Taxation in Agriculture

Chapter 17. Germany

Abstract

This chapter contains a description of tax provisions applied to agriculture in 2019, unless otherwise specified. They include taxes on income and profit, property, good and services, environmental taxes, and tax incentives for R&D and innovation.

17.1. Overview

Approximately 51% of Germany’s total land area is used for agriculture. There are 275 400 farms, with an average size of 60 hectares. An estimated 90% of farms are family run businesses.

Preferential taxation provisions exist to reduce taxes paid by the agricultural and forestry sectors. These include special rules for book keeping, special exemptions and tax rate reductions, an income smoothing mechanism, a lower property tax on arable land, a fixed flat rate arrangement for value added tax, and of most significance in terms of tax expenditure for the sector is the reduced tax rates for diesel fuels.

17.2. Income taxation

Income tax is a personal and federal tax. Income tax rates for farmers are the same as for other (unincorporated) businessmen.

For small scale, low income farmers there is a simplifying procedure for farmers to estimate taxable income (“flat rate” method). Under this method taxable income is calculated based on an average amount set out in legislation and farmers are not obligated to keep accounts. Farmers with less than 20 hectares or less than 50 livestock units are eligible to apply the flat rate method.

In addition, to limit the administrative burden on small businesses, including farms, there is an intermediate, simplified cash-based procedure to determine profit (only income less expenses is accounted for). Farms falling between the income thresholds can use this net income method for tax purposes.

Farms generating income greater than EUR 60 000, or turnover greater than EUR 600 000, or that have an imputed “economic value” greater than EUR 25 000 are obliged to use standard bookkeeping rules. As of 2016, about 57% of all farms fell under this category.

An overt subsidy element is a special tax agriculture income allowance deducted from annual taxable income. The allowance is EUR 900 for single farmers and EUR 1 800 for married farmers, if the gross income is below EUR 30 700 for single farmers or EUR 61 400 for married couples.

Income smoothing of profits from agricultural and forestry holdings was introduced at the end of 2016 in response to market and climate induced profit volatility. This was to supplement the two-year smoothing of profits already in place. In doing so, the incomes from agriculture and forestry that are taken as a basis for taxation are to be evenly distributed among three specific tax assessment periods (period 2014-16, period 2017-19, and period 2020-22). The new regime has not yet come into force as it is still subject to the state aid approval by the European Commission.

Not exclusive to agriculture and applicable to all taxpayers is the following treatment of capital gains. Capital gains of less than EUR 45 000 are exempt from income tax when a taxpayer has reached the age of 55 or is permanently unable to work under social security law and is divesting or terminating their business. The capital gains allowance is granted to the taxpayer only once. For capital gains up to EUR 136 000, the EUR 45 000 allowance is deducted, with income tax levied on the difference between the gain and EUR 136 000. For capital gains greater than EUR 136 000, the EUR 45 000 allowance is progressively reduced by the amount by which the capital gain exceeds the EUR 136 000 threshold. Therefore the allowance no longer applies to capital gain of EUR 181 000 or more.

Companies are normally required to keep accounts and are taxed on this basis.

17.3. Property taxation

Annual land taxation in Germany for all kinds of land and buildings, is based on economic values relating to 1964. This is not specific to agriculture and therefore no concession is implied.

17.4. Tax on goods and services

The standard value added tax (VAT) rate is 19% with a VAT of 7% applying to foodstuffs and beverages and other basic goods and services.

Farmers are eligible for a ‘flat rate’ system for value added tax that is believed to be advantageous. Farmers can apply a flat rate of 10.7% to their sales to compensate them for the VAT paid on inputs. The flat rate system is used by 66% of farms.

Farmers pay reduced energy tax rates for electricity and mineral oils and gases. The tax refund for agricultural diesel is designed to charge agriculture with a tax rate of EUR 255.60 per 1 000 litres for diesel fuel. Since 2003, this corresponds to a compensation of EUR 214.80 per 1 000 litres for diesel fuel.

Fuel for agricultural use is taxed at a lower rate.

Agricultural vehicles are exempt from automobile taxes used to fund the building of roads.

17.5. Environmental taxes

Germany levies an energy tax on electricity and mineral oils (see the section above).

17.6. Tax incentives for R&D and innovation

Germany does not offer any tax incentives for R&D or the introduction of innovation.

17.7. Other taxes

A special social security system operates for farmers, their spouses and family members working on the farm covering old age pensions, health insurance and accident insurance. Government expenditure is needed to balance the system.

17.8. Estimation of the value of taxation expenditures

The Federal authorities make estimates of the budgetary effect of tax measures on the agricultural sector. The most recent sets of figures from Federal Reports on Subsidies are given in Table 17.1.

Table 17.1. Budgetary effects of tax measures on the agricultural sector, 2013 to 2018

Million EUR

	2013	2014	2015	2016	2017	2018
Agricultural income allowance	55	55	50	60	60	60
Exemption from car tax	260	260	260	260	260	260
Allowance on diesel oil tax	430	400	440	450	450	450

Source: 25^th Federal Report on Subsidies for 2013 to 2016 from September 2015; and 26 Subventionsbericht for 2015 to 2018 from August 2017.