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Germany
Preface
This guide was prepared by Falk GmbH & Co. KG in 2011. Here is a complete list of Praxity
participating firms in Germany:
Falk GmbH & Co. KG
Contact: Gerhard Meyer (Gerhard.Meyer@falk-co.de)
Website: www.falk-co.de
FIDES Treuhand GmbH & Co. KG
Contact: Dr. Christoph Lffler (c.loeffler@fides-treuhand.de)
Website: www.fides-treuhand.de
Mazars GmbH
Contact: Uwe Wolf (Uwe.Wolf@mazars.de)
Website: www.mazars.de
Praxity 2011
This guide is intended as a general guide only and should not be acted upon without further
advice.
Contents
1.
2.
3.
4.
5.
6.
1.1
1.2
1.3
1.4
1.5
1.6
General information
Page
8
9
11
17
21
Business environments
Permanent establishment or branch
Work and residency permits
Labour law
Acquisition of German enterprises
7.
8.
9.
10.
11.
12.
Personal taxation
31
36
38
40
41
42
7.1
7.2
7.3
7.4
7.5
Income tax
Personal income tax rates
Assessment and filing
Taxation of non-residents
Inheritance and gift tax
12.1
12.2
12.3
12.4
12.5
12.6
Transport
Language
Time relative to Greenwich Mean Time (GMT)
Business hours
Public holidays
Useful links
1. General information
1.1 Opportunities and possible obstacles for foreign investors
The Federal Republic of Germany welcomes investment from abroad. Many foreign companies are
active here, conducting business either as a subsidiary of a foreign parent corporation or as a branch
office. Germany is one of the most attractive locations for setting up business enterprises in Europe.
Some of the key attractions for foreign investors include:
Investing in Germany means investing in the economic core of the European Union. The single
European market has the potential to reach 500 million consumers.
The lower chamber (Bundestag) is elected by the population for a four-year term. The
government is formed by a coalition of parties, which have a majority of seats. The
Government of Germany is headed by the Chancellor. Since November 2005, the Chancellor
has been Angela Merkel.
The upper chamber (Bundesrat) consists of members appointed by the state governments.
These members represent the respective governing parties of each state. The number of
delegates for each state more or less reflects its proportion of the overall German
population.
The German legal system follows the constitution. All legislative acts of the parliaments have to
conform to the constitution.
The German legal system is based on detailed codes and is principle based. Initial Acts of Parliament
are regularly proposed and debated in the parliament (Bundestag). Legislation is enacted by the
Bundestag and, if necessary, approved by the representatives of the German states (Bundesrat).
The German court system is a decentralised, multi-tier system. There are different jurisdictions for
certain areas of law, such as civil law, tax law or labour law. Consequently, there are separate courts
for each area of law.
The judgements of the supreme courts of each area of law are only binding for the involved litigants.
However, they are seen as a guiding line for other courts, especially the lower courts.
1.6 Currency
The unit of currency is the Euro, represented by . A single Euro is divided into 100 cent. The
International Standards Organization (ISO) currency code is EUR.
3. Government incentives
European Law (European Commission) imposes general restrictions on state subsidies. Government
incentives may take the form of cash grants, low-interest loans or export guarantees. These
incentives are, however, often limited to certain industry sectors and services or to a particular
group of investors.
The available tax incentives are mainly special depreciation allowances for small or medium-sized
companies, and a rollover relief for certain capital gains.
Investitionszulage (IZ).
In certain regions of Western Germany and Berlin, support is also available through the GRW, albeit
at a lower level. Here, large companies can obtain up to 15% of their investment costs (eligible for
support) reimbursed, medium-sized companies up to 25%, and small companies up to 35%.
Eastern Germanys IZ
The IZ is a special incentives programme created to promote investment activities in Eastern
Germany. The IZ scheme supports investment projects in the federal states of Berlin, Brandenburg,
Mecklenburg-Vorpommern, Saxony, Saxony-Anhalt and Thuringia only. The IZ is granted tax-free.
This programme is based on the Investment Allowance Act 2010. Investors automatically receive IZ
funding (subject to all eligibility criteria being satisfied) when investing in Eastern Germany.
To qualify for the IZ incentives, an application has to be submitted to the relevant tax authority (not
later than four years after the end of the calendar year for which the IZ incentive is applied for).
