Taxation of Businesses

Since tax law is subject to fluctuations it is difficult to write down the state of the law. Following provisions will only give you a rudimentary primer on what you need for understanding. For more, detailed and up to date information consult your attorney or tax advisor.

This presentation is reaching out to SME not required to keep books. Since keeping books is a very formal and a sophisticated matter in general, and bigger companies will have their bookkeeping personnel anyway, no need for any such information is assumed here.

BTW: Did you know? Tax Return - its origin:

Until 1694, English sovereigns financed their expenditure simply by issuing credit tokens (IOUs) to taxpayers at a discount. In other words a tax-payer could "prepay" his taxes, for instance by giving the sovereign 8 pounds sterling in goods and services in exchange for a 10 pound token from the Exchequer (Treasury), which could be returned in payment of taxes.
Interestingly, the phrase "tax return" derives from the payment of tax by returning the credit token to the King's Exchequer, and the phrase "rate of return" literally described the time over which the taxpayer could achieve his discount and profit by returning his tokens/credits to the Exchequer. So in the above example, if the taxpayer paid 10 pounds tax in one year, he would make a 2 pound profit on an 8 pound investment and a 25% rate of return. If he paid 5 pounds in tax a year then the rate of return would be 12.5% and so on. It will be observed that no compound interest was involved. But that's history; it is not so easy anymore today.

 

Computing the Taxable Income
pursuant to §2 EStG (N.B. This overview covers about 90% of the rules!)
  Turnover (earnings before
operational deductions)
Umsätze (Einkünfte vor Abzug
von Betreibsausgaben
)
  earnings (= profit) Einkünfte (= Gewinn)
minus contribution to assistance for old-age Altersentlastungsbeitrag
minus relief for single parents Entlastungsbeitrag für Alleinziehende
minus € 640 for income in forestry
and agriculture
€ 640 bei Einkünfte aus Forst-
und Landwirtschaft
  = total amount of earnings = Gesamtbetrag der Einkünfte
minus special expenses Sonderausgaben
minus extraordinary burdens Außergewöhnliche Belastungen
  income = Einkommen
minus
child benefits or exemptions
Kindergeld oder Kinderfreibetrag
  = income to be taxed or taxable income = zu versteuerndes Einkommen

 

Why is the tax law and taxation in Germany so very complicated?

The law on taxes in Germany is as regular as the irregular verbs in the English language. This fact is due to the Germans’ attitude toward the fiscal authority. It is considered as a sport, comparable to a cat and mouse game, for a German to outwit the fiscal authority in order to reduce tax payments as much as possible. This corresponds with the difficulty of tax law. The eagerness for this game supposedly derives from the general dissatisfaction with Germany’s political and/or commercial situation.
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Do I not have to pay any value added or sales tax when I buy something? I have been always paying the price on the tag and nothing more.

Sure, you are paying value added tax. Here we typically have all inclusive prices. Taxes and service fees must be included in prices for the end consumer (§1 I 1 PAngV). As a businessman on the other hand, you will often find two or three sums as the “price” (net/gross sum, VAT). What ever the price structure may be, do take a good look for the final price.
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Being a businessman, which taxes do I have to pay?

This depends on the kind of businessman you are. All are subject to income tax (Einkommenssteuer) respectively corporate tax (Körperschaftssteuer) for incorporated companies, and VAT. Only those practicing a trade or industry (and not a free profession) will have to pay trade tax (Gewerbesteuer). Trade tax will always be imposed upon all corporations.
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