10 tax tips for startups in Germany

If you plan to launch a startup in Germany, the taxation issue is a point you should pay attention to. As a founder in Germany, you need to know exactly which taxes you need to pay. Here in Wise Business Group, we point out ten tax tips for startups in Germany. So, we can make you familiarize with tax issues as much as possible.

10 important tax tips for startups in Germany

Anyone who decides to start a company in Germany has to overcome several obstacles. The issue of tax for “start-up businesses” is not a trivial issue. When setting up your business in Germany, you should ask yourself these questions:

• How do I pay taxes correctly?
• What can I deduct from my taxes?
• What tax obligations do I have?
• And important questions like this to avoid problems with the tax administration and certainly tax savings in your business.

The first step after establishing your company in Germany is to know your taxes in Germany:

Tax tip 1: This is what the German tax authorities first ask of new business founders

If you are looking to start a new business in Germany, before starting your business, know the types of taxes that will apply to your business and take them seriously. It’s best to invest in getting a good consultancy. As failure to do so, can lead to human error and ultimately tax penalties. Now let’s look at some tax tips for starting your new business in Germany. You are required to pay a series of taxes from the very beginning of your business in Germany.

If you have a limited liability company, you must have these ready:

• Your articles of association (Gesellschaftsvertrag)
• Your commercial registration certificate (Handelsregisterauszug)
• Your business license (Gewerbeschein)

After filling out the tax questionnaire and receiving the documents from the regional tax office, it will take about one to two months to get your tax number. In Germany, you will usually get your tax number in the form of a postal letter to your company’s address.

It is the same for sole proprietorship (Einzelfirma) and freelancer (Freiberufliche Tätigkeit) with the difference that the required documents for the former will only be a business license and the filled-out questionnaire, and for the latter only a filled-out tax questionnaire suffices.

Our tax advisors can help you fill out the business tax registration questionnaire and receive a tax number in Germany. You can contact us via email or WhatsApp.

Tax tip 2: What taxes are subject to you in Germany?

As a new self-employed person, you should be familiar with the following types of taxes for your tax return:

• income tax
• Church tax (does not apply to Muslim Iranians)
• Solidarity tax (West Germany)
• Value added tax
• Business tax
• Salary tax
• Corporate performance tax

Important tax tips for new businesses in Germany:

For a newly established business, the tax office collects the amount of income tax in the so-called advance payment method (Vorauszahlungsverfahren). However, a different approach is initially applied to start-ups:

The tax administration obtains the basis for calculation using the tax registration questionnaire when starting self-employment. This means that some tax rates are adjusted based on your estimate of income (business profit) in the first year. So, you have to predict your profit for the tax administration.

Tax point 3: The tax flexibility of startups in Germany

Do the taxes mentioned above seem too much for you? Do not worry! In addition to the multitude of tax obligations, there are also numerous tax options for startup entrepreneurs, self-employed people, and freelancers in Germany that will save your tax costs.

So, if you’ve done your tasks and filled out the tax administration’s registration form, it’s worth doing a thorough search in the paragraphs of the German tax law. There are many ways to offset some of the tax costs. For example, by crediting anticipated operating expenses (Anrechnung der vorweggenommene Betriebsausgaben) or claiming input tax at a fixed rate (Geltendmachung der Vorsteuerpauschale). These are just two of dozens of tricks that your tax advisor in Germany can offer you for tax savings.

You can already determine some of these tax tricks in the aforementioned questionnaire for starting your business in Germany. If you choose to fill out the questionnaire too optimistically and estimate your annual profit too high, you will immediately receive an assessment notice from the tax office for your quarterly income tax advances. If you are unlucky, the tax office will also notify you of the quarterly advance payment of the turnover tax. Both of these will immediately have a negative impact on your budget for your first year in Germany.

What do we understand?

One of the most important tax tips for new businesses is to be pessimistic about your profits in Germany.

It is wiser to be pessimistic in your profit assessment and enter the profit even close to “zero” at first. This, in addition to a less financial pressure on you in the first year, saves your time. It allows you to see how your business is progressing as a self-employed person in Germany. 

Keep in mind that declaring less income does not mean paying less tax. At the end of the year, the local tax department calculates the difference between the declared figure and what you actually earned. If you had an excess of income you will have to pay the tax office. The opposite is also possible; If your actual income is lower than your estimate, the tax office will refund the difference to you.

Tax Tip 4: Reduce your tax burden in Germany by forecasting your business expenses

If you are planning your future career as a founder in Germany, you should know that you can reduce your tax burden a year before you actually start your business with these expenses:

• Expenses that are the result of business losses,
• Operating costs,
• All costs related to setting up a business: from financial, tax and start-up consulting to notary, court and other office costs.

The aforementioned expenses are considered tax deductible. In order to save tax, you can offset the resulting losses with the subsequent income of your activity.

Here are some examples of expected costs before starting your business in Germany:

• Seminar costs, for example for attending a startup seminar.
• Costs related to providing specialized information related to your economic activity, such as books, magazines, newspapers, monthly magazines, CDs, etc.
• Travel and hotel expenses.
• Fees for tax consultants or lawyers.
• Postage, office supplies and the like.
• The cost of renting a property even if you work at home.
• The cost of renting office equipment such as printers, etc.

So that the German tax office does not cause you problems later and accepts these expenses as business expenses, for each invoice, record exactly how these expenses are related to the start-up or operation of your business in Germany. This is especially easy with professional accounting softwares in Germany.

Tax tip 5: Starting a business after unemployment in Germany

If you have been unemployed for a while in Germany and intend to start your own business, you can use the German tax law optimally to reduce your new business tax or increase your income.

