Corporation tax and its surcharge

Two GmbHs with the same profit of 200,000 € do not pay the state the same amount. The corporation tax rate is identical for both, the solidarity surcharge too — and several thousand euros still separate them at the end. The reason lies not in the Corporation Tax Act but in a percentage decided by their respective municipality. This module covers the first of the two taxes; the second covers the tax that makes the difference.

Who is subject to unlimited corporation tax liability

Corporation tax is the income tax of the legal person. Who falls under it is not left to the tax administration's judgement but set out in a list: § 1 (1) KStG names the corporations, associations and pools of assets having their place of management or their seat in Germany.

Capital companies come first, and the statute names them expressly: European companies, stock corporations, partnerships limited by shares and companies with limited liability. Since the option under § 1a KStG, opting partnerships belong there as well.

The list does not end there. Cooperatives including European ones, mutual insurance and pension fund associations, and other legal persons under private law follow as separate numbers. For our purposes the first number matters most, because a second rule hangs on it.

That the list is a list and not a description carries practical value. Anyone wanting to know whether an entity is liable to corporation tax looks it up in the enumeration rather than in an interpretation. The legal form decides, not the activity.

This sets corporation tax apart from income tax, where the nature of the activity decides the category of income. For a corporation the question is already answered before one knows what it does — and that is precisely what leads to the requalification in the next section.

The connecting factor is twofold and alternative: place of management OR seat in Germany. A company whose seat lies abroad but whose business is run from Germany therefore already meets one of the two conditions and is subject to unlimited liability.

Unlimited liability means the whole of the income is caught, not only the domestic part. The delimitation by source that characterises limited liability falls away. That reach is the real content of the term.

The statute also has entities in mind that exist under foreign law and would not be legal persons under German company law for want of legal capacity. § 8 (1) sentence 4 KStG treats dealings between them and their participants, for income tax purposes, like dealings between a corporation and its shareholders.

A further special rule concerns commercial operations of public bodies within the meaning of § 4 KStG. For them, § 8 (1) sentence 2 dispenses with the intention to make a profit and with participation in general commerce — two features that otherwise help decide whether an activity is a trade.

How the income is determined

On the question of what counts as income and how it is to be determined, § 8 (1) sentence 1 KStG refers to the provisions of the Income Tax Act and of the Corporation Tax Act. Corporation tax thus builds on the same notion of profit as income tax and only supplements it.

This requalification reaches far beyond corporation tax law. It is the reason a GmbH always operates a trade and is therefore always liable to trade tax — whatever it actually earns its money from. The second module picks up exactly here.

For determining income it is, under § 8 (3) sentence 1 KStG, of no relevance whether the income is distributed. The company taxes its profit whether it pays it out or retains it. The distribution decision shifts no tax at the level of the company.

Sentence 2 of the same provision draws the harshest consequence: hidden profit distributions do not reduce income. What was booked as a business expense but is in truth a benefit conferred on the shareholder is added back to income.

The opposite direction is regulated too. Hidden contributions do not increase income under sentence 3. The statute therefore treats both movements between company and shareholder symmetrically: what stems from the shareholding relationship is not to alter the tax result.

• Starting point: the profit, determined under the EStG and the KStG (§ 8 (1) KStG)
• Requalification: all income counts as trading income (§ 8 (2) KStG)
• Irrelevant: whether the profit is distributed or retained (§ 8 (3) sentence 1)
• Add-back: hidden profit distributions do not reduce income (sentence 2)
• No increase: hidden contributions do not increase income (sentence 3)

The practical weight of this list sits in its fourth line. An excessive managing director's salary, an interest-free loan to the shareholder, a company car with no contract: each of these can be treated as a hidden profit distribution and then raises taxable income retrospectively.

The symmetry of sentences 2 and 3 is not complete, however. Under sentence 4, income increases in so far as a hidden contribution has reduced the shareholder's own income. The statute thus prevents the same transaction from giving relief at both levels at once.

Sentence 5 extends that correction to a configuration running through third parties: a hidden contribution resting on a hidden profit distribution by a person close to the shareholder and not taken into account in taxing them. Excepted is the case where the distribution did not reduce the income of the distributing corporation.

