Most German taxes are levied on income or on transactions. Capital taxes are
part of Germany’s tax tradition, although they are now only levied locally on
land ownership. Even there, their effect is small and, for a profitable business, is
in any case partially compensated by a corresponding trade tax deduction.
Business income is subject to two taxes, trade tax and then either corporation or
income tax. Trade tax is levied under national rules but at rates fixed by the
local authority where the business has establishments. The profit of an
incorporated business is also subject to corporation tax; that of an
unincorporated business owned by a natural person forms part of his or her
income tax assessment.
Partnerships are transparent vehicles once the trade tax
has been paid; that is, the taxable income is allocated to the partners in profit-
sharing ratio and is then subject to corporation or income tax in their hands.
Although the partnership is transparent from the point of view of the tax
burden, it is not so from the point of view of the tax administration; the taxable
income allocated to the partners is based on returns filed by the partnership, as
are any additional expenses of the partners that they may wish to deduct but
did not charge to the partnership (such as interest on a loan taken out to
finance the purchase of a partnership share).