Investment projects in Eastern Germany can combine the IZ with support from the GRW. However,
the level of support from both programmes may not exceed the maximum level of support
permitted in the respective region.
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11
Business organisations
The main legal forms of business organisations in Germany are:
Since 1994, the forming of small joint stock corporations has been simplified. Up to a specific scale,
an AG can be formed by a single shareholder, and the statutory requirements are in many regards
less burdensome.
The minimum issued share capital is 50,000. The minimum par value per share is 1. Shares may
also be issued without par value, but allocable value of the total capital must be at least 1. A
minimum of 25 % must be paid up on each share, with the remaining balance to be settled on
demand. Par value shares must be sold at least at par; if they are sold for a higher amount, this share
premium must also be paid in. Unless restricted by its articles, an AG enjoys the benefit of
unrestricted transfer of its shares and, therefore, may raise capital freely. The AG is typically used
when capital is to be raised from the general public. The shares can be traded on a stock exchange, if
certain regulatory requirements are fulfilled.
In general, it takes about six weeks after the signing of the Articles of Association to register an AG.
Formation expenses comprise, in particular, legal, registration and notary fees. The initial subscribers
are responsible for appointing the first Supervisory Board.
12
Shareholders can act only in meetings duly called by the Management Board, and in which a quorum
(minimum number of members) is present. An annual meeting is required by statute, and special
meetings are authorised when called by the holders with a designated percentage of voting rights.
For tax purposes, a corporation is treated as an entity and is therefore taxed on its own income. If
the corporation pays a dividend to its shareholders, the shareholders are subject to taxation.
However, if the shareholder is a corporation, the dividend is tax-free except for 5%.
Merger
Formation of a holding company
Formation of a joint subsidiary
Conversion of a public limited company previously formed under national law.
The SE must have a minimum share capital of 120,000. Statutes require the registered office of the
SE be its place of central administration. Unlike the AG and GmbH, the SE can easily transfer its
registered office within the European Community to another Member State without dissolving the
company.
In terms of corporate governance, the shareholders of an SE can choose between a monistic and a
dualistic board system. The dualistic system basically works like the corporate governance system of
an AG with a Supervisory Board, a Management Board and the General Meeting of Shareholders.
In a monistic system, however, there is only a Board of Directors and the General Meeting of
Shareholders. So-called non-executive directors who form the Board of Directors appoint and
control the so-called managing directors. These managing directors are responsible for the day-today running of the company and are authorised to decide all matters relating to the conduct of the
business. The managing directors may also belong to the Board of Directors. Therefore, unlike in the
dualistic system, there is no strict separation between managing and non-executive (controlling)
directors. The functions exercised by the General Meeting of Shareholders are basically the same as
for the AG, since almost all of them are governed by the German AktG.
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14
General partners, who essentially have the rights and obligations of partners in an ordinary
partnership
Limited partners, who do not participate in the management of the partnership's business
and are subject to only limited liability.
A KG does not have its own legal character, but it can sue or be sued, acquire rights, and incur
liabilities under the firms name. A KG is also governed by the German Commercial Code.
The partnership agreement must specify which partners are general and which partners are limited.
Subject to the provisions of the partnership agreement, only general partners have management
authority and the power to represent the partnership. Limited partners are excluded from such
functions.
The limited partnership must file for registration with the Commercial Register. Limited partners are
liable for their partnerships debts until their limited liability is recorded in the Commercial Register.
In order to protect the limited partners from additional liability, the final formation of the
partnership should be conditioned on the completion of the registration. Like an OHG, the possibility
of general partners being exposed to unlimited liability, means a KG is not a very common business
organisation in Germany.
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16
The commercial register is managed by the district court, where it is open to public viewing at no
cost. In addition, the companies register can also be consulted online, via the common register
portal of the German federal states (Gemeinsames Registerportal der Lnder,
www.handelsregister.de). Some of the company data stored in the commercial register is also
available electronically through the commercial register of the Federal Gazette (Bundesanzeiger,
www.unternehmensregister.de).
Companies are required to register if they carry out a commercial business operation. This is
determined by various criteria, including:
As a general benchmark, a business with an annual turnover of over 500,000 and a profit of
50,000 can be assumed a commercial business operation. In each case, the registration
requirements should be determined by qualified counsel.
