General Taxes in Germany
Germany has one of the most complicated tax systems in the world. Find out more about deductibles and allowances, as well as German tax for freelancers, employees and start-up businesses...
How to Pay Tax
Taxes are automatically deducted from wages and are paid by the employer. Unless a tax return (Steuererklärung) is filed, no tax overpayment will be reimbursed. However, nearly all tax returns lead to a tax refund. This is subject to tax planning and careful collection of expenses (receipts) to claim back as much as possible.
- More information on tax for employees
Freelancers (Freiberuflern), businesspeople and start-ups
The tax authorities have to be notified about the establishment or change of a business or company, otherwise fines might be imposed. Tax returns have to be filed on a regular basis and taxes must be paid, at potentially high cost.
Filing correct tax returns from the beginning is essential – it helps to implement proper tax planning initially and to stay effective on all tax payments. Double payments and illiquidity can be avoided in this way, and it can also help generate a clear financial overview for the business.
Taxes from overseas
Expatriates should be extremely sensitive to tax issues, as many economic circumstances will affect more than one tax system. In these cases, it is necessary to identify the taxation rights of each state involved and fulfil all tax compliance obligations in the respective states. This is the basis for reducing the overall tax burden and not paying taxes in more than one state.
If an expatriate’s home country obliges them to file tax returns and notify the authorities of foreign bank accounts, violations could be deemed tax fraud!
- More information on expatriate tax issues
Types of Tax
The most relevant taxes are:
Personal Income Tax (Einkommensteuer)
A multitude of income streams belonging to individual persons is taxed by the personal income tax. Amongst them are income from capital gains, rental income, wages and salaries and business income. Wage tax and capital gain tax are components of the income tax; church tax is also a component of the income tax and computed automatically.
Corporate Income Tax (Körperschaftsteuer)
All of the income of a corporate body is taxed as corporate income tax. The tax rate is 15% flat, but there are further taxes levied. In total, a corporation pays around 31% tax. Income tax of another 26% is levied on capital gains, once the earnings are distributed.
Solidarity Surcharge (Solidaritätszuschlag)
A surcharge of 5.5% of the computed tax amount out of personal income tax and corporate income tax is generally levied in order to compensate the costs of the German reunion.
Trade Tax (Gewerbesteuer)
An additional tax is levied on personal income from a trade or business, as well as the income of corporations: the so-called “trade tax”. The tax rate depends on the region: economically attractive regions have higher tax rates than less well-off areas.
Property Tax (Grundsteuer)
Real property in Germany is taxed. The tax authorities determine the value of the real property and a specific collection rate is applied to it. The property tax resembles a wealth tax, though property remains otherwise untaxed in Germany.
Property Transfer Tax (Grunderwerbsteuer)
On transfer of real property, a tax similar to a stamp duty is due. The tax rate differs from region to region. Normally it is between 2.5% and 6.5% of the agreed and notarised price.
Value Added Tax (Umsatzsteuer)
Every business sale is levied with VAT (UmSt). End-consumers are finally taxed with VAT without having any chance to reclaim it. Business owners can reclaim input VAT – this is VAT which was charged to them. The VAT tax rate is normally 19%, some items are taxed at a rate of 7% (food or literature), and others are tax exempt.
Inheritance Tax (Erbschaftsteuer) and Gift Tax (Schenkungsteuer)
Inheritance and gifts are taxed in Germany. If the inherited asset was located in Germany or the deceased was resident in Germany, the tax is due. There are very limited ways to prevent double taxation in the field of inheritance and gift tax.
There are other taxes like dog tax (Hundesteuer), vehicle tax (Kraftfahrzeugsteuer), cinema tax, coffee tax and petrol tax. Most of these taxes will be levied when buying the product or when registering the car or dog (for example) at the relevant authority. The tax will be computed automatically, and a tax statement will be sent to vehicle owners once a year.
Tax Authorities and Tax Obligations
In most cases the regional tax authority (Finanzamt) in the taxpayer’s place of residence is in charge of their taxes. When coming to Germany, together with all the visa formalities, expatriates should normally receive a tax identification number (Steueridentifikationsnummer). Next to this ID there is a tax number, which is only issued on request – the latter is only needed if tax returns (Steuererklärungen) are filed and determined by the responsible tax authority.
The regional tax authority will be in charge of checking all income and deductions presented in the tax return. Any receipt could be demanded, so it is necessary to keep thorough records. If no tax return is filed, the tax authority may estimate the tax - note that in most cases estimations are higher than the real income. A tax estimation is not a substitute for the filing of a tax return.
Unless they are classed as employees, everyone has to file a tax return by 31 May of the following year. Tax advisors have the right to file their clients’ returns later than that. In this case, they need to notify the client’s tax authority before 31 May.
Employees file their tax returns indirectly through their employer. However, in most cases, filing a tax return creates a refund for tax overpayment.
The fiscal year is equal to the calendar year. Tax returns are filed electronically (with some exceptions).
Once the tax authority issues the tax statement (Steuerbescheid), the tax has to be paid – the statement will contain a deadline for payment. Normally, advance tax payments will be determined by the tax authority. The dates and amounts will be stated in the tax statement. These advance payments can be changed upon application.
Disclaimer: Tax law is a complex matter. Any information provided on this website is intended as a summary and not to be more than a general overview. A specific client-advisor relationship does not arise from any information shown herein. Neither the author nor the publisher are responsible for any liability, especially for actions taken on the basis of information contained in this summary, nor for any errors, omissions etc. This text is not intended to render legal, accounting or tax advice.
Due to the complexity of tax law in any country and especially the interaction of multiple tax systems it is always recommended and encouraged to seek professional advice concerning specific matters before making any decision.