Germany: German Business Tax Reform

Last Updated: 5 December 2000

On the basis of an Act on the Reduction of Tax Rates and Reform of Business Taxation (Steuersenkungsgesetz) approved by the two chambers of the German parliament on July 7, 2000 and July 14, 2000, major changes to the income taxation regime applicable in Germany will take place. Some of the changes will become effective as of January 1, 2001, others only over a period of until 2005. Below, certain effects from the new tax regime are described in a summarized form.

1. Ongoing Taxation

1.1. Reduction of Tax Rates
For individuals, the taxation of income on the basis of a progressive scale will be maintained. The maximum personal income tax (PIT) rate (applicable to taxable net income in excess of DM 102,000) will be reduced from presently 51% to 42%, such reduction taking place in several steps until the year 2005. The minimum tax rate will be reduced from presently 22.9% to 15%, starting from approximately DM 15,000 (personal income less than this amount will not be taxed).

For corporations, the present split income tax rates of 40% for retained profits and 30% for distributed profits will be abolished and replaced by a uniform corporation income tax (CIT) rate of 25% for all profits. This tax rate applies to all "new" profits generated by corporations in the business years starting in 2001 and thereafter.

1.2. Change of Corporation Income Tax Regime
The former imputation tax system under which the CIT paid by the German corporation was credited to the income tax (PIT or CIT) liability of the shareholder in case of a dividend distribution will be abolished. Instead, a definite CIT at a rate of 25% will apply to the taxable net income of the German corporation (or German permanent establishment of a foreign corporation), regardless of whether such profits are retained or distributed. This CIT is definitive, i.e. no tax credit is granted to shareholders upon distribution. Local trade tax and solidarity surcharge come in addition.

In addition to the company's CIT, dividends are taxed at the shareholder level. German resident individuals are taxed only on half (50%) of the German or foreign dividends received by them at the applicable PIT rate. In order to avoid a multilevel taxation of corporate profits, dividends received by entities subject to German CIT are tax-exempt on the level of the receiving company. This tax exemption applies to dividends paid by German as well as foreign corporations. Furthermore, no minimum holding or waiting periods are required in order to benefit from the exemption. The basic idea is that profits are only taxed once at a corporate level and, in addition, in the hands of the individual shareholder upon a dividend distribution.

Consequently, the tax reform encourages to retain profits (taxed with a 25% CIT rate) rather than to distribute profits, which are then taxed in addition on the individual shareholder's level.

Withholding tax (20 %) will continue to be charged on distributions by German corporations, with full tax credit for the German resident shareholder. No withholding tax or at a lower rate may be charged to foreign parent companies under applicable tax treaties or EU-regulations.

1.3.Transition Provisions
Under the CIT system with a split CIT rate, a distribution of ordinary corporate profits to the companies' ultimate individual shareholders leads to a reduction of the applicable CIT rate from 40% to 30%, i.e. to a claim of the company vis-à-vis the fiscal authorities for a credit or repayment of the difference. Special rules apply, however, in case of a distribution of tax-free foreign source income or for distributions to German parent companies organized as a corporation. For CIT purposes, retained profits generated in periods before the new CIT regime (i.e. including all business years starting before the end of the calendar year 2000), will be separated from profits of future business years for a 15 years transition period. In case of dividend distributions during this transition period, it is assumed that all "old" profits are distributed first before profits generated under the new CIT regime are used in order to fund the respective dividends. To the extent "old" profits are distributed, the distributing company will still be entitled to benefit from the former split CIT rate, i.e. the reduction from the 40 % tax rate to a 30 % tax rate will be granted to the company.

On the shareholders' level, however, an equivalent 15 years transition period will not be available. The tax credit under the current imputation tax system for the 30 % CIT paid by the distributing company will only be granted to the shareholders, if the distributed profits have been generated by the company under the current CIT rules and will be distributed as a dividend (hidden profit distributions will not be covered) during the first business year, for which the new CIT regime applies to the company. This means that the 30 % income tax credit is available for dividends paid out during the calendar year 2001, provided the company's business year complies with the calendar year. For all following distributions of "old" profits during the 15 years transition period, a reduction of CIT to 30 % will still be possible at the company's level, although a respective credit will not be granted to the shareholders under the old imputation tax system. Instead, 50 % of all dividends received will be taxable in the hands of the individual shareholders as described under 2. above.

As a general guideline, from an individual shareholder's point of view, it might be more beneficial to receive old profits of a company as a dividend until the end of the company's first business year starting in 2001 rather than later. This situation may cause some German corporations with individuals as shareholders to pay to its shareholders a "superdividend" in order to use up as much of their "old" profits as possible before the end of the first business year starting in 2001.

