Income Tax

What is income tax?

Income tax (German: Ertragsteuer, also written Ertragssteuer) is the umbrella term for taxes that are measured by profit or income. Profit or income forms the tax base here, that is, the amount to which the tax rate is applied. In Germany these include personal income tax (Einkommensteuer), corporate income tax (Körperschaftsteuer) and trade tax (Gewerbesteuer); their statutes make up income tax law (Ertragsteuerrecht). A solidarity surcharge is levied on personal income tax and corporate income tax, and on the personal income tax of church members additionally church tax.

The contrast is formed by transaction taxes (Verkehrsteuern) such as value added tax and real estate transfer tax, which attach to a transaction such as a sale, and by taxes on assets such as property tax (Grundsteuer). In the income statement, income taxes appear in the item “taxes on income and earnings” (Steuern vom Einkommen und vom Ertrag). This income tax expense comprises the taxes of the financial year, additional payments for earlier years and, where applicable, deferred taxes. For a funding round and a company sale, income taxes matter in three ways. They reduce the cash surplus on which the valuation rests, for example in the DCF method. They are a subject of examination in due diligence. And the purchase agreement regulates who bears taxes for periods before the sale.

The three income taxes

• Personal income tax: burdens natural persons under a progressive tariff, and in sole proprietorships and partnerships also the current profit (personal income tax).
• Corporate income tax (Körperschaftsteuer): burdens the taxable income of corporations such as the GmbH (German limited liability company) at 15% (as of 2026), plus 5.5% solidarity surcharge on the tax, together 15.825%. A reduction by one percentage point per year from 2028, down to 10% in 2032, has been enacted by law.
• Trade tax (Gewerbesteuer): a municipal tax on the trade earnings of every commercial business. Trade earnings are multiplied by the base rate of 3.5%, and the result (assessment amount) by the municipality's multiplier (Hebesatz). Each municipality sets its multiplier itself; it is at least 200%.

Trade tax has not been a deductible business expense since 2008 (Section 4(5b) of the German Income Tax Act, Einkommensteuergesetz, EStG). It therefore reduces neither its own tax base nor that of corporate income tax. An allowance on trade earnings exists only for natural persons and partnerships, not for corporations.

Calculating the income tax burden of a GmbH

Formula: income tax burden of a GmbH = 15.825% (corporate income tax with solidarity surcharge, as of 2026) + 3.5% × municipal multiplier

For the same profit, the burden thus depends only on the location (as of 2026):

• Multiplier 200%: trade tax 7%, total burden 22.825%
• Multiplier 400%: trade tax 14%, total burden 29.825%
• Multiplier 500%: trade tax 17.5%, total burden 33.325%

With the enacted reduction in corporate income tax, the total burden falls by around 5.3 percentage points by 2032, that is, with a multiplier of 400% to around 24.6%. Multi-year plans and valuations reflect these steps.

These rates relate to the company. If it distributes profits, a second level of taxation follows at shareholder level, with flat-rate withholding tax (Abgeltungsteuer), the partial income method or, where a holding GmbH is the shareholder, the extensive exemption under Section 8b of the German Corporation Tax Act (Körperschaftsteuergesetz, KStG) (holding structure). If a company maintains permanent establishments in several municipalities, the trade tax assessment amount is distributed among the municipalities in proportion to the wages paid there (apportionment, Zerlegung).

From profit to the tax base

The starting point is the profit according to the tax balance sheet. It shows the business assets for income tax purposes, that is, the assets and debts that are attributable to the business for tax purposes; it can deviate from the assets in the commercial balance sheet. Outside the balance sheet, the profit is corrected: non-deductible business expenses are added back, tax-exempt income such as dividend income under Section 8b KStG is deducted. For trade tax, separate add-backs and deductions apply. Under Section 8 No. 1 of the German Trade Tax Act (Gewerbesteuergesetz, GewStG), the financing components of certain expenses are added back. These are interest in full, rents for real estate at one half, rents and leasing instalments for movable assets such as vehicles at one fifth and licence fees at one quarter. Of the total, to the extent it exceeds EUR 200,000, one quarter is added to trade earnings. In the opposite direction, deductions apply, for example for own real estate.

Losses and change of shareholders

Losses can be carried forward without time limit into later years and offset there against profits (loss carryforward). For growth companies that make losses for years, this is a considerable future tax advantage. Above a base amount of EUR 1 million, however, the offset per year is limited to part of the excess profit (minimum taxation).

This advantage can be lost on a change of shareholders. If an acquirer acquires more than 50% of the shares within five years, unused losses are in principle lost in full under Section 8c KStG; the same applies to trade tax. Persons close to an acquirer and groups of acquirers with aligned interests also count as one acquirer. A capital increase that shifts shareholding percentages is equivalent to a transfer. Exceptions exist for intra-group transactions and up to the amount of existing hidden reserves. On application, the continuation-bound loss carryforward under Section 8d KStG can preserve the losses if the business is continued unchanged.

