Taxes

You should address the topic of taxes even before you start up your company. Before choosing a particular legal structure, you should consult a tax advisor [Steuerberater] in order to find out about the fiscal implications of your decision.

You should be familiar with these taxes:

VAT [Umsatzsteuer]

VAT [Umsatzsteuer] is payable when you sell goods or services. The standard rate is 19% and a reduced rate of 7% is applicable, for instance, to professions in the arts and the media. You are required to bill your customers VAT and to state this separately in your invoices. You should take note of the information that is required in your invoices. You are then required to pay the VAT which you receive from your customers to the Tax Office as part of your VAT return [Umsatzsteuer-Voranmeldung].

Input tax [Vorsteuer]

You pay input tax on (almost) all company-related purchases. You should ensure that this tax is stated separately on the invoices which you pay. (Note: Invoices do not use the term "input tax" [Vorsteuer], but "VAT" [Umsatzsteuer].) You can then deduct this input tax [Vorsteuer] from the VAT [Umsatzsteuer] which you pay to the Tax Office as part of your VAT return [Umsatzsteuer-Voranmeldung].

Income tax

Anyone who generates or receives income is required to pay income tax [Einkommensteuer].
The income tax rate depends on the personal profit that you generate with your company (less all of your operating expenses). In the first year of your self-employment, the Tax Office will estimate your profit on the basis of the information you provide. The Tax Office will then determine a certain sum which you will have to pay as quarterly advance payments. If your income is higher than initially expected, you will have to pay tax arrears the following year. If you have to pay both tax arrears and income tax pre-payments at the same time, you may find yourself in some financial difficulty. You should hence contact your tax advisor to find out whether you can expect tax arrears and how much this will be so that you can put aside money to cover this.

Trade tax

You will be required to pay trade tax every quarter to your municipality. Once a year, you or your tax advisor, respectively, will be required to issue a trade tax return and to send this to the Tax Office.

Corporation tax

Corporation tax [Körperschaftsteuer] is payable solely for the profit generated by corporations [Kapitalgesellschaften] (GmbH, AG). You will be required to pay corporation tax every quarter in advance to the Tax Office [Finanzamt] responsible for your company.

Small entrepreneur regulation

There are a number of rules designed to make business easier for small entrepreneurs.

If you fulfil both of the following preconditions, you will not be required to pay VAT [Umsatzsteuer] to the Tax Office [Finanzamt]:

  • your turnover [Umsatz] including payable tax did not exceed €17,500 in the previous calendar year and
  • your turnover [Umsatz] plus payable tax is not expected to exceed €50,000 in the current year.

At the time you establish your business, you should realistically estimate the total turnover you expect to generate. In the year of establishment, the expected total turnover for the current calendar year, including VAT, may not exceed €17,500.
Note: Anyone who does not pay turnover tax is not entitled to claim input tax. If you as an entrepreneur have high expenditure on investments and/or deliveries, you should consider waiving the tax exemption for small entrepreneurs. You should discuss this matter with your tax advisor.

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