Israel – Germany Tax Treaty

Business Activity in Germany

Germany has a successful economy with a high share of the global market, and its leading exports are industrial goods. Some of the industries that Germany specializes in are green technologies, which consist of products in the field of environmental and climate protection. The country is also known for its ground-breaking inventions such as the motorbike, tram, and car, and researchers and engineers continue to develop creative and worldly ideas for innovation.

Germany’s economy has grown steadily, especially in exports. The car industry leads with €506 billion in earnings in 2022, helping to drive related fields like chemicals, electronics, and metals. Other big sectors, like healthcare (€392 billion in 2021) and electrical engineering (€182 billion in 2020), also play a big role and create a range of jobs.

The country invests heavily in research and development (R&D)—3% of its GDP in 2021—showing its commitment to innovation. In 2022, German companies filed over 57,000 patents, with a strong focus on green technologies like renewable energy and eco-friendly tech.

Most German businesses are small to medium-sized, known as the Mittelstand, making up 99% of all businesses. These companies often lead in their industries, creating top-quality products with a focus on long-term customer relationships. Many are family-owned, rooted in local communities, and emphasize stability and well-paying jobs. Employees here are deeply involved in innovation and problem-solving.

Bilateral Agreements Between Germany and Israel

Several agreements were signed between Israel and Germany:

1. International Investment Agreement
2. Convention on Social Security
3. Double Taxation Agreement

Reciprocal Promotion and Protection of Investments

The bilateral Agreement on International Investments between Israel and Germany was signed on June 23, 1976, and entered into force on April 14, 1980. This agreement aims to provide legal protection for the activities of investors and investments from non-commercial risks. This agreement encourages mutual investment between Israel and Germany by creating a safe, comfortable investment climate.

To read the agreement in English, click here.

Convention On Social Security

Israel and Germany have signed and ratified in 1975 the Convention on Social Security. The purpose of this agreement was to prevent a situation of double social security between the two countries.

To read the agreement in Hebrew, click here.

Double Taxation Agreement

The double taxation treaty is a bilateral agreement between two states that outlines the tax regulations governing income and assets in both countries. In addition, the treaty includes guidelines for the exchange of information on tax issues between those countries.

The original tax treaty between Israel and Germany was signed in 1962, with an amending protocol added to the treaty in 1977. The current treaty was signed on August 20, 2014, and entered into force on December 31, 2016.

To read the agreement in English, click here.

Applicability of the MLI

Germany and Israel both signed the MLI, meaning that there is an automatic exchange of information between the two countries. Israel signed the MLI on June 7, 2017, and ratified it on September 13, 2019. Germany signed the MLI on the same date as Israel but ratified it on December 18, 2020.

Residency for Tax Purposes in Germany

Residence of an Individual

In Germany, individuals are deemed to be residents if their domicile or habitual place is located in Germany. A domicile is a place an individual can use and intends to keep. A habitual abode is where a person is physically present, suggesting their stay is not just temporary. As well, according to German law, an individual qualifies for residence if stays in Germany for a continuous period of more than six months.

In situations where an international assignee maintains residency in two or more countries, the employee is regarded, for the purpose of applying the double tax treaty (DTT), as a resident of the contracting state where they have a significant center of vital interests. This included both personal and economic interests.

To read how an individual can become a tax resident of Israel, click here.

Residency of a Company

A company is considered a resident in Germany and eligible for taxation if its place of incorporation or main place of control and management is in Germany. Companies that don’t meet either of these aspects are considered “non-resident”, however, they still have tax obligations limited to their income from German sources.

To read about how a company becomes a tax resident of Israel, click here.

The Tax System in Germany

The German Tax Authority is called the Federal Central Tax Office (Bundeszentralamt für Steuern)

Income Taxation: 0% – 45%

Taxation of Companies and Branches:15.825%

VAT: 19%

Capital Gains Tax: 26.375%

Withholding Tax

Inheritance Tax and Estate Tax in Germany

Inheritance and gift tax are imposed on lifetime gifts and assets transferred upon death. They will be charged in situations where the donor or the beneficiary of a gift/estate is resident in Germany for taxation purposes. If none of the parties is resident in Germany, the law states that only the assets that are located in Germany should be subject to tax. There are possible tax benefits available for business assets.

The tax rates are progressive, ranging from 7% to 50%, and the tax-free allowances vary from EUR 20,000 to EUR 500,000, depending on the value of the assets and the relationship between the giver and the recipient. When calculating the tax, any acquisitions made within the last ten years are considered, and the allowances can be used once every ten years.

An additional tax-free allowance of EUR 256,000 is available for a surviving spouse, reduced by the value of pension rights, if any, which are not chargeable to inheritance tax. Surviving children may also enjoy an additional tax-free allowance of up to EUR 52,000 depending on their age at the date of inheritance.