1.4. Taxation of Partnership Income
German partnerships performing business activities are subject to German trade tax but not German CIT. Instead, the partnership income is attributed as business income to the respective partners and taxed at their individual income tax rates (PIT or CIT, as the case may be). As a consequence of this concept, partnership profits may be subject to a maximum income tax rate of 42 % (future maximum PIT rate, see 1. above), while profits of a German corporation are only taxed at the uniform CIT rate of 25 %. Both, partnerships and corporations, are subject to German trade tax at the same rates.

In order to compensate partners in a German partnership for the potential disadvantage of higher income tax rates, the German legislator allows the individual partners to reduce their PIT to be paid on the partnership profits by the trade tax to be borne by the partnership itself. The credit for the individual partners is calculated in a more general way and does not consider the actual trade tax payments effected by the partnership or the exact individual PIT rates of the partners. Since trade tax is a local tax and tax rates vary between the different German municipalities, and, furthermore, not all partners in a German partnership are taxed at the same PIT rate, this concept may not result in a full compensation or may result in an overcompensation of the trade tax paid.

If profits are distributed, individuals acting as partners in a German partnership are always taxed at lower income tax rates compared to individual shareholders in a German corporation.

2. Implications for M & A Transactions

2.1. Share Sale by Individual Shareholder
In case an individual sells shares in a share deal, basically half (50 %) of the capital gain realized will be taxed at the applicable PIT rate (maximum 42 %).

Shares held as a business asset can only be sold under the 50 % rule after a minimum holding period of 1 year after the acquisition of the shares expired. If shares belong to a business property and are sold before the 1 year holding period expired, the full realized capital gains become taxable in the hands of the selling individual.

If shares in a corporation are privately held, the capital gains realized from the sale are only subject to the 50 % capital gain taxation rule, if the shares are sold within a period of 1 year after the acquisition of the respective shares or if the shareholdings in the respective corporation by the individual was 1 % or more in the nominal capital of the foreign or German corporation within the last 5 years before the sale. In all other cases, privately held shares in a corporation can be sold totally tax-free by German resident individuals.

Under certain anti-abuse rules, the sale of shares in a corporation are taxable under the 50 % rule if the respective shares are received by the individual as a compensation for a tax-free (or partly tax-free) contribution to the respective corporation within a period of 7 years prior to the sale of the newly issued shares.

Losses from the sale of shares in a corporation can only be used if a capital gain would also be subject to German taxation. Furthermore, potential capital losses can only be used in order to balance capital gains resulting from the same kind of transactions.

The rules with regard to the taxation of capital gains will, basically, become effective for share sales during the first business year of the respective company starting during the calendar year 2002, i.e. share sales are covered as of January 1, 2002 for shares in companies whose business year complies with the calendar year.

Foreign shareholders resident in a country which entered into a tax treaty with Germany usually can realize capital gains on the disposition of shares in German corporations free from German capital gains tax.

2.2. German Corporation as Seller of Shares
In case a German corporation sells shares in a German or foreign corporation, the capital gain realized by the seller on this sale will be exempt from tax in Germany. This tax exemption applies to dispositions realized after the end of the first business year starting in 2001; i.e. in general, disposals after January 1, 2002, if the business year is the calendar year. The exemption applies for CIT as well as for trade tax purposes. A minimum one-year holding period for the shares disposed of has to be observed.

Furthermore, anti-abuse provisions apply. In particular, a sale of business assets can not be realized tax-free by first contributing those assets to a corporation, and subsequently selling the shares of this new corporation. In those contribution situations, a waiting period of seven years needs to be observed before a tax-free share sale is possible.

As regards the application of the favorable capital gains treatment as of the year 2002, tax structuring is available to ensure tax-free realization of capital gains on the disposal of shares even if contractual arrangements on the disposition are made before 2002.

2.3. Disposition of Partnership Interests
Dispositions of partnership interests, in principle, are subject to full CIT or PIT on the capital gain realized, i.e. up to a maximum tax rate of 42 % for individuals. However, an individual as seller is entitled to the application of a reduced capital gains tax rate once in a lifetime, which is 50% of the tax rate that would otherwise be applicable to this capital gain.

2.4. German Reorganization Tax Act
From the perspective of a purchaser in a share sale transaction, it is important to note that, basically, a tax-free step-up of the book values of the company's assets and a subsequent depreciation (and amortization in case of goodwill) of the stepped-up values will no longer be possible by converting the company to a German partnership. This may either result in lower purchase prices for shares in German companies or in pre-acquisition restructuring activities to be required from the selling party.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions