Taxation of Partnerships in Germany
Taxation of Partnerships in GermanyUpdated on Wednesday 23rd November 2022
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The taxation of partnerships in Germany does not take place as per the corporate tax regime but as per the personal taxation regime, as the individuals who make up the partnership are the ones subject to tax.
There are several types of partnerships in Germany, for example, the general and the limited partnership, and because they are not treated as separate legal entities from their founders, they are not subject to the regular corporate tax. German partnerships are viewed, for taxation purposes, as an association of two or more partners.
Our team of lawyers in Germany presents the main taxation issues for partnerships and describes the characteristics of these business forms. Investors should be well aware of the fact that the partnership is not a separate legal entity and that they will need to handle the personal taxation matters, as per the imposed income tax rates in force.
The attorneys at our law firm in Germany can provide investors with complete information about the taxation of all the types of business forms in the country. We offer specialized pre-incorporation counseling that also includes taxation matters so that investors can understand the requirements that are expected of them once they start their German business.
What are the taxation rates for partnerships?
According to the personal taxation regime in Germany, there are several different categories of taxation, as per the income bracket:
- 0%: applicable to an annual income per individual between 0 - 8,820 EUR (for married individuals, 0 – 17,640);
- 14% to 41.99%: for income that exceeds the base amount, between 8,821 – 54,057 EU (for married couples, 17,641 – 108,114)
- 42%: for income between 54,058 – 256,303 EUR per year, per individual (for married couples (108,115 – 512,606);
- 45%: above 256,304 EUR per year per individual ((512,607 per year for married couples).
The figures on the brackets represent the amounts calculated for married couples as they file a joint return. One of our attorneys in Germany can give you more details about this procedure.
The personal income tax is also subject to a 5.5% solidary surcharge of the personal income tax rate.
What is the tax harmonization for partnerships?
As seen above, the distributed earnings of partnerships are subject to taxation at progressive rates. Because the highest rate can be burdensome on small businesses, the partners can opt for a flat taxation rate of 28.25% to which the solidary surcharge is added (resulting in a total tax rate of 29.8%).
Another option to reduce the tax burden is to offset the trade payments for the distributed and retained earnings against the personal income tax. Please reach out to the tax experts at our law firm in Germany for more information on the trade tax and the offset of these payments. Our team is also able to provide services related to tax minimization, as applicable.
The income tax is levied at the level of the partnership and it is attributed to the two or more partners according to their equity interest in the partnership.
One of our lawyers in Germany can offer complete information about the taxation requirements for partnerships set forth by the Federal Ministry of Finance.
Facts about partnerships in Germany
Partnerships, unlike corporations, are not independent and separate legal entities. Instead, the partners are responsible for the actions of the business and are liable with their own assets.
The partnership does not require a minimum share capital and the registration process is a rather simple one, as it will not have Articles of Association. In most cases, the partners will all sign the incorporation document for the partnership in front of a German notary.
Below, we list the main types of partnerships in Germany:
- The general partnership: is incorporated by at least two partners and they both have unlimited liability.
- The limited partnership: is also formed by at least two partners, a general one and a limited one; the general partner has unlimited liability;
- Civil law partnership: like in the first case, there are at least two partners who have unlimited liability.
- GmbH & Co.KG: the general partner is a limited company that is fully liable for the businesses’ debts.
The civil law partnership has the lowest incorporation requirements our of all the partnerships forms. Conversely, the GmbH & Co. KG has moderate to high requirements for registration as it will need to be registered with the German trade register.
Although the partnership is subject to lighter taxation and reporting requirements, compared to a corporation, it is advisable to seek proper guidance and advice whenever needed from a local team of experts, such as our German accountants. We can give you more details about the general compliance requirements, the tax filing and payment due dates, and answer other questions upon request.
Contact our law firm in Germany for more information about the taxation of partnerships as well as the requirements for incorporation.