The German taxation system is comprised of direct and indirect taxes that are collected by the federal government or by the local authorities. The most important taxes are the income tax and the value-added tax in Germany.
The flat withholding tax (Abgeltungsteuer) is a tax levied on income made from capital and capital gains. It is also important to know that Germany has an extensive double taxation network that comprises about 90 countries in order prevent companies from being applied the same taxes twice.
Shareholders are taxed separately in Germany the distinction being made between shareholders as individuals and shareholders as legal entities. At individual level, the shareholder is required to pay a flat rate withholding tax on dividends of 25% and an additional solidarity charge of 5.5%.
In case of partnerships regarded as shareholders the dividends are 40% exempt from taxation according to the Income Tax Act of 2009. This is a partial income method (Teileinkünfteverfahren) and it replaces the half income method that was applied before and that had a rate of 50%.
In cases where the shareholders are corporations the dividends are exempt from taxation according to the Corporation Tax Act in Germany, as a small percentage of 5 is considered a non-deductible expense and is added to the profit of the company.
In March 2013 a new law the introduces taxation of portfolio dividends was enforced and it stipulates that all shareholders owning less than 10% dividends in a company are subject to a corporate income tax of 15.825% including the additional solidarity charge. This law was enforced in order to stop discriminating non-resident corporate shareholders. The tax is applied to dividends only and it does not affect the participation exemption applied to capital gains that was set at 95%.
The new law stipulates the German Federal Tax Office is in charge with the refund procedure of the dividend tax. A nonresident company may claim a refund only if it is an EU member state, has less than 10% shares in a German company, cannot benefit from the German withholding tax deduction in its country and respects the demands of the anti-treaty-shopping rule in Germany. The company must bring documents that prove its dividends ownership, certificates of residency and that the German withholding tax could not be collected in the company’s resident country.
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