Worked example: income taxes of a GmbH with add-backs

Simplified example: a GmbH achieves a taxable profit before income taxes of EUR 400,000; there are no further off-balance-sheet corrections. It pays EUR 100,000 in interest, EUR 600,000 office rent and EUR 100,000 in leasing instalments for vehicles and IT. The multiplier is 450%.

• Corporate income tax (rate as of 2026): 400,000 × 15% = EUR 60,000; solidarity surcharge: 60,000 × 5.5% = EUR 3,300
• Add-back amounts: interest EUR 100,000, rent 600,000 × 50% = EUR 300,000, leasing 100,000 × 20% = EUR 20,000; total EUR 420,000
• Add-back: (420,000 minus 200,000) × 25% = EUR 55,000; trade earnings 400,000 plus 55,000 = EUR 455,000
• Trade tax: 455,000 × 3.5% = EUR 15,925 assessment amount, × 450% = EUR 71,662.50
• Income taxes in total: 60,000 plus 3,300 plus 71,662.50 = EUR 134,962.50, around 33.7% of the profit
• Without add-back: trade tax 400,000 × 3.5% × 450% = EUR 63,000, total EUR 126,300 or around 31.6%

The add-back costs EUR 8,662.50 of trade tax per year in this case. A financial planning that calculates with the multiplier alone underestimates the tax burden accordingly.

Distinctions: income tax, value added tax and deferred taxes

• Value added tax: a transaction tax on supplies that the company charges to the customer and remits after deduction of input tax. As a rule it does not burden profit.
• Withholding tax: not a separate type of tax but a form of collection in which the payer withholds the tax; capital gains tax and wage tax are withholding taxes on personal income tax (withholding tax).
• Deferred taxes: a balance sheet item for future tax burdens or tax relief arising from differences between the commercial and the tax balance sheet, not an additional tax.
• Income tax information report (Ertragsteuerinformationsbericht): a report in which companies and groups with revenue above EUR 750 million in two consecutive financial years disclose their income taxes, among other things by EU member state (Sections 342 et seq. of the German Commercial Code, Handelsgesetzbuch, HGB). It applies for the first time to financial years beginning after 21 June 2024 and, as a rule, does not affect growth companies.

Common mistakes

• Flat rate instead of location rate. Anyone who plans with a uniform rate of 30% is off by several percentage points, depending on the multiplier.
• Profit equated with trade earnings. Add-backs for interest, rent, leasing and licences increase trade tax even if profit is unchanged.
• Loss carryforwards taken at face value. After an acquisition of more than 50% they are lost without an exception provision and then have no value for acquirers.
• Tax payments planned at the wrong time. After the first profitable year, the final payment and adjusted advance payments often coincide and burden liquidity twice.
• Open assessment periods forgotten. Taxes for years before the sale can still be assessed years later; without a tax clause in the purchase agreement, it is unclear who bears them.

Frequently asked questions

How high is the income tax burden of a GmbH?

As of 2026, around 22.8% at the minimum multiplier of 200%, around 29.8% at 400% and around 33.3% at 500%; individual municipalities are higher. Add-backs in trade tax can increase the actual burden. From 2028, it falls step by step with corporate income tax.

Is trade tax deductible as a business expense?

No. Since 2008, trade tax reduces neither the taxable profit nor the tax base of corporate income tax.

Does a registered office in a municipality with a low multiplier reduce the tax?

Only if work is actually done there. What matters are the permanent establishments: the assessment amount is distributed according to wages among the municipalities in which the company employs staff.

Who bears taxes for earlier years after a company sale?

The purchase agreement regulates this. A tax indemnity is customary, under which the sellers bear taxes for periods up to the agreed reference date, to the extent they have not already been taken into account in the calculation of the purchase price.

What is an income tax group (ertragsteuerliche Organschaft)?

A link between parent and subsidiary under which the subsidiary's income is attributed to the parent (Sections 14 et seq. KStG). The prerequisites are a majority of the voting rights and a profit and loss transfer agreement for at least five years that is actually carried out. Profits and losses of both companies are thus offset, also for trade tax. Acquirers use the tax group, for example, to offset interest from the acquisition financing against the profits of the acquired company.

Is it spelled Ertragsteuer or Ertragssteuer?

Both spellings are correct; the Duden dictionary lists both. In tax law, the form without the linking s is common, for example in the Ertragsteuerinformationsbericht of the HGB.

The Roemer Capital view

In the financial models we build for clients, we calculate income taxes with the multiplier of the actual permanent establishments and with the trade tax add-backs, not with a flat rate. In a valuation based on cash surpluses, every percentage point of tax burden affects enterprise value directly.

In sale processes, we show loss carryforwards separately and assess, together with the client's tax adviser, whether they survive an acquisition. Only then can they be defended as value in the price negotiation.