Tax Deductions

The significant difference between nominal and effective tax rates in Germany is based on a series of options for tax deductions.

Losses for corporate income tax purposes can be carried back for one year, limited to a total loss amount of EUR 511,500.

Losses can be carried forward with no time restriction. Up to an amount of EUR one million loss carry-forward is possible – free from any restrictions. For sums in excess of EUR one million, at least 40 percent of the taxable income must remain subject to taxation. In other words, a maximum 60 percent of taxable earnings exceeding EUR one million can be offset against incurred losses.

Generally, interest payments are fully deductible as operating expenditure. However, some special rules apply for corporate groups. If the amount of interest payments exceeds the amount of interest earnings for more than EUR 1 million, these exceeding interest payments are only deductible up to an amount of 30% of the EBITDA (earnings before interest, taxes, depreciation and amortization).

Straight line depreciation for assets is a deductible expense for tax purposes. The annual depreciation is calculated by dividing the purchase price by the estimated useful life of the asset.

All depreciations have to apply the straight line method.

The German fiscal unit concept allows profit and loss pooling to determine the profit for taxation purposes at the level of the controlling parent. Profits and losses from German subsidiaries are consolidated and subject to taxation at the level of the German parent company. Fiscal unit preconditions are:

• The controlling parent is resident in Germany.
• The parent holds more than 50 percent of voting rights of corporate subsidiary entity.
• A profit and loss pooling agreement between parent and subsidiary entity exists with a duration of five years.
• This agreement is registered with the commercial register.