For practice one test question follows, standing before every booking between company and shareholder: would a prudent business manager have granted the same benefit on the same terms to a stranger? Where the answer is no, the territory covered by § 8 (3) KStG begins.

The descending rate of § 23 KStG

The corporation tax rate is no longer a single percentage but a path. § 23 (1) KStG names a figure of its own for each assessment period, and those figures fall. Anyone quoting the rate from memory almost certainly quotes the current year's and not that of the year in question.

For assessment periods up to 2027 corporation tax is 15 percent. For 2028 it is 14, for 2029 thirteen, for 2030 twelve percent. The path does not stop there: it runs on through eleven percent down to ten percent for periods from 2032.

A descending path has a consequence reaching beyond the tax computation. It makes the timing of profit realisation a quantity worth looking at: the same profit costs less corporation tax in 2032 than in 2026, by a third of the rate.

It also makes every calculation that hard-wires the rate correct for one particular year and wrong for every other. A multi-year plan applying 15 percent throughout systematically overstates the burden of the later years.

It bears noting that this path concerns corporation tax alone. Trade tax does not follow it: its tax base figure stands unchanged in the statute, and its multiplier is set by the municipality in any case. The overall burden therefore falls more slowly than the corporation tax rate.

The rate attaches to the assessment period, not to the date of a payment or an invoice. What matters is the period to which the income is attributable. A divergent financial year shifts that attribution; it does not shift the rule of attribution.

Because the path stands in the statute and not in an administrative instruction, it can be looked up for every year concerned. That is the practical value of this provision: a five-year plan needs no forecast of what the legislator will do, only a table.

The solidarity surcharge on corporation tax

A surcharge is levied on corporation tax. § 4 sentence 1 SolZG sets it at 5.5 percent of the assessment base. It is not a separate tax on profit but a tax on a tax, and that governs how it behaves.

What the assessment base is, § 3 (1) no. 1 SolZG states: where an assessment to income tax or corporation tax is to be made, the corporation tax assessed, reduced by creditable or refunded corporation tax, where a positive amount remains.

Because the surcharge sits on top of the tax, it follows the descending path of § 23 KStG automatically. As corporation tax falls, the surcharge falls in the same proportion, with no need to amend the Solidarity Surcharge Act.

Now to the commonest false assumption in this area. The statute knows a threshold below which no surcharge is levied, and it is a substantial one. The only question is who it applies to.

§ 3 (3) SolZG answers it in four words: the surcharge is to be levied "from persons liable to income tax" only where the assessment base exceeds the amounts named there. The threshold is therefore tied to income tax liability, not to corporation tax liability.

For a GmbH this means the surcharge falls due from the first euro of corporation tax assessed. There is no floor below which it would lapse, and the tapering zone of § 4 sentence 2 SolZG does not help either, because it attaches to the same threshold.

That tapering zone still deserves an explanation, because it explains why the surcharge is not a cliff edge for individuals. Above the threshold it amounts to no more than 11.9 percent of the difference between the assessment base and the applicable threshold.

Without that cap a step would arise at the threshold: one euro more income tax would abruptly trigger the full surcharge on the whole assessment base. The 11.9 percent instead lead gradually up to the 5.5 percent.

§ 4 sentence 4 SolZG takes two cases back out of that cap. On income tax under § 32d (3) and (4) EStG and on wage tax under § 39b (3) EStG the surcharge is always 5.5 percent, notwithstanding sentence 2.

The surcharge accompanies the tax during the year as well. Under § 3 (1) no. 2 SolZG it is measured, where advance payments of income or corporation tax are due, by those advance payments. It falls due not only on assessment but with every instalment.

One last small point with practical effect sits in § 4 sentence 3 SolZG: fractions of a cent are disregarded. Anyone hunting a one-cent difference against the assessment notice will often find it here and not in the assessment base.

The assessment base itself deserves a further look. It is the corporation tax assessed, reduced by creditable or refunded corporation tax, and only where a positive amount remains. Credits therefore bite twice: on the tax and on its surcharge.

In computational terms this means the surcharge is never to be examined in isolation. Every correction to corporation tax draws a correction of the surcharge behind it, and without any decision of its own — it follows the tax it sits on.