Family businesses pay half of all corporate taxes in Germany

19 October 2021, Munich. A study conducted by the ifo Institute on behalf of the Foundation for Family Businesses found that the importance of corporate taxes has increased significantly in recent years. The study considered corporate taxes in the context of trade tax, corporation tax, capital gains tax, income tax and the solidarity surcharge.

According to the study, family businesses in Germany paid roughly 67 billion euros per year in corporate taxes between 2010 and 2018. That is around 48 per cent of total corporate tax revenue. The 500 largest family businesses accounted for roughly 12 billion euros of this, or just under a fifth.

Low corporate tax rates essential for growth

“It will only be possible to reduce the national debt incurred as a result of handling the coronavirus pandemic through economic growth”, says Prof Rainer Kirchdörfer, Chairman of the Foundation for Family Businesses. “The best prerequisite for this is lower corporate tax rates. The 2008 corporate tax reform has given companies room to grow. In the current crisis situation, it is essential to provide fiscal stimulus for growth again.”

Germany is considered a high-tax country by international standards. In fact, Germany ranks second to last in the tax category of the Country Index for Family Businesses, which measures the attractiveness of 21 industrialised countries on the basis of objective data. An earlier company survey commissioned by the Foundation for Family Businesses has already shown that lower taxes would increase family businesses’ willingness to make investments.

Average tax burden of almost 38 per cent

 
The study reveals that large family businesses are taxed particularly heavily. The average effective tax rate of the 500 largest German family businesses already amounts to around 28 per cent at the corporate level. Allowing for taxes at the shareholder level (income tax paid by members of partnerships and the withholding tax on dividends paid by public limited companies) results in a tax burden of nearly 38 per cent. By contrast, when factoring in taxes paid by shareholders, income from DAX companies that are not family businesses is subject to a tax rate of only around 26 per cent.

Family businesses at a tax disadvantage

“Family businesses bear a large part of the tax burden in Germany. At the same time, in practice they are at a considerable tax disadvantage compared to corporations with anonymous free float”, says Kirchdörfer, Chairman of the Foundation. “It is therefore time that, after years of increasing tax burdens, we now begin moving in the opposite direction and provide relief as we come out of the coronavirus crisis instead of talking about tax increases.”

Partnerships are also placed in a worse position than corporations. When the taxation of shareholders is taken into account, the tax burden of partnerships in the top 500 family businesses lies at roughly 41.5 per cent, about six percentage points higher than that of family businesses operated as corporations (around 35.5 per cent).

The problem especially applies to retained profits

 
Partnerships are at a particular disadvantage if they retain profits, i.e. keep them within the company. Retained profits are subject to the individual tax rates of the shareholders, which are significantly higher than the tax burden on undistributed profits in corporations. The special rule governing retained profits in the case of partnerships, which was introduced into Germany’s Income Tax Act as part of the corporate tax reform, is hardly utilised by companies as it can lead to an even higher overall tax burden and involves a great deal of additional work, as the study confirms on the basis of a survey of the companies concerned. A total of 62 per cent of family businesses in Germany are sole proprietorships or partnerships. Among family businesses with more than 500 employees, this figure lies at one quarter.