their registered office or place of management in Germany) are subject to corporate income tax on their worldwide income, subject to double tax treaties; non-resident corporations are taxed on German-source income, such as profits of a German permanent establishment or income from German real estate. Taxable income is determined on the basis of the commercial balance sheet, adjusted for tax purposes. Hidden profit distributions to shareholders, for example excessive salaries or below-market sales, are added back, and non-deductible expenses include half of supervisory board remuneration and certain fines. Hidden contributions by shareholders, conversely, do not increase taxable income.

Trade tax is levied on the trade income, which starts from the profit for corporate income tax purposes and is adjusted by additions and deductions. The most important addition is one quarter of financing costs, including interest and the financing element of rents, leases and licence fees, above an allowance.

Municipalities set their own multipliers, which vary considerably; the statute provides a default multiplier of 280% if a municipality has not set a higher one (§ 16(4) GewStG). Companies that only manage their own real estate can, under conditions, claim an extended deduction that removes rental income from trade tax. Location decisions and group structures should therefore consider the municipal multipliers. Where a business has establishments in several municipalities, the trade tax base is allocated among them, generally by reference to wages paid, and each municipality applies its own multiplier.

Fiscal unity

A German group can combine the profits and losses of its corporations through a fiscal unity (Organschaft). For corporate income tax and trade tax, this requires that the parent holds the majority of voting rights in the subsidiary from the beginning of the financial year and that the companies conclude a profit and loss transfer agreement for at least five years that is actually performed.

The fiscal unity allows losses of one group company to be set off against profits of another and is the usual tool for pushing acquisition debt down to the operating level in buyouts. Errors in the agreement or its performance can retroactively destroy the fiscal unity, so it should be reviewed in due diligence.

Planning for the falling corporate tax rate

The staged reduction of the corporate tax rate affects more than future tax payments. Deferred tax assets and liabilities in financial statements must be measured at the rate expected to apply when the differences reverse, so companies with large deferred tax positions will see accounting effects as the reform progresses. The timing of income and deductions gains significance: deductions are worth more in years with a higher rate, income is cheaper in later years.

Investors comparing locations should note that the combined corporate tax burden in Germany will fall towards roughly 25% on average by 2032, depending on municipal multipliers. Distributions to individual shareholders remain subject to the flat tax on investment income or the partial income method, so the overall burden on distributed profits falls less than the headline rate.

Dividends, capital gains and interest

Dividends received by a corporation and capital gains from the sale of shares in other corporations are excluded from income, but 5% of the amount is treated as a non-deductible expense, so that 95% is effectively exempt (§ 8b(1)–(3) KStG). For dividends, the exemption requires a holding of at least 10% at the beginning of the calendar year; smaller portfolio dividends are fully taxable. For trade tax, dividends are generally exempt only from a 15% holding. Capital gains from shares are exempt irrespective of the size of the holding. Capital losses and write-downs on shares are not deductible.

Interest is deductible in principle, but several rules limit deductions. The interest barrier restricts net interest expense to 30% of tax EBITDA, with an allowance where net interest expense is below EUR 3 million (§ 4h EStG). Interest on shareholder loans must be at arm's length; excess interest is a hidden profit distribution. A quarter of interest is added back for trade tax purposes. Anti-hybrid rules deny deductions for payments that lead to mismatches in the recipient's taxation. Licence payments to related parties in preferential regimes that do not meet international standards can also be partly non-deductible. Group financing should therefore be reviewed against all of these rules together rather than in isolation.

Tax losses and share transfers

Corporations can carry losses forward without time limit and back for a limited period, subject to minimum taxation rules that restrict the use of loss carry-forwards above a threshold to a percentage of income. A change in ownership can destroy losses: if more than 50% of the subscribed capital, membership rights or voting rights in a corporation are transferred directly or indirectly to one acquirer, related parties or a group of acquirers with common interests within five years, unused losses are forfeited entirely (§ 8c(1) KStG). Exceptions apply to intra-group transfers and to the extent the corporation has hidden reserves subject to German tax.