The application for registration in the commercial register is electronically filed in publicly certified
form, by a notary, to the appropriate commercial register. As a rule, company types that are
required to file an entry on the commercial register in order to establish the organisation, the
possible liability limitations for the partner(s) takes effect after the entry on the commercial register
has been made. If business was conducted prior to this registration, the partners would be liable for
any company losses, using their personal private assets.
The total costs for entry onto the commercial register vary depending on the type of company being
registered. Costs incurred cover the notary certification and the fees charged by the district court for
entry and publication in the Federal Gazette (Bundesanzeiger). The costs and fees are not levied on
an arbitrary basis, but are regulated by law. They largely depend on the number of partners and the
share capital. If additional legal advice is sought, further costs may be incurred.
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18
19
Interest in a company - When acquiring an interest in a company, there are different tax
consequences for the buyer and seller, depending on whether the acquisition is an asset or
share deal. Under German tax law, for a corporate shareholder, the capital gain is tax
exempt; an individual shareholder receives a preferential tax rate when selling shares. As a
result, both corporate and individual shareholders generally prefer share deals. However, as
a general rule, purchasers can only depreciate acquired assets. In particular, the purchaser is
not allowed to depreciate the acquired (pro-rata) good will in case of a share deal.
Consequently, buyers of German companies prefer asset deals.
If the essential assets of a business are transferred, the liabilities follow the assets. This includes the
tax liabilities of the past two years, liabilities to the employees (pension schemes, collective
bargaining agreements etc.) and creditor liabilities.
Due diligence
The legal and tax history of the company being acquired must be thoroughly investigated prior to
the actual acquisition. The recent annual financial statements and reports of the tax and social
security submitted to the authorities should be examined closely. This includes reviewing their latest
audits relating to income tax, salary and wage tax, value added tax and social security contributions.
Also, the bylaws of the company being acquired should be reviewed. Recently, environmental
regulations have become increasingly important in acquisition decisions.
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21
22
the services, performance and remuneration are evidenced and documented in writing, in
advance.
These principles are of particular importance for a German subsidiary of a foreign parent company. If
the above requirements are not met, the payment or remuneration is treated as a deemed profit
distribution. Once a deemed profit distribution is recognised, it cannot be reversed and may lead to
retroactive taxation for past years.
The Federal Minister of Finance has published circulars with administrative principles for the
examination of:
German tax law requires documentation of international transfer pricing and cost contribution
arrangements. The company has to prove that inter-company transactions have been carried out at
arms length terms. Violations of these documentation regulations are subject to financial
penalties.
6.5 Losses
Income tax losses of up to 511,500 can be carried back and offset against taxable profits of the
previous tax period. Additional losses may be carried forward and offset against taxable profits in
future years without any limit of time. However, losses carried forward can be offset against profits
only up to 1 million unrestrictedly. The exceeding amount (loss of more than 1 million) is only
deductible at a rate of 60% of the remaining taxable profits. Therefore, a company with a loss carry
forward of more than 1 million pays taxes, if the subsequent profit is not high enough, even though
the amount of losses could absorb the profit. This is called minimum taxation.
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24
the subsidiary is integrated financially into the parent company from the beginning of the
tax year, through direct or indirect majority voting
and
the two companies complete a profit and loss pooling agreement of at least five years
duration and file this agreement in the Commercial Register.
Group taxation is effective from the beginning of the year of registration of the pooling arrangement
in the Commercial Register.
Group taxation is available for corporate and trade tax purposes. Whats more, group taxation is
available for the purpose of value added tax (VAT), although other requirements have to be fulfilled.
Controlled foreign company legislation
There is detailed legislation regarding the allocation of foreign passive income to German tax
residents and for extended limited tax liability for residents leaving Germany (Auensteuergesetz AStG).
Holdings in foreign corporations
Based on domestic law, capital gains realised on the sale of both domestic and foreign shares by
German companies are tax-free, irrespective of the percentage of shareholding. Correspondingly,
capital losses or write-downs are not tax deductible.
However, 5% of the realised capital gain is considered as non-deductible expense and is therefore
taxed.
Parent subsidiary directive
The German implementation of this EU directive bans withholding taxes on dividends distributed by
a subsidiary in Germany to a parent company in another EU member state. In addition, it offers tax
relief with respect to received dividends from the parent company.
