Profit: Euro 100
Corporate tax (15%): Euro 15
Surplus tax (5.5%): Euro 00.83
Trade tax (10%): Euro 10
Total tax (26%): Euro 25.83
There is a standard corporate tax rate of 25% for both, a company's distributed as well as for it's retained (undistributed) profits.
On profits that are paid to shareholders also a 25% withholding tax needs to be settled according to the German double taxation treaty.
The German "half-income system" can be take in consideration to reduce this burden of double taxation. The "half-income-system" allows the shareholder to pay taxes on only 50% of the dividends and profit that were paid by the company. As a result only 50% of the dividends are subject to withholding taxes while the other half of the dividends remain free of taxes.
For a dividend payout of 100,000 euros the corporation tax is 25 percent = 25,000 euros. Of the remaining 75,000 euros, the company transfers withholding tax of 20 percent – i.e. a further 15,000 euros to the tax authority before the payout is made to the shareholder.
However, this withholding tax counts as an advance payment for the shareholder's income tax once the dividend has been paid out, and therefore added again when the shareholder's income tax is calculated.
Of the remaining 75,000 euros to be assessed after the dividend payment, only 50 percent = 37,500 euros are subject to income tax, the other 37,500 euros are tax-free. Supposing the income tax rate to be 35 percent, this would lead to income tax of 13,125 euros on the taxable half.
This is then offset against the withholding tax of Euro 15,000 deducted before the dividend payment, resulting in a tax rebate of 1,875 euros from the tax authority. Ultimately, therefore, the shareholder receives an amount of 61,875 euros after the German income tax has been deducted.
The trade tax on income (Gewerbeertragsteuer) is based on the federal Trade Tax Act, but is levied by the local authorities (Finanzamt). A regional German Finanzamt is allowed to adjust their own trade tax rate depending on the value of its regional industry by using a multiplier (Hebesatz).
The trade tax deduction on income usually ranges between 7% and 20% of the business income. Trade tax is also deductible as an expense against taxable income within the year of assessment.
As an individal community is allowed to commercialize its area the trade tax of a major German city would be much higher than the one of a community outside this city.
For this reason, the trade tax should be taken in consideration when evaluating the right location to settle your business.