The German tax system comprises two basic tax categories: direct and indirect taxes. For direct taxes, the taxable entity also bears the tax burden, e.g. income tax, corporation tax and trade tax. For indirect taxes on the other hand, the tax debtor transfers the tax burden to a third party.
In the case of value added tax on the supply of goods and services by entrepreneurs, the latter will usually pass the value added tax incurred on to the end user through a correspondingly higher selling price. Indirect taxes include, in particular, excise taxes such as the tax on mineral oil and on tobacco.
The German Income Tax Act (Einkommensteuergesetz, EStG)26 covers seven different types of income: income from agriculture and forestry, income from business, income from self-employment, income from employment (wages nd salaries), income from capital investments, income from rental and leasing and other income. Any accrual of amounts not falling under one of these seven categories is not subject to German income tax.
Corporations are independent taxable entities. Accordingly, the taxable income is determined on the level of the corporation and it is also the corporation which is liable for tax.
Income subject to taxation at source: Various forms of income from German sources, such as wages and salaries, dividends or certain interest payments, are subject to German withholding tax. This applies to both taxpayers who are domiciled in Germany and taxpayers who are not domiciled in Germany. In general, the German fi scal authorities may initially retain these withholding taxes at certain fi xed tax rates; in the case of taxpayers with unlimited tax liability, these withholding taxes are regularly deducted in the assessment procedure. Only the flatrate withholding tax on investment income of 26,375% is compensatory. However, even if a taxpayer is not domiciled in Germany, the taxation right of the source state is often restricted through the provisions of a double taxation agreement; the national withholding taxes initially collected may exceed the amount of taxation at source that is permissible under a double taxation agreement. If this is the case, a refund of the excess withholding taxes initially collected under national regulations can normally be requested. The aforementioned scenario and steps that can be taken to avoid an overpayment of tax in Germany are outlined in the following example of a dividend payment by a German corporate entity to an investor domiciled abroad.
Foreign investors, both natural persons and corporations, may become subject to German value added tax if they are doing business within the defi nition of the regulationsgoverning value added tax.