How?

People in Germany receive unemployment benefits and have to pay income tax for those benefits. In this way, you can request from the tax office that the past unemployment tax be refunded to you as a start-up allowance. An alternative is that you pay a lower income tax in the year you start your business in Germany than a business with the same income. 

Tax Tip 6: Take advantage of tax benefits as a founder

If you, as a founder in Germany, have not achieved the best sales in the first few years of self-employment, you can go to the tax office to claim various benefits. But you must apply for it. These benefits are not available without applying to your local tax office. Here we review some of these items together:

• In the first few years after establishment, the liquidity of your company in Germany is often under pressure because your sales are not yet satisfactory. In Germany, for sales of less than €500,000 per year, as a new business owner you can submit an Ist-Besteuerung request to the tax office. What is the advantage of this request? You only pay sales tax (value added) to the tax office when your customer has deposited it into your business bank account. In this case, your company’s cash flow will be higher.
• Do small business regulations apply to you? If your turnover in the first year after starting your business in Germany is less than €22,000, you can register as a small business owner in accordance with Section 19 of the Sales Tax Act (UStG). This is also possible only in the form of an official request. However, it is worth it. As a small business owner, a lot of paperwork will be saved in your business accounting, which will reduce your accounting costs. Another valuable tip is that you don’t need to show sales tax on your invoices.

Contact us to learn about other tax benefits that founders in Germany can enjoy.

Tax Tip 7: Pre-filing the sales tax declaration in Germany is a tedious undertaking

As a start-up in Germany, the tax authorities treat you differently when it comes to the pre-registration of the sales tax return (Umsatzsteuervoranmeldung) compared to company owners who have established their company in Germany for several years. This means that you must now calculate your tax for the pre-filing tax return for the first two years after starting your business. Also, you must report it exactly every month to the tax authorities in Germany.

Note: According to the amendments for the pre-registration of tax returns, the founders of the company in Germany can submit tax returns quarterly (every 3 months) from January 2021 to December 2026, provided that the amount of their sales tax is less than 7,500 euros per year.

Tax Tip 8: Pay attention to the correct method of determining your profit

Which method you can use to determine the profit of your business in Germany after establishment depends on the amount of profit, as well as the legal form of the company and the size of your business. Your tax advisor in Germany will know which of the following types will be used:

• The first method of Einnahmen-Überschuss-Rechnung, called simple calculation of income-surplus or for short (EÜR) is used when your annual sales in Germany are expected to be less than 800,000 EUR and the resulting profit is less than 80,000 EUR. If you are a freelancer in Germany (freelancing is a legal form), you can always determine your profit according to the EÜR regulations, regardless of the amount of sales.
• The Betriebsvermögensvergleich method or the comparison of business assets is applied to all companies that work with double-entry bookkeeping (doppelter Buchführung) and prepare balance sheets.
• The profit calculation method is based on average rates or Gewinnermittlung nach Durchschnittssätzen is to reduce the burden on smaller companies in Germany that do not do continuous accounting.
• Estimation of the tax base or Schätzung der Besteuerunggrundlage is not a regular form of profit determination and is a tool for the tax administration to assess the profit as a tax base for delinquent taxpayers.

We will explain more about each of these methods in the following articles.

Tax tip 9: Think about corporate performance tax as well

If you have established a company such as a GmbH, UG or AG in Germany, you must pay corporate tax on taxable income. This happens when your economic activity in Germany is subject to profit. The tax rate in this case is 15%. Also, the solidarity surcharge, which is 3% on average in Germany.

Tax Tip 10: Here’s how you can eliminate your business tax burden in Germany

If your business in Germany needs to register a Gewerbe (trade), you will face trade tax. This is the tax that your district municipality collects from you on all the profits of your business registered with the Gewerbeamt. Trade tax has served to finance municipalities in Germany and is determined by them.

Important note

For Gewerbe businesses in Germany (businesses that are not corporations or freelancers), the amount of trade tax is offset by income tax at a flat rate.

As a new business owner, depending on your municipal assessment rate and your personal income tax rate, you may be able to get at least some business tax relief. In other words, limited liability companies in Germany have a fixed trade tax rate (15%). However, for Gewerbe businesses, like a shop, the trade tax rate is adjusted according to the income. Therefore, it can be lower than a company with the same income.

You can contact our tax advisors for information on the types of taxes payable for start-up businesses in Germany. They will introduce you to the most optimal methods of setting up and registering a company in Germany. They will help you with effective tricks to reduce the tax burden, as well.

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An overview of important tax tips for startups in Germany

As a founder in Germany, you should be aware of the tax types you must pay after starting your business. For this purpose, it is better to get help from a tax advisor in Germany. Here, we briefly mention ten important tax tips for startups in Germany:

1. After registering your business in Germany, complete the tax registration questionnaire and submit it to the tax office. Then, apply for a tax number.
2. Estimate the profit from your business in the first year for the tax office.
3. Read German tax paragraphs and learn about tax saving tricks.
4. Reduce your tax burden by forecasting your business expenses.
5. If you start your business in Germany after a period of unemployment, you can use German tax laws to optimize your business tax.
6. Take advantage of tax benefits for founders in Germany.
7. In the first two years after registering your business in Germany, you must calculate your tax monthly for the pre-registration of the tax return and report it to the tax authorities.
8. According to the amount of profit, the legal form and the size of your business in Germany, use the correct method of determining the profit.
9. Pay attention to corporate performance tax.
10. You can reduce your business tax burden by registering a Gewerbe business in Germany.

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For more information on how to start your economic activity in Germany and tax issues, contact us through WhatsApp.

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