International tax planning for residents of Germany

Strict tax authorities and high taxes

It’s worth noting that German tax authorities are quite strict. Probably the most aggressive in the entire EU. If you are from Germany you must follow all the rules, otherwise, you will certainly run into problems. 

On the surface, German taxes don’t seem that high. The standard tax rate is about 15%. However, there are numerous other taxes on top of this that need to be paid. 

By the time you pay all the required taxes, you’ll end up paying around 30-33% in tax. This is among the highest in the EU.

Having this in mind it’s reasonable that you will want to save money on taxes. 

Can you do something to reduce your German taxes?

Short answer YES you can.

Corporate residency rules in Germany are based on where you have registered seat of the company, as well as where is the company managed and controlled. 

This means that to structure yourself in a way to minimize German tax, you’ll need to register a company abroad. However, registration of a company abroad is not enough. You will need management and control of your company to take place outside of Germany. These are absolutely necessary first steps. 

Next important thing is that you have to be aware of your sourced income, and not have that income sourced in Germany, otherwise it will be taxed in Germany.

This means that your foreign company will need to have a genuinely foreign-sourced income. In our video about sourced income we talked about this little deeper, so make sure you check that out if you are not familiar with sourced income term.

After this, we will need to take a look at CFC rules. 

In some respects, CFC rules in Germany are not that bad. The threshold is 50%.

So what does that mean? Well, if you are a partner with some foreigner and they own 51% of the company, while you own 49% that wouldn’t qualify for CFC for German rules, which is good. 

German rules only apply to low tax countries, however, what they consider low tax is 25% and less. Also, it only applies for passive income. This is something that can work in your favor. 

Germany also has a participation exemption, which is typically about 95% under certain circumstances. You could have up to a 95% reduction in tax on income that comes from the foreign company to the German parent company.

So what would it look like in practice? You would have a German company, which would have some operations, and which would pay taxes. Then you would have a foreign company: foreign-registered and foreign managed and controlled. You would want to have actual employees and operations in a country where this company is formed. You would make most of your income here, in a foreign company. 

You could bring back that income into Germany, and take advantage of the participation exemption. 

What are some other nuances when it comes to German tax?

One is that they typically don’t charge withholding tax on interest. There are some exceptions to this. But potentially if you want to invest from outside into Germany you would be able to extract the interest income. 

Where would this be relevant? For example, in a case where you want to lend money against property in Germany and your money gets paid out as interest payments. 

Contact us and we’ll help you pay less tax in Germany 100% safe and legal

As we already said, German taxes are not low. However, if you know how to do the right thing your tax bill can drastically decrease. Don’t hesitate to contact us. We want to hear about your situation and help you legally reduce your taxes as much as possible.