What is a corporation tax return

Corporate Income Tax: Who Pays It and How Is It Calculated?

Corporate income tax (KSt) is the tax that legal entities have to pay. A legal person is, for example, a GmbH, an association, a cooperative or a stock corporation. To make it easy to compare, corporate income tax is to the company what income tax is to individuals. All persons, natural persons and legal persons, have to pay tax on their income in Germany. The Corporate Income Tax Act (KStG) applies to the legal person, the Income Tax Act (EstG) applies to the natural person.

Who has to pay corporation tax?

Corporate income tax must be paid by legal entities that are based in Germany. As mentioned at the beginning, the following are affected:

  • societies

  • Corporations (GmbH, AG)

  • Cooperatives

  • Foundations

In German tax law there are - as is so often the case - exceptions for corporation tax. These exceptions ensure that legal persons may only be subject to corporation tax to a limited extent, even if they actually have to pay corporation tax based on their legal form. If, for example, a corporation has its headquarters abroad and only one branch in Germany and the headquarters of the management are not in Germany, then this legal person is in Germany limited taxable.

Conclusion: If you run a GmbH based in Germany or your company operates in the legal form of an AG or cooperative, as a foundation or association, corporation tax is due on corresponding profits. Income tax is not levied on the income of the legal entity.

Who is completely exempt from paying corporate income tax?

Self-employed small business owners, farms and freelancers do not have to pay corporate income tax. You are already charged with income tax. In addition, the following bodies and institutions do not have to pay corporate income tax:

  • political parties

  • State banks

  • Professional associations

  • non-profit or church bodies

  • Federal company

  • Professional associations

  • public institutions

Who does corporate income tax go to?

In the tax system, corporate income tax is defined as a community tax. The tax is communal because the federal and state governments are jointly entitled to it. The corporate income tax return is drawn up together with the annual financial statements. It is therefore an annual tax.

What is the tax rate?

The tax rate is currently 15%. The solidarity surcharge of 5.5% is added. Overall, legal entities must reckon with an effective burden of 15.825%. There are allowances for agricultural cooperatives and associations. All others have to pay corporation tax.

Calculation of corporate tax

The basis for calculating corporate income tax is the taxable income. There is a fixed calculation scheme, which results from the tax laws. The legislature has provided various correction values ​​that increase profit or have to be taken into account to reduce profit. For example, to determine the annual surplus, according to the tax balance sheet items, such as hidden deposits, donations and allowances must be deducted. Hidden profit distributions and other non-deductible expenses such as portions of entertainment costs or too expensive gifts to employees must be added to increase profit.

If your company produces losses in one year, the legal entity has no income that could be taxed. Therefore, the corporate income tax is set at zero euros.

Are there any allowances?

The corporate income tax law also knows allowances. However, these are only reserved for a few taxpayers. In Paragraph 24 of the KStG, an allowance of € 5,000 is granted. Cooperatives and associations whose main field of activity is agriculture and forestry even benefit from € 15,000. This allowance is applied and deducted from the calculated income. What remains is the calculation basis, on the basis of which the corporation tax is levied.

Loss deduction ensures lower burdens

One advantage that legal persons benefit from as opposed to natural persons is the loss deduction. If you produce a big minus in one year, you can claim this tax loss. You can either carry it back or present it. Depending on which variant you choose, you carry out a loss carryforward or a loss carryforward.

This is how the loss deduction works: Reduce profits in the future or in the past

Suppose you had a bad year that ended with a loss. We put this loss at € 10,000 as an example. In the next year the tide turned and they make high sales. The profit is € 50,000. The legislature stipulates that you can carry forward the € 10,000 loss from the previous year to the following year. This means that instead of the € 50,000 you only have to pay € 40,000 as far as corporate income tax is concerned.

You could also choose to carry back the € 10,000 loss to the previous year. Then her tax bill would be overturned. Instead, the tax office recalculates the previous year's taxes. In the current year, there is then a zero result, which does not entail any taxes.

Year after year you can decide whether you want to carry a loss forwards or backwards. You can also split a loss and carry one part forward to the following year and book the other part in the previous year. You should be aware that the instrument of loss carryforward or loss carryforward is helpful in shifting your tax burden. It is advisable to instruct the tax advisor to calculate different variants. Because the design options in connection with the postponement of losses have consequences, the explanation of which is beyond the scope of this article. Therefore our tip: use the specialist knowledge of your tax advisor! Only when you fully understand the consequences can you decide which path makes the most sense for you.