Bavaria's Tax System: High Or Low?

Germany has a progressive tax system, with income tax rates ranging from 0% to 45% depending on income level and tax class. The average total corporate tax burden in Germany is 28.9%, which is lower than in other large industrialised countries. In Bavaria, the total tax burden is even lower, as towns and districts often grant companies more favourable conditions for local business tax. However, companies in Bavaria must also pay a municipal trade tax, which varies between 7% and 17% depending on location. In addition to income tax and corporate tax, there are several other taxes in Germany, such as value-added tax (VAT), solidarity tax, and church tax.

Corporate tax is 15%

The corporate tax rate in Bavaria is 15%. This rate applies to corporations with the legal form AG or GmbH. All profit distributions to the shareholders are then taxed at 60% and subject to a flat-rate withholding tax (income tax) of 25%, which means that another 15% tax is due when a profit distribution is made. This brings the total tax rate to 15.825%.

In addition to the corporate tax, businesses in Bavaria must also pay local business rates. These are district-level taxes that vary depending on the local district administration. The usual rate for local business rates is around 15%.

Bavaria offers a competitive system of corporate taxation. The average total tax burden for Germany as a whole is less than 30%, which is lower than in other large industrialised nations such as France, Spain, Italy and the United Kingdom. In some parts of Bavaria, the tax burden for companies is even lower, as towns and districts often grant their companies more favourable conditions when it comes to local business tax.

When considering the tax burden in Bavaria, it is important to also take into account additional wage costs and fee models, such as those for waste disposal. Despite the corporate tax rate of 15%, the overall effective costs of doing business in Bavaria may be comparable to other locations in Central Europe.

Local business rates are 15%

The average total corporate tax burden for Germany is 28.9%, which is lower than other large industrialised countries such as France, Spain, Italy and the UK. However, the tax burden for companies is even lower in some parts of Bavaria, as towns and districts often grant their companies more favourable conditions when it comes to local business tax.

Companies in Germany are taxed in two different ways, depending on their legal form. Corporations with the legal form AG or GmbH are subject to corporation tax, currently at 15%. All profit distributions to the shareholders are then taxed at 60% and subject to a flat rate withholding tax (income tax) of 25%, which means that another 15% tax is due when a profit distribution is made.

In addition, both corporations and partnerships pay local business rates. Business rates are a district-level tax for which the tax rate is defined individually by the local district administration. This means that local business rates vary from district to district. The usual rate is around 15%.

Bavaria offers a competitive system of corporate taxation. When all effective costs are compared, Bavaria often proves to be a better-value location that can compete with comparable locations in Central Europe.

Income tax is progressive

Germany has a progressive tax system, and Bavaria is no exception. The country's average total corporate tax burden is 28.9%, which is lower than that of other large industrialised countries like France, Spain, Italy, and the UK. However, the tax burden for companies is even lower in some parts of Bavaria, as towns and districts often grant their businesses more favourable conditions for local business tax.

In Germany, income tax is progressive, meaning that the tax rate increases with taxable income. Most people pay income tax through payroll deductions by their employer. If an individual has multiple professions, runs their own business, or is self-employed, they must submit an annual tax return to determine their income tax.

The German tax system has different income tax brackets, and the rates vary from year to year. For example, in 2024, the income tax brackets are as follows: less than 11,604 euros, 11,604 - 66,760 euros, 66,761 - 277,825 euros, and more than 277,826 euros. The corresponding tax rates for these brackets are: 14%, 24%, 42%, and 45%, respectively. These figures are regularly adjusted.

Additionally, there are various surcharges and deductions that can impact the amount of tax paid. For instance, a solidarity surcharge of 5.5% is levied on all individual income taxes to improve the economic situation and infrastructure in certain regions. On the other hand, individuals can claim tax credits and deductions for things like employment expenses, alimony payments, charitable contributions, childcare costs, and education expenses.

When it comes to corporate taxation in Bavaria, the tax rates depend on the legal form of the company. Corporations with the legal form AG or GmbH are subject to a 15% corporate tax. Profit distributions to shareholders are then taxed at 60% and are subject to a 25% flat-rate withholding tax, resulting in an additional 15% tax when profit distributions are made.

On the other hand, partnerships with legal forms such as GbR, oG, or KG are not subject to corporate tax. Instead, the company's profits are attributed to individual shareholders, who must pay income tax according to the progressive tax rate, with a current maximum of 45%. Both corporations and partnerships are also subject to local business rates, which vary by district, typically ranging around 15%.

Solidarity surcharge

The solidarity surcharge, or Soli, is an additional 5.5% fee on income tax, capital gains tax, and corporate tax in Germany. This means that all taxpayers in Germany who owe any of the above-mentioned taxes must pay the solidarity surcharge. The surcharge is imposed as a percentage of all individual income taxes.

The solidarity surcharge was introduced in 1991 to help cover the costs of German reunification, as well as the Gulf War (Operation Desert Storm) and its aftermath, and to provide support for countries in central, eastern, and southern Europe. For a long time, there has been controversy in Germany about ending the solidarity surcharge, and it has been the subject of several proceedings before the Federal Financial Court and the Federal Constitutional Court, where its constitutionality was always confirmed. Since there is no political unity on terminating the surcharge, it is not expected to end soon, despite being introduced as a temporary additional tax.

From January 1, 2021, the threshold for paying the solidarity surcharge was increased, resulting in tax cuts for an estimated 90% of German taxpayers, including freelancers and self-employed business owners. Now, only high-income earners are subject to the surcharge. The surcharge is calculated as 5.5% of your income tax and is only charged if your earnings exceed the tax-free threshold. Child tax-free allowances are deducted before the calculation of the solidarity surcharge, unless they have already been considered for your income tax.

Church tax

In Germany, the state collects a church tax (Kirchensteuer) from members of some religious congregations. Both the Protestant and Catholic churches, as well as Jewish denominations, are legally permitted to collect taxes from their members. The tax is then funnelled by German tax offices to the respective faiths.

The church tax is only paid by members of the respective religions, so if you are not a member of a church tax-collecting denomination, you are exempt. The percentage of income tax paid varies depending on the German state. In Bavaria, the percentage is 8%, whereas all other states pay 9%. For example, if you earn 50,000 euros and pay 10,000 euros in income tax, you will pay an additional 800-900 euros in church tax.

The church taxing system has been in place since the 19th century and is rooted in the pre-Christian Germanic custom where the leader of a tribe was directly responsible for the maintenance of the relevant religious group. This custom was later adopted by the Christian churches, and the concept of church maintenance by the ruler of a community remained the accepted custom in most Western European countries.

To avoid paying church tax, you can declare yourself as having no faith. However, this will result in restrictions on certain sacraments in German churches, such as marriage or baptism. You will also be unable to participate in confirmation, work in church institutions, or become a godparent.

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