The reduced tax rate in Germany applies only if the foreign holding company:
The directive applies to shareholdings with a minimum participation of 10% and grants EU member
states an option to demand that the shareholding must have been held continuously for a period of
two years. In Germany, this minimum period is one year.
The zero tax rate only applies if a certificate of exemption issued by the tax authorities is presented
beforehand. If withholding tax has already been paid, it can be refunded upon application.
Germany introduced a general anti-directive and anti-treaty shopping provision into its national tax
code to protect against the abuse of these benefits by non-EU residents (see section 7).
Interest and royalties directive
25
This directive applies to shareholdings with a minimum participation of 25 % and grants EU member
states an option to demand that the shareholding must have been held continuously for a period of
two years. In Germany, no minimum period applies.
The zero tax rate only applies if a certificate of exemption issued by the tax authorities is presented
beforehand. If withholding tax has already been paid, it can be refunded upon application.
Based on this directive, Germany also introduced a general anti-abuse provision to protect against
the abuse of the above benefits for non-privileged companies.
Mergers directive
The mergers directive enables a company or several companies within the EU to reorganise and
benefit from tax neutrality. However, the directive permits taxation of capital gains, if the taxation
right of the former residence/source country is restricted after the reorganisation. This directive was
amended in 2006 to extend the scope, for example, to an SE (European Company).
Germany has implemented pursuant (compatible) regulations, corresponding to the amended EU
directive, to ensure cross-border mergers, spin-offs, transfer of assets and exchanges of shares
involving companies from at least two member states of the EU are tax neutral. Effectively, as of the
end of 2006, it has been possible to conduct tax-neutral cross-border reorganisations in Germany,
providing the taxation right of Germany is not restricted.
The corporate tax rate for non-resident foreign corporations generating income from German
sources has been 15% since 2008. The same rate applies to domestic corporations.
Thin capitalisation rules
As of 2008, the former thin capitalisation rules were replaced by a general interest stripping rule.
This rule restricts the deductibility of all interest expenses of a company, irrespective of the seat of
the parent company. This regulation states that interest payments may not be deducted from
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27
Interest is 0.5 % per month on both tax claims by the tax office and tax refunds claimed by the
taxpayer. The interest period starts 15 months after the end of the tax year. Interest on tax claims of
the tax authorities is never deductible. However, interest on tax refunds claimed by the taxpayer is
always taxable for individual and corporate income tax purposes.
Appeals
Appeals against tax assessments must be made within one month after the receipt of the tax
assessment notice. This deadline is strict, and late appeals are not accepted.
An appeal against a tax assessment is possible at three levels. First of all, an appeal to the
appropriate tax office can be filed. The next step is to appeal to the competent tax court and finally
to the Federal Tax Court (Bundesfinanzhof).
It may also be possible to contend that European law is breached by German tax law. However, the
taxpayer may not directly appeal to the Court of Justice of the European Union (ECJ). The Taxpayer
can only request the (federal) tax court to refer the case to the ECJ in a preliminary ruling procedure.
The judgement of the ECJ is binding for all tax courts and can overrule national tax rules.
Corporate tax and individual income tax
As of 2009, the half-income system has been replaced in Germany by the part-income system for
dividends of shares allocated to the business assets and by the final withholding tax of 25%
(Abgeltungsteuer) for dividends of shares allocated to the private assets, respectively. Still, it
remains a shareholder relief system.
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10,000
(1,400)
(1,500)
(82.50)
Remaining balance
7,017.50
7,017.50
Taxation of shareholder
Final withholding tax at 25% plus solidarity surcharge: 26.375%
Net Income
1,851
5,166.50
pension insurance,
unemployment insurance,
health insurance,
nursing care insurance,
accident insurance.
Employees may be exempt from the mandatory German social security system if they are sent to
Germany by a foreign employer and if their terms of employment in Germany are limited from the
beginning.
Generally speaking, social security contributions are shared equally by the employer and the
employee, with the exception of accident insurance costs, which are solely covered by the employer.
The employer is responsible for withholding and remitting the full amount of social security
contributions (employees share and employers share) to the relevant authorities. Deductions made
from an employee's salary are calculated on a sliding scale, according to the income threshold.
