background image
6.1. Main Rules Governing the Determination of Taxable Income

Taxable income of corporations is based on the annual financial statements prepared under German generally accepted accounting principles (GAAP), subject to numerous adjustments for tax purposes. After the annual financial statements have been filed with the tax authorities, they may be changed only to the extent necessary to comply with GAAP and the tax laws.

The basic principles governing the determination of taxable income of companies are set out in the Income Tax Law (section 2 et seq. of the EStG) and the Corporate Income Tax Law (section 7 et seq. of the KStG). All types of income realized by a company, regardless of whether they are derived from trading and similar business activities or from investments, are categorized as business income and are liable to both corporate tax and trade tax.

Under both commercial and tax law, a company must keep its books on an accrual basis. The determination of taxable income is based on the net worth comparison method (Betriebsvermögensvergleich), pursuant to which net income is the difference between the value of net assets at the beginning and end of the year. The result thus obtained is adjusted for tax purposes by deducting capital contributions and adding withdrawals.