TAXATION IN GERMANY

The most important taxes in Germany are:

VAT	Umsatzsteuer
Wage Tax	Lohnsteuer
Income Tax	Einkommensteuer
Corporation Tax	Körperschaftssteuer
Municipal Trade Tax	Gewerbesteuer

Following is a short description of these most important taxes:

VAT - Value Added Tax

The VAT rate is currently 19%. There is a reduced rate of 7% for deliveries and imports of certain foods, agricultural products, books, newspapers, magazines, art objects, wheelchairs, orthopaedic aids and local public transportation.

Companies have to calculate their VAT and submit a VAT return if there total sales in the previous calendar year exceeded € 17,500 or they expect a sales of more than € 50,000. If the sales falls below these limits, the company may aply to the tax authority - "Finanzamt" - for exemption from VAT. This application has a binding effect for five years.

Companies charge their customers VAT on deliveries and services made or performed in Germany. The collected VAT has to be filed and paid to the tax authority generally on a monthly basis. The tax authority assigns a tax ID when it starts business.

VAT paid to seller when goods are delivered or services brought is known as input VAT. On the monthly tax return this input VAT can be deducted from the VAT the company has charged to its customers. The remaining amount has to be paid to the tax authority of the town were the company's headquarter is located. In order to be able to deduct the input VAT, this item must be listed separately on all invoices for amounts above € 100. If the input VAT exceeds the charged VAT the tax authority refunds the balance amount within a short period.

If a company has low sales, it may request that its VAT not be paid until it has received payment from its customer.

If goods are to be delivered into other EU countries, the business documents have to indicate that the delivery is exempt from VAT and list the VAT-ID numbers of the buyer and the seller. In Germany this number can be obtained from the Federal Finance Bureau - "Bundesamt der Finanzen" - in Saarlouis. A summery notification must also be submitted to the Federal Bureau. This enables the authorities in the buyer's country to determine whether the buyer has paid VAT.

WAGE TAX

If a company employs one or more employees, it has to pay wage tax, solidarity surcharge (a special levy to finance German reunification) and, where appropriate, a church tax to the tax authority. All employees have to present their wage-tax-card, which are issued by the local community administration, to their employer. The wage-tax-card is returned to the employee at the and of the year or at the end of the employment relationship. Wage tax is based is based on tax brackets, marital status, numbers of children, religious denomination, etc. These taxes have to be filed and paid to the tax authority on a monthly basis. Small companies may file and pay their wage tax on a quarterly or annual basis.

INCOME TAX

This tax only applies to individuals. All income from agriculture, forestry, commercial enterprises, self-employed work, employed work, capital yield, rent, leases and any other sources are subject of tax. As the wage tax, the progressive income tax rates are based on various factors.

Income tax ranges from 0% to 45% (42% as of January 2005).

Income tax is payable on the basis of the annual income tax return. Quarterly installment payments are due during the year.

CORPORATION TAX

Corporations ("AG" and "GmbH") is, as a legal entity, subject to corporation tax in its own right. The taxable amount of the corporations' income is determined on the basis of the relevant provisions in the Income Tax Act as modified on the specific rules in the Corporation Tax Act. The corporation tax rate is a uniform 25 % regardless of the distribution policy of the company. Additional there is the solidarity surcharge with 5,5% from the corporation tax.

If the shareholder receives dividends as income from the corporation, only one-half of which is charged to income tax if the shareholder is an individual.

Dividend income is completely tax-free in the hands of a corporate shareholder.

Like income tax the corporation tax is also payable on the basis of the annual corporation tax return. Quarterly installment payments are due during the year.

MUNICIPAL TRADE TAX

The controversial municipal trade tax is collected by local authorities and is intended to cover their additional costs (infrastructure etc.) arising from the presence of businesses in their area.

Trade tax is based on taxable income as determined under the rules for income or corporation tax. However there are various adjustments to be made before arriving at the basis of assessment. In practical terms the most significant of these adjustments is usually that concerning long-term interests expenses. This item is fully deductible for corporation tax purposes, but only deductible as to one-half for trade tax purposes.

From the trade taxable income an allowance of € 24,500 is granted for sole proprietorship and partnerships.

The remaining trade taxable income is multiplied by (usually) 5% to give a "taxable factor". For sole proprietorship and partnerships there is a reduced percentage up to € 48.000 trade taxable income. The "taxable factor" then is multiplied by the rate fixed by the local authority. The national average of these local rate are somewhere near 400%.

However, since trade tax is deductible as expenses from its own basis of assessment, the overall effective burden generally lies within the range of 15-20%. This burden is deductible as expenses for income or corporate tax purposes.