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Employee
Western
States
Eastern
States
Percentage
Percentage
30
Pension insurance
9.95%
9.95%
5,500
4,800
Unemployment insurance
1.5%
1.5%
5,500
4,800
Health insurance
7.30%
8.20%
3,712.5
3,712.5
Nursing insurance
0.975%
0.975%
1.225% (childless)
3,712.5
3,712.5
Total
19.725%
20.625%
20.875% (childless)
Example:
The employer's deductions for a married man without children in 2011, based on an annual salary of
30,000 in the Western States would have been:
Employee
2,500
Deduction
342
19
522
883
1,617
Employer
2,500
493
Total costs:
3,021
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7. Personal taxation
7.1 Income tax
Individuals who are German residents, or are foreign nationals legally recognised as German
residents, are subject to unlimited taxation, unless a tax treaty assigns the right to impose tax on
income in favour of another country. Individuals who are not resident in Germany will be subject to
limited taxation only, on income from German sources that are listed in section 49 in the German
Income Tax Act.
An individual is a resident of Germany, if his or her residence or habitual abode is in Germany.
Meaning, an individual may be subject to unlimited taxation in Germany from the very first day of
his or her stay.
What is regarded as taxable income?
The German Income Tax Act ( 2 para. 2 EStG) sets out seven categories of taxable income. Income
that does not fall within one of these categories is not taxable:
Withholding tax is levied on wages, dividends, interest, capital gains, income from a silent
partnership or from a participation loan, royalties and income from securities ( 43 para. 1 EStG).
This tax can be credited against the personal income tax liability, unless the withholding tax on
private capital income is final (see the next paragraph on Abgeltungsteuer).
Capital gains derived by an individual within the first three categories of income, are included in the
respective category of income. Private capital gains of securities are taxed as capital income, the rest
only in the event of a private, short-term transaction. Only in case of a substantial shareholding in a
corporation, the income is qualified as trade income.
A private short-term transaction occurs when the holding period for real estate was not more than
10 years, or for other property (e.g. cars, but not securities) was not more than one year. Such gains
are regarded as ordinary income and taxed at regular rates.
Gains arising from the sale of substantial shareholdings in corporations and of partnership interests,
qualify as business profits. A substantial shareholding in a corporation is given, if the participation
amounts to 1% of the share capital at any time throughout the five years preceding the transfer.
Capital gains arising from the disposal of a sole proprietorship or partnership may be subject to a
preferential tax rate under certain conditions. Such capital gains are not subject to trade tax.
The net income of each of the categories of income listed above is calculated separately and - after
deducting operating expenses and other income-related expenses added to obtain the total
income. The only exception is the category for capital income (see the next paragraph on
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33
2009
2010
2011
Basic allowance ()
7,834
8,004
8,004
14.0%
14.0%
14.0%
42.0%
42.0%
42.0%
in excess of
52,552
52,882
52,882
The special maximum tax rate of 45% is imposed on income in excess of:
Income
Single ( )
2009
2010
2011
250,401
250,731
250,731
Considering the additional solidarity surcharge of 5.5% on the individual income tax, the effective
marginal rates amount to 44.3% (47.5% for the special maximum rate).
34
Methods of taxation
Non-resident individuals are taxed on their German source income either through a withholding tax
or a tax assessment.
Withholding tax
Withholding taxes imposed on non-residents include:
Wage tax on income from employment, taxed at a progressive rate of between 14% and
45%.
Capital income from dividends and certain interest, generally subject to a withholding tax of
25%.
Income from use of royalties, generally subject to a withholding tax of 15%.
Income for services provided by artists, sports people, actors, writers, journalists and
photographers, performed or used in Germany. These activities are subject to a withholding
tax of up to 15%.
Remuneration of supervisory board members, subject to a 30% withholding tax.
35
Supervisory board members and for services provided by artists etc. upon application (only
available for EU/EEA residents)
The tax base is the general taxable income. The progressive tax rate schedule for single persons
applies. The general tax-free amount of 8,004 (as part of this tax rate schedule) is only applicable to
income from dependent employment. The tax assessment period is the calendar year.
Application for more favourable taxation
Non-resident individuals, who derive at least 90% of their taxable income from German sources or
whose non-German income does not exceed 8,004, may apply for more favourable taxation in
Germany. In this case, they are basically taxed like German residents.