The continuation-based loss carry-forward (§ 8d KStG) offers an alternative: on application, § 8c does not apply if the corporation has maintained the same business operations since its formation or at least for the previous three years, and does not change it. The business must then be continued without harmful events, such as discontinuing it, changing its purpose or joining a partnership, or the remaining losses are lost. For start-ups and growth companies with large accumulated losses, § 8d KStG is an important consideration in financing rounds and exits; see venture capital.

VAT in transactions

The sale of a business as a whole, or of an independently operable part of it, to a buyer who continues it is not subject to VAT as a transfer of a going concern. Asset deals that do not meet the conditions, for example because only individual assets are sold, are subject to VAT, and the buyer's right to deduct input VAT must be checked. Share deals are generally VAT-exempt, but the seller's input VAT on deal costs may then not be deductible. VAT treatment of management fees, holding company services and transaction costs is a frequent topic in tax due diligence and in tax audits after a transaction.

Real estate transfer tax in share deals

Real estate transfer tax (Grunderwerbsteuer) applies to transfers of German real estate at rates set by the federal states, which differ considerably between states and are applied to the consideration. In share deals, it applies where at least 90% of the interests in a partnership owning German real estate change hands within ten years (§ 1(2a) GrEStG), where at least 90% of the shares in a corporation owning German real estate change hands within ten years (§ 1(2b) GrEStG), or where one acquirer unites 90% or more of the shares (§ 1(3) GrEStG). Transfers to new shareholders are aggregated, so successive transactions can trigger the tax.

These rules require careful structuring in M&A involving property-rich companies. Buyers traditionally acquired less than 90%, with a co-investor or the seller retaining the remainder, but the current 90% thresholds and ten-year observation periods make such structures more demanding. Exemptions are available for certain intra-group restructurings. Real estate transfer tax is a transaction cost that can significantly affect the price and should be modelled early. See our page on real estate transactions and our insight on share deal or asset deal for real estate.

Tax-neutral reorganisations and tax due diligence

The Reorganisation Tax Act (Umwandlungssteuergesetz, UmwStG) allows mergers, divisions, changes of legal form and contributions of businesses or shares to be carried out at book value, without realising hidden reserves, if the German right to tax the reserves is preserved and the statutory conditions are met. Contributions of a business or a majority shareholding into a corporation in exchange for new shares can be made at book value (§§ 20 and 21 UmwStG), but a subsequent sale within seven years can trigger retroactive taxation on a sliding scale.

Divisions require that both the transferred and the remaining assets constitute a business unit. Many reorganisations are therefore planned with a binding ruling from the tax office, which provides certainty at the cost of a fee and some months of preparation. Real estate transfer tax must be checked separately, because the UmwStG does not cover it and only certain group reorganisations benefit from a specific exemption.

Exit taxation is the counterpart to tax-neutral reorganisations. If assets or a business are transferred abroad, or a corporation moves its place of management out of Germany, hidden reserves are generally taxed as if the assets had been sold, with an option in some cases to pay the tax in instalments. Groups planning to relocate functions, intellectual property or holding companies should quantify these effects in advance, together with corporate tax implications in the receiving state.

Tax due diligence in acquisitions focuses on open assessment periods and audit findings, the existence and use of tax losses, the validity of fiscal unities, hidden profit distributions, transfer pricing, wage tax and social security compliance, VAT, and real estate transfer tax risks. Findings are addressed through tax indemnities in the share purchase agreement, which typically make the seller liable for taxes relating to periods up to closing, and through cooperation clauses for future tax audits. W&I insurance may cover unknown tax risks but usually excludes known issues. See mergers and acquisitions and our insight on the corporate tax rate cut from 2028.

• Model the corporate tax rate path from 2028 in valuations and deferred taxes.
• Check municipal multipliers when choosing locations and group structures.
• Assess loss forfeiture and real estate transfer tax before signing.
• Obtain binding rulings for complex reorganisations.

How TRW & Co helps

We work with clients and their tax advisers on corporate tax in Germany as it affects transactions and structures. We integrate tax structuring into acquisitions, disposals, financings and reorganisations, draft and negotiate tax indemnities and tax covenants, structure transactions to manage loss forfeiture and real estate transfer tax, implement fiscal unity and profit transfer agreements, and carry out reorganisations under the UmwG and UmwStG. We support clients in tax due diligence and coordinate legal and tax workstreams. To discuss a structure or a transaction, please contact us.