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Taxes & social security contributions in Bavaria: facts worth knowing for start-ups and companies
German tax law seems daunting at first glance. But it’s worth looking into the details as overall the total tax burden of 29.8 percent in Germany is quite a bit lower than in other industrial countries like Spain or Italy. Added to this, the state of Bavaria offers a low tax burden for companies in many regions through cheaper trade tax conditions. Here’s a brief summary for you.
Differentiation between legal forms
One thing is crucial above everything else to get an initial overview of taxes and social security contributions: the respective company’s legal form. This has a significant influence on which taxes have to be paid. With legal entities, in other words stock corporations like a GmbH or AG, the corporate tax kicks in. 15 percent of the taxable income and 5.5 percent solidarity surcharge has to be paid to the Tax Office with this. This regulation applies to domestic and foreign income (global income) with companies based in Germany. If the head office and management board are based abroad but the income is earned in Germany, there is a limited corporate income tax liability, i.e. only the domestic income is taxed. With sole proprietorship and business people, these are so-called natural persons, with a GbR, OHG or KG they are partnerships. These are liable for income tax. The amount of income tax is calculated from the gain that is paid out to the natural persons proportionally from the company profit. The tax-free allowance must be noted here, which varies from year to year and according to marital status and is currently (2017) EUR 8,820 for single people and EUR 17,640 for married couples with a shared income tax assessment.
Tax liability for start-ups
Apart from this, there are more regulations regarding taxation in Bavaria. For example, with the exception of farming and liberal professions, the self-employed have to pay trade tax as well as income tax. With natural persons this is only dropped with a trade income of more than EUR 24,500.
Trade tax is calculated from the trade tax rate and rate of assessment. The trade tax rate is the same throughout Germany and is 3.5 percent. Local authorities can set the rate of assessment themselves every year. You can get a summary with the average figures from the Federal Statistical Office.
It is worth looking at the trade tax as taxes can definitely be saved with the right location. Compared to the other 15 federal states, Bavaria has had relatively cheap rates of assessment over the last few years.
The sales and/or value added tax liability is also important. This is 19 percent with the exception of seven percent for food and always has to be charged and therefore paid to the Tax Office. Companies liable for sales tax can also deduct input tax. This means that they can reclaim their paid sales tax on accounts payable from the Tax Office. Good to know: costs resulting from start-ups can usually be taken into account for tax purposes.
Social security contributions for founders
Founders do not have an employer covering their social security. Therefore they have to take over this cover themselves, in other words ensure themselves. For this purpose, the contribution rate for statutory health insurance is approx. 15 percent but depends on income and is regularly recalculated. Accident insurance varies depending on the profession, scope and agreed insured sum. If staff are already employed at the start-up, they naturally have to be protected by social security cover. The employer’s social security contributions are calculated from the employee’s gross salary:
• Unemployment insurance: 1.5%
• Health insurance: 7 or 7.3%
• Care insurance: 1.275%
• Pension insurance: 9.35%
In addition, the employer has to cover 100% of their employees’ occupational accident insurance. The exact contribution amount depends on the business.
Alternative: The employer’s social security contributions are calculated from the employee’s gross salary and consist of the following elements:
• Unemployment insurance
• Health insurance
• Care insurance
• Pension insurance
• Occupational accident insurance
Double taxation with international foundation
If foreign companies opt for an independent branch with own management, capitalisation and accounting in Bavaria, this is not a separate legal entity for tax purposes. If the main enterprise abroad is a partnership or corporation, it is liable for limited income or corporate tax in Germany. The main enterprise’s dependent branches are business premises. They only have to tax any profits made in Germany under certain circumstances.
Alternatively, profit taxation is in the country of origin, where in this case the amount of tax paid in Germany is taken into account. The double taxation agreement between Germany and more than 100 countries prevents double taxation in the home country. Income, trade and sales tax as well as the solidarity surcharge are also incurred:
• Sales tax: required if the place of performance is in Germany
• Trade tax: EUR 24,500 tax-free allowance
• Solidarity surcharge: 5.5 percent
You can get more support with taxes and social security contributions from the Federal Central Tax Office or the Federal Employment Agency. We are happy to assist you with any questions regarding starting up in Bavaria – just contact us!