EU citizens may alternatively apply for preferential taxation for married couples, which is not
available to non-resident individuals.
In addition, special agreements exist with France, Switzerland, Austria and Luxembourg for daily
cross-border workers.
Unlimited inheritance and gift tax liability is applicable, if the decedent or donor or the recipient has
German residency. Limited inheritance or gift tax liability applies only with regard to certain German
property defined in 121 of the Valuation Act (Bewertungsgesetz - BewG). Extended limited tax
liability may exist within the rules of the Foreign Transaction Tax Act (Auensteuergesetz - AStG).
The valuation of the transferred property is assessed according to the provisions of the Valuation
Act. All property is basically valued according to their current market value. However, certain
privileges exist for agriculture and forestry, for shares (holding of more than 25%), for sole
proprietorships and for participations in trade partnerships. These types of property may be passed
on either tax-free or 85% tax-exempt. However, several conditions and deadlines have to be
considered.
Smaller gifts or inheritances are exempt from tax by deducting a personal allowance from the value
of the assets. Personal allowances are granted, for example to spouses (500,000) and to children
(400,000).
The applicable inheritance and gift tax rate depends on the value of the beneficiarys gain and what
the relationship is between the beneficiary and the decedent or donor. For example, for children or
the spouse of a decedent, the applicable rates range from 7% to 30%, whereas the applicable rates
range from 30% to 50% for persons who are not related to the decedent.
Six double taxation treaties on inheritance and gift taxes exist. These include Denmark, France,
Greece, Sweden, Switzerland and the United States.
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Whether the right to tax particular income is exercised by the country of residence or the
country of source
To what extent tax credits will be granted by one country for taxes paid in another country
Whether income is fully tax-exempt in one country or the other.
The following schedule summarises regular withholding tax rates for double taxation treaties, in
relation to income taxes:
Recipient of
German-source
income
Dividends
Dividends
Holding
Holding
Royalties
Interest
Less than
10 %
10 %
less than
or more 25 %
25%
or more
Australia
15
15
10
25
Austria
15
5 (E)
0 (I)
0 (I)
Belgium
15
15 (E)
0 (I)
25/0 (I)
Bulgaria
15
5 (E)
5 (I)
5 (I)
Canada
15
10/0
10/0
Cyprus
15
10 (E)
0/5 (I)
10 (I)
Czech Republic
15
5 (E)
5 (I)
0 (I)
Denmark
15
5 (E)
0 (I)
25 (I)
Egypt
15
15
15
25
Estonia
15
5 (E)
10 (I)
25 (I)
Finland
15
10 (E)
5 (I)
0 (I)
France
15
5 (E)
0 (I)
0 (I)
Greece
25
25 (E)
0 (I)
10 (I)
Hungary
15
5 (E)
0 (I)
0 (I)
India
10
10
10
10
37
20
15
10
15
Ireland
10
10 (E)
0 (I)
0 (I)
Israel
25
25
0/5
15
Italy
15
15 (E)
5/0 (I)
25 (I)
Japan
15
15
10
10
Latvia
15
5 (E)
10 (I)
25 (I)
Lithuania
15
5 (E)
10 (I)
25 (I)
Luxembourg
15
10 (E)
5 (I)
0 (I)
Malta
15
5 (E)
0 (I)
25 (I)
Netherlands
15
10 (E)
0 (I)
0 (I)
New Zealand
15
15
10
25
Norway
15
25
Poland
15
5 (E)
5 (I)
25 (I)
Portugal
15
15 (E)
10 (I)
25 (I)
Romania
15
5 (E)
3 (I)
25 (I)
Russian Fed.
15
25
Singapore
15
25
Slovak Republic
15
5 (E)
5 (I)
0 (I)
Slovenia
15
5 (E)
5 (I)
25 (I)
South Africa
15
7.5
10
Spain
15
10 (E)
5 (I)
10 (I)
Sweden
15
0 (E)
0 (I)
25 (I)
Switzerland
15
5*
25
United Kingdom -
15
15 (E)
0 (I)
0 (I)
United States
5/0
25
15
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11. Trusts
The Anglo-American concept of trusts does not have an equivalent concept in German law. The
closest German concept is the foundation (Stiftung). Foundations, however, are rarely used for
business purposes in Germany.
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12.2 Language
German. Foreign languages are widely spoken, especially English.