The significant difference between nominal and effective tax rates in Germany is based on a series of options for tax deductions.

Loss Carry Back

Losses can be carried back for corporate income tax purposes, restricted to one year, and limited to a total loss amount of EUR 511,500.

Loss Carry-Forward

Losses can be carried forward unrestricted in time, but minimum tax rules apply with regard to the amount of earnings that can be set off against losses carried forward:

• Up to an amount of EUR 1 million, loss carry-forward is possible free from restrictions.
• At least 40 percent of taxable income exceeding EUR 1 million must remain subject to taxation. In other words, a maximum 60 percent of taxable earnings exceeding EUR 1 million can be set off against incurred losses.

Loss utilization is no longer possible in the case of substantial changes in share ownership and increases in assets or other funds.

Deductibility of Interest Payments

The deduction of interest payments is possible. However, there are restrictions for related parties and shareholders, and thin capitalization rules must be observed.

Deduction of interest for shareholder loans is subject to thin capitalization rules. Interest is deductible from taxable income if:

• the shareholder loan is provided as compensation for short-term debt capital (= less than 6 months), regardless of the stake of the shareholder’s capital, OR
• the shareholder loan is provided as compensation for long-term debt capital (= more than 6 months), and the shareholder holds a stake of more than 25 percent of the shareholders capital (exemptions see below), OR
• the interest amount is less than EUR 250,000 per fiscal year, regardless of the stake of the shareholder’s capital (exemptions see below)

For situations in which the shareholder holds more than 25 percent of the shareholders capital and the interest amount is more than EUR 250,000 per fiscal year, a deduction is possible if:

• the long-term debt capital is provided by persons not related to the shareholder, or by a third party without any recourse on the shareholder, OR
• the interest is not calculated as percentage of the loan (e.g. only performance-related), OR
• the interest is a percentage of the loan and the equity-loan-ratio (ratio of the shareholder’s equity stake to the loan) is not more than 1:1.5 (safe haven), OR
• the interest is a percentage of the loan and the equity-loan-ratio is more than 1:1.5 (e.g. 1:3), but another market investor would offer the capital for equal conditions (market investor test)

Reform of Company Taxation
Under the reform of company taxation, a modified interest stripping rule has been designed to prevent interest payments from reducing taxable gains below a certain level:

Generally, interest payments are fully deductible as operating expenditure up to the amount of interest earnings. However, interest payments in excess of interest earnings are deductible only up to an amount of 30 percent of the EBITDA (earnings before interest, taxes, depreciation and amortization).

This limitation does not apply:

• to a fully deductible allowance of up to EUR 1 million in interest payments (in excess of interest earnings of the same fiscal year)
• where the business operation does not or only in parts belong to a corporate group
• where the business operation belongs to a corporate group and the equity ratio (Eigenkapitalquote – the ratio of equity capital to balance sheet total) of the business operation in its balance sheet under IFRS is equal or even higher than that of the corporate group – the so-called “escape clause”. Falling short of the corporate group equity ratio by up to 1 percentage point is not harmful.

Non-deductible interest payments can be carried forward to future assessment periods.

Straight-Line Depreciation
Straight-line depreciation for fixed assets is a deductible expense for tax purposes.

Under the straight-line depreciation method, the annual depreciation is calculated by subtracting the salvage value of the asset – that is, the estimated value of an asset at the end of its useful life – from the purchase price, and then dividing the remaining amount by the estimated useful life of the asset.

Examples of the average useful life of certain assets (depending on the precise nature of the asset):

• Machinery: 5 - 16 years
• Office equipment: 3 - 25 years
• Street vehicles: 6 - 12 years
• Goodwill: 15 years
• Buildings: 8 - 33 / 50 years

Depreciation regarding the (technical) consumption is permitted if consumption is verifiable.

All depreciations have to apply the straight-line method.

Fiscal Unity Concept

The German fiscal unit concept allows profit and loss pooling to determine the profit for taxation purposes at the level of the controlling parent.

Profits and losses from German subsidiaries are consolidated and subject to taxation at the level of the German parent company.

Preconditions for a fiscal unit:

• Controlling parent is resident in Germany
• Parent holds more than 50 percent of voting rights of corporate subsidiary entity
• Profit and loss pooling agreement between parent and subsidiary entity
• Registration of this agreement with the commercial register