Israel – Germany Tax Treaty

Business activity in Germany

Germany has a successful economy with a high share on 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. The Automotive industry remains Germany’s leading economic sector as the industry brought in  441 billion euros in 2021.

Overall, Germany has a strong economy that continues to grow through innovations and investments. With almost 59,000 patent applications in 2021, the country has proven to be a leading factor in research and technology areas, and they continue to maintain this status.

Bilateral agreements between Germany and Israel

Several agreements were signed between Israel and Germany:

1. Convention on Social Security
2. Investment encouragement and protection agreement
3. Double taxation convention

Convention on Social Security

In 1996, an agreement on social insurance between Israel and Germany entered into force. The purpose of this agreement was to prevent a situation of double social security between the two countries.

Investment encouragement and protection agreement

In 1980, a bilateral agreement entered into force between Israel and Germany. This agreement was aimed at providing 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.

Double taxation convention

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 into the treaty in 1977. The current treaty was signed in 2014 and entered into force on 1/1/2017.

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 06/07/2017 and it was entered into force on 01/01/2019. Germany signed the MLI on the same date as Israel on, 06/07/2017 but it did not go into effect until 01/04/2021.

Residency for tax purposes in Germany

Residence of an individual

In Germany, individuals are deemed to be a resident if they have a home that’s available to them, whether through renting or ownership, or even in certain cases, a room at a friend’s house. If an individual resides in Germany at the same location for more than 183 days in one calendar year, they are considered a taxable resident.

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.

Residency of a company

A company is considered as a resident in Germany 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 as “non-resident”, however they still have tax obligations limited to its income from German sources.

Germany also has permanent establishment (PE) laws, which is defined as any domestic business facility serving the corporate purpose for a certain period of time. For these laws, Germany mostly follows the Organization for Economic Co-operation and Development (OECD) model. By following this model, Germany fosters businesses that are good for the people and saves large amounts of money for taxpayers.

The tax system in Germany

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

Income taxation: 0% – 45%

Taxation of companies and branches:15.825%

VAT: 19%

Capital gains tax: 25%

Withholding Tax

Inheritance tax and estate tax in Germany

This tax pertains to inheritance and is connected to the transfer of inherited assets to beneficiaries, including legal heirs and other recipients. In Germany, the inheritance tax is not levied on the entire estate left by the deceased individual, but rather on the assets received by the specific heir after deducting all applicable estate taxes.

Some of the assets that are deducted from the inheritance tax include:

• Household goods, such as linen and clothing, as long as the value doesn’t exceed €41,000.
• Land ownership, objects/collections of art, scientific collections
• Normal occasional gifts
• Financial contributions to charity and political parties

Relocation

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 just 3% in 2022, 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 is wanted by domestic employers, and therefore are granted work visas.

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.

Real Estate Taxation in Germany

Real estate in Germany is classified into two categories, and depending on which category the real estate is in, they will be taxed at different rates. The two categories are: “Real Property Tax ‘A’: Real property used for agriculture and forestry”, and “Real Property Tax ‘B’: constructable real property or real property with buildings. The tax rates are relatively low, ranging from 0.26% – 1%, and are calculated on an annual basis but usually paid every three months to the local tax office, known as Finanzamt.

Transfer of funds from Israel to Germany

According to section 170(a) of the Israeli income tax ordinance, any transfer of payment to a non-Israeli resident is subject to 25% of withholding tax. The tax authority can allow, under certain circumstances, to reduces or dismiss the withholding tax. Our firm handles withholding tax matters with the Israeli Tax Authority.

Due to the fact that both countries have a tax treaty with each other, one can submit a declaration form (2513/2 form – Statement regarding a payment to a foreign resident that is exempt from withholding tax), and under certain circumstances, there is a possibility to transfer the payment without the withholding tax and the approval of the Tax Authority.

In providing advice regarding the transfer of money abroad, in addition to the issue of withholding tax, our office handles the requirements of the foreign banks, such as an accountant’s approval regarding the payment of taxes and examines additional actions required in light of the uniform standard of CRS between the countries – automatic exchange of information between countries which is carried out first through the banks and then between the tax authorities of each two countries.

The banks raise many difficulties and charge high fees for converting shekels into other currencies, so it is important to consult before transferring the funds – 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.

Here are some of the most used entities:

1. 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.
2. 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.
3. 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.
4. 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.
5. Limited Liability Company (GmbH) – This entity is the most commonly used, and its 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 only offers tax incentives in a small number of circumstances, and not usually of direct business relevance. This is both due to the country’s budget and the constitutional requirement for equal payment of all taxpayers.

The only main tax incentive was introduced in 2019, and it’s a federal R&D subsidy. This act entails a 25% subsidy of salaries and wages for certain R&D (research and development) purposes.

For other tax incentives, local authorities may provide offerings, including access to affordable land within industrial estates and specific forms of direct government assistance.

Germany Double Tax Treaties