There are many corporate structures that are not separate legal entities but associations of partners, whereby the partners hold all rights and obligations. This is the case with civil law partnerships (GbR), the general commercial partnership (oHG) and limited partnerships (KG). Due to their structure, the partners themselves are subject to personal income tax (Einkommenssteuer) rather than any corporate income tax (Körperschaftssteuer), each paying the individual tax rate that is applicable to themselves.
Personal Income Tax Rates
Personal income tax rates are dependent on your personal annual income. It starts at 14% for those whose annual income is in excess of the tax-free allowance of EUR 8,820. It then rises to a maximum of 42% for those earnings over EUR 54,058. In the case that you earn over EUR 256,303 per year, you are subject to a 45% income tax rate on every euro in excess of EUR 256,303.
Similar to corporate income tax, partners can also be subject to a solidarity surcharge in addition to their personal income tax. This surcharge is currently rated at 5.5% of the individual partners personal income rate.
Harmonizing Corporation and Partnership Tax Rates
In the large majority of cases, any distributed or retained earnings are subject to the standard system of personal income tax with progressively rising tax brackets. There are two options that a partnership can consider if they wish to reduce their tax burden (making it closer to the tax burden of corporations):
To avoid the rising brackets of personal income tax, the partnership can choose to apply a flat taxation rate of 28.25% plus the standard solidarity surcharge on any retained earnings for the partnership – this equals a flat taxation rate of 29.8%, almost equal to the tax rate that a corporation would pay (If retained earnings (taxed with a flat rate) were to be distributed to the partners later, the earnings that are distributed could, under some circumstances, be subject to a further 25% taxation burden.) It’s also possible for the partnership to offset their trade tax payments on both distributed and retained earnings, against their own personal income tax. Please refer to the chapter we have written on trade tax for more information about this subject.