Relocation to Germany

Many foreigners choose to immigrate to Germany each year because of its great job opportunities and salaries, fascinating cultural sights and attractions, and good public transportation. Most importantly, Germany also has a thriving economy and welfare system which is what motivates so many people to move there. The country has a very low unemployment rate, at 3.3%, and many of the occupations in demand include doctors, IT specialists, and engineers. Overall, it’s very easy for immigrants to integrate into the labor market because they bring the qualifications and experience that are wanted by domestic employers, and therefore are granted work visas. The recent visa program entitled “The Opportunity Card” (ChancenKarte) allows third-country national qualified workers to come to Germany and search for a job.

It should also be noted that Berlin, the country’s capital, is home to the largest Jewish population in the country. Therefore, there may be even more job opportunities available for Israelis looking to relocate there. Currently, the Jewish community in Germany is estimated to be 118,000, the fourth largest Hebrew community in Western Europe and the eighth largest in the world as of 2023.

Real Estate Taxation in Germany

In Germany, the property tax is levied by municipalities and the calculation of the tax is dependent on the tax value of the property. Such tax value is significantly lower than the fair market value and generally varies between 2.6 percent and 10 percent, depending on the multiplier of the respective municipality. The current system was ruled unconstitutional by the German Federal Constitutional Court and will remain in effect only until 31 December 2024. Starting 1 January 2025, property tax will be based on new regulations.

The real estate transfer tax in Germany is levied between 3.5% to 6.5% of the purchase price for property transactions. This tax is applied to the purchase price or—if there is no consideration—to the property’s value.

Transfer of Funds from Israel to Germany

According to section 170(a) of the Israeli Income Tax Ordinance, all payments transferred to non-Israeli residents are subject to a 25% withholding tax. However, this tax can be reduced or even waived if certain conditions are met. Our firm handles withholding tax matters with the Israeli Tax Authority.

As mentioned above, the countries have signed a tax treaty, that allows taxpayers to submit a 2513/2 form – Statement regarding a payment to a foreign resident that is exempt from withholding tax, to potentially transfer the payments without paying the withholding tax.

In addition to assisting with withholding tax matters, our firm also helps with other issues related to transferring funds abroad. This includes providing an accountant’s approval regarding the payment of taxes, reviewing additional actions required under the CRS standard, and more.

Moreover, banks often raise many difficulties and charge high fees for converting shekels into other currencies. Therefore, consulting with a specialist before transferring the funds is highly recommended, click here to contact us.

For more information on money transfers abroad, click here.

Types of Business Entities in Germany

Germany has several different types of business entities which are related to different kinds of companies. The operating rules of each entity differ; they have different consequences and are chosen based on how large the company is. The main types of legal entities include:

Sole Proprietorship: This business entity is the most basic type of business structure for German businesses, and it’s for individually owned companies. The structure offers simple tax reporting since it’s not subject to corporate taxes, although personal income taxes are still applicable. Raising capital through debt or equity may be more challenging in this structure, and the owner is liable for all debts, losses, and legal proceedings faced by the business.

Limited Partnership (KG): This business entity is good for small and medium-sized enterprises, and it requires a minimum of two partners. One partner has unlimited liability, while the other only has as much liability as the value of their shares in the company. A minimum of €50,000 is required for this entity, which is then divided into shares among the partners.

General Partnership (OHG): This business entity requires a minimum of two partners. Both partners have unlimited liability and the profits are shared between them. There is no minimum capital required for this entity.

Civil Law Partnership (GBR): This type of company has two partners, both with unlimited liability, and it has to be registered with the trade office. If the profits of the business surpass €25,000, the company will be classified as a commercial business, and it will have to then be registered this way.

Limited Liability Company (GmbH): This entity is the most commonly used, and it is used for both small and medium-sized companies. A GmbH involves at least one director and one shareholder, and the shareholder may also be the founder of the company. There’s a minimum share capital of €25,000, and the company’s shares cannot be traded on the stock exchange.

Incentive Laws in Germany

Germany generally does not offer extensive tax incentives due to budget limitations and a constitutional focus on taxpayer equality. However, the German Research Allowance Act, introduced in 2019, provides an R&D subsidy. This allowance grants a tax-free subsidy of 25% of wages for eligible R&D projects, capped at €500,000 annually. In response to COVID-19, this cap was temporarily doubled to €1 million per year until June 2026.

In 2024, the Growth Opportunities Act expanded this benefit further. For eligible R&D expenses incurred after March 2024, the allowance cap rose to €10 million, with a maximum subsidy of €2.5 million per year (and €3.5 million for qualifying small and medium-sized businesses). This includes certain depreciation costs for new or self-made assets. Tax incentives beyond R&D support are rare and typically not directly related to standard business operations.

Germany Double Tax Treaties