The taxation of a cooperative has been quite often the subject of the presentation of alternative tax design models in social media recently. This is the reason for a hype about this type of company, because for certain incomes there is actually a legal exception to the taxation of cooperatives. However, the framework conditions for this are very narrow. In principle, the taxation of a cooperative follows that which is also prescribed for corporations. This means that in addition to business tax, 15% corporate tax is also incurred. Only income related to the promotion of cooperative members is tax-free. This also only applies to cases in which ordinary members of the cooperative receive support. On the other hand, this is excluded for income from merely investing members. In particular housing cooperatives must take this latter aspect into account.

What is a cooperative? Establishment, taxes, benefits, evaluation

1st Taxation of Cooperatives – Introduction

The cooperative is a form of enterprise with special characteristics. On the one hand, it has members instead of partners, which connects it more with registered associations. This also includes the democratic leadership principle, which serves as a basis for a cooperative. Thus, each full member, regardless of the amount of his participation, has only one vote. In the case of companies, however, this is regulated quite differently.

But when it comes to determining the taxation of a cooperative, the question of legal personality is examined. Because a cooperative is an independent legal entity. So it has its own rights and obligations. Its members must therefore always be considered legally separate from it. Therefore, this connection also has a fundamental importance in the taxation of a cooperative.

Since we focus in this article on the taxation of entrepreneurial cooperatives, considerations on the conditions that lead to a tax exemption for non-profit cooperatives are left out. Thus, the brief mention of this special cooperative form for our purposes is completely sufficient to deal with the topic appropriately.

2nd taxation of a cooperative – business tax

2.1 Cooperatives are in principle subject to trade tax

First of all, we consider the tax liability for business tax. As a corporation, this also comes into consideration for a cooperative. Accordingly, the taxation of a cooperative takes place quite regularly in the context of the business tax collection of the municipality in which it has a registered office. Thus, § 2 (2) sentence 1 GewStG explicitly mentions cooperatives in determining the legal tax liability.

Now, however, there is a striking difference to other companies subject to trade tax. Because with a cooperative you have to distinguish from which source the profit comes from. If income from transactions with members of the cooperative leads to a profit, the cooperative must enter this profit into a separate reserve. Therefore, the profit is appropriately also called cooperative refund. The advantage here, however, is that this refund is to be regarded as operating expenses instead of dividends. It thus contributes to a reduction in the total taxable profit. Furthermore, this also remains independent of an actual distribution, so that the acidification has no effect on this.

2.2. Exemption from business tax liability

However, for certain cooperatives there is a prospect of exemption from taxation by business tax. Thus, agricultural cooperatives according to § 3 no. 12 and 14 GewStG are provided for as exceptions. For this purpose, such a cooperative must also comply with the provisions regarding the exemption from corporate tax, which are regulated in § 5 (1) no. 14 KStG.

In addition, there may be an exemption from the trade tax taxation of a cooperative on the basis of § 3 no. 15 GewStG. In this case, the exemption is also associated with the Corporate Tax Act. In fact, § 5 (1) no. 10 KStG is decisive here. Since we want to discuss this in more detail in the next chapter, the statement that this is about housing cooperatives is sufficient at this point.

A further exemption in the taxation of a cooperative can be obtained on request from the financial administration. This concerns the so-called extended land reduction according to § 9 paragraph 1 GewStG. If the cooperative only earns income from renting or leasing, this exception can apply to the taxation of a cooperative. If the cooperative also receives income from other sources, this possibility of tax exemption is eliminated.

Since a cooperative is a corporation from a tax point of view, it also bears the associated corporation tax. A look at the details is nevertheless illuminating.

3.1. Regular taxation of a cooperative

Since cooperatives are now also subject to corporate tax, they also have to pay 15% of the profit as tax.

Regarding the tax treatment of profit distributions by a cooperative to its members, comments on corporate tax are also appropriate. As with trade tax, such refunds are also deductible as operating expenses under corporate tax. But only those remunerations that flow to ordinary cooperative members are taken into account. All other profits are thus subject to the regular taxation of a cooperative.

However, there is also the possibility for agricultural and forestry cooperatives to use an allowance. This amounts to a maximum of EUR 15,000 and is legally set out in § 25 KStG. It also sets out the conditions for granting the allowance. Thus, the agricultural and forestry land and buildings provided by members for use by their cooperative must be proportional to their membership contributions. However, this is only possible in the first ten years of the existence of the cooperative.

3.2. Tax-free exemptions in the taxation of a cooperative

As mentioned earlier, there are also exceptions to the taxation of cooperatives in the case of corporate tax. On the one hand, these are suitable for agricultural and forestry cooperatives. On the other hand, tax exemptions also apply to housing cooperatives. However, this only applies under certain conditions. Only if the cooperative receives a maximum of 10 % of its income from sources other than the promotion of its ordinary members does the cooperative not be taxed under the corporate tax assessment.

Now let’s look at the tax treatment of profit distributions that cooperative members receive from their cooperative. This results in a division according to the source of the income. If the cooperative traded with its members, the profit it makes is to pay into a reserve. This reserve is used for cooperative repayment. It is therefore not a real profit, but a revenue that is linked to the promotion of the members. However, profits made by the cooperative with outsiders are fully taxable. In order to take account of the tax differentiation in taxation, the cooperative is allowed to tax the refund as operating expense in the calculation of its profit. For this reason, part of the profits distributed by the cooperative to the receiving member must be regarded as tax-free and another as taxable.

Of course, distributions of profits to members of the cooperative are also to be regarded as tax exempt, although indirectly, if the cooperative does not have to pay such taxes on its profits due to trade tax or corporate tax exemptions.

Furthermore, a distinction is made between such participations in the cooperative which are in the private assets or in the operating assets of a member.

Taxation of the distribution of a cooperative: participation in private assets

If a member of a cooperative keeps his participation in a cooperative in his private assets, then the taxation takes place as capital gains tax. So the cooperative retains 25% as capital gains tax and 5.5% as solidarity surcharge and, if necessary, church tax. With this withholding tax, the cooperative member can consider the taxation of this profit as paid. Of course, he can also have it checked whether the personal tax rate on the assessment of his other income is lower than this 25% (cheaper examination). In this case, he can arrange for the tax administration to also tax the distribution of profits at the lower tax rate.

This form of taxation is often the case for members of housing cooperatives, provided they are natural persons.

4.2 Taxation of the distribution of a cooperative: participation in business assets

On the other hand, the taxation of profit distributions of a cooperative to its members can be quite different if they hold their share in their business assets. One can further distinguish whether the member of the cooperative is a natural or a legal person.

4.2.1. Natural person as taxable person

In the case of a natural person who holds an operating interest in the cooperative, the distribution can be taxed under the partial income procedure. Consequently, only 60 % of the distribution is taxable. In addition, advertising costs linked to the holding of the participation in the cooperative may also be tax-reducing.

4.2.2. Legal person as recipient of the cooperative refund

If, on the other hand, a legal person participates in the cooperative, such as a GmbH, then the distribution of the cooperative refund takes place by applying the tax exemption according to § 8b KStG. For this purpose, the legal person must hold at least 10% of the cooperative at the beginning of the calendar year. However, this also requires taxation on 5% of the refund. Because with this flat-rate taxation, the legislator wants to ensure that even expenses that do not constitute operating expenses remain taxable.

Tax-free benefits to cooperative members?

The last aspect of our considerations on the taxation of a cooperative has been the subject of much misinformation on social media recently. Because there various actors propagated that as a member of the cooperative, you can collect contributions from the cooperative tax-free, if you declare them as a support purpose of the cooperative. The error here is that this is largely only possible under very specific conditions.

Tax-free in the broadest sense, however, all types of grants are only if one of two conditions applies. Either the cooperative obtains tax exemptions for its own business tax and corporation tax due to tightly regulated statutory exemptions or the cooperative obtains this distributed share of the annual profits (exclusively) through business activities with its members. After all, a cooperative aims to promote its members. This distinguishes it from a profit-oriented corporation in tax matters as well. Therefore, the legislature alone treated these promotion-based profits as indirectly tax-exempt.