Taxation in Germany
Taxes in Germany are levied by the federal government, the states as well as the municipalities. Many direct and indirect taxes exist in Germany; income tax and VAT are the most significant.
The legal basis for taxation is established in the German Constitution, which lays out the basic principles governing tax law. Most taxation is decided by the federal government and the states together, some are allocated solely at the federal level, some are allocated to the states, and districts and municipalities may enact their own tax laws. Notwithstanding the division of tax law jurisdiction, in practice, 95% of all taxes are imposed at the federal level.
At the federal level, the government receives tax revenues from residents in the form of individual income tax, property sales taxes, and capital gains. The amount of federal tax liability may be reduced by various deductions, and mitigated by various allowances for children. Some non-residents are liable in Germany if they have certain types of income there. Generally, public and private corporations are liable for taxes in Germany, with certain exemptions such as charitable foundations and religious institutions. Products and services generated in Germany are subject to value-added tax under EU rules, with certain exemptions. Other types of tax revenue include real property transfers, inheritance and gift taxes, capital gains, aviation, and motor vehicle taxes.
Terminology and concepts
The German word for tax is which originates from the Old High German noun stiura meaning "support".The Grundgesetz is the common term for the German Constitution in German, known in full as the Grundgesetz für die Bundesrepublik Deutschland, or "Basic Law for the Federal Republic of Germany".
General legal or administrative jurisdictions in Germany fall roughly into four levels: federal, state, district, and municipality, and tax authority follows this same pattern, although it is concentrated chiefly at the federal and state level.
The fiscal administration in Germany is the part of public administration which is responsible for the determination and collection of taxes. The Federal Central Tax Office is the federal agency responsible for administering certain sections of the country's tax code. It was spun off from the Federal Ministry of Finance in 2006.
Taxation principles
The German Constitution lays down the principles governing taxation in the following articles:- The ability-to-pay principle
- Equality in taxation
- The lawfulness of taxation
- The welfare state principle
- The federation has the right on customs.
- The federation and the states decide together on most of the tax law. Formally, the states can decide that there is no federal law. In practice, there are federal laws for all taxation issues.
- The states decide on local excise taxes.
- The municipalities and the districts can decide on some minor local taxes like the taxation of dogs.
So even if Germany is a federal state, 95% of all taxes are imposed on a federal level. The income of these taxes is allocated by the federation and the states as following :
- The federation receives exclusively the revenue of:
- * Customs
- * Taxes on alcopops, cars, distilled beverages, coffee, mineral oil products, sparkling wine, electricity, tobacco, and insurance
- * Supplement on income taxes so-called solidarity surcharge
- The states receive exclusively the revenue of:
- * Inheritance tax, real property transfer tax
- * Taxes on beer and gambling
- * Fire protection tax
- The municipalities and/or districts receive exclusively the revenue of:
- * Real property tax
- * Taxes on other beverages, dogs, and inns.
Structural organisation of fiscal administration
Germany's fiscal administration is divided into federal tax authorities and state tax authorities. The local tax offices belong to the latter. They administer the "shared taxes" for the Federation and the States and process the tax returns. The number of tax offices in Germany totals around 650.As a result of discussions in 2006 and 2009 between Federation and States, the Federation also administers some taxes. The competent authority is the Federal Central Tax Office which is also competent authority for certain applications of tax refund from abroad. Since 2009, the BZSt allocates an identification number for tax purposes to every taxable person.
Jurisdiction
There is normally at least one finance court in every state. Appeal instance is the Federal Finance Court of Germany in Munich.Fiscal Code
The common rules and procedures applying to all taxes are contained in the fiscal code as so-called general tax law. The individual tax laws regulate in which case tax is incurred.Tax identification numbers
From 2009 onward, every German resident receives a personal tax identification number. In the coming years, businesses will be receiving a business identification number. The competent authority is the "Federal Central Tax Office".Tax revenue
In 2014, German tax revenue totaled €593 billion.Tax revenue is distributed to Germany's three levels of government: the federation, the states, and the municipalities. All of these are jointly entitled to the most important types of tax. For this reason, these taxes are also known as "shared taxes". Tax revenue is distributed proportionately using a formula prescribed in the German Constitution.
Income tax for residents
Individuals who are residents in Germany or have their normal place of abode there have full income tax liability. All the income earned by these persons both at home and abroad is subject to German tax.Types of income
For the purposes of charging income tax in Germany, earnings are divided into seven different types of income. A distinction is made between:If a taxpayer's income does not fall into any of these categories, then it is not subject to income tax. This includes winnings at a lottery, for example.
Income tax
The rate of income tax in Germany ranges from 0% to 45%. The German income tax is a progressive tax, which means that the average tax rate increases monotonically with increasing taxable income. Moreover, the German taxation system warrants that an increase in taxable income never results in a decrease of the net income after taxation. The latter property is due to the fact that the marginal tax rate is always below 100%.Income tax rates in 2019
No income tax is charged on the basic allowance, which is €9,169 for unmarried persons and €18,338 for married couples who file jointly. Beyond this threshold, the marginal tax rate increases linearly from 14% to 24% for a taxable income of €14,255. In the subsequent interval up to a taxable income of €55,961, the marginal tax rate increases linearly from 24% to 42%. The last change of rates occurs at a taxable income of €265,327 when the marginal tax rate jumps from 42% to 45%. The course of the marginal tax rate and the resulting average tax rate are depicted in the graph to the right. The tax liability of married couples who file jointly is assessed on half their total income, and the result from applying the tax tariff is multiplied by two afterwards. Due to the progressive tax schedule, this always more favorable than taxing each spouse separately. This splitting advantage increases with the income difference between both spouses.Solidarity surcharge
On top of income tax, the so-called solidarity surcharge is levied at a rate of 5.5% of the income tax for higher incomes. The solidarity surcharge was introduced in 1991 and, since 1995, has been justified with the additional costs of the German reunification. These include the debts and pension obligations of the East German government, as well as the costs of upgrading infrastructure and environmental remediation in the new states of Germany.Up to €972 annual income tax, no solidarity surcharge is levied. Above this threshold, the solidarity surcharge rate increases with a rate of 20% until it reaches 5.5% when the annual income tax is €1,340.69.
For example, if €10,000 income tax result from a certain annual taxable income, a solidarity surcharge of €550 will be levied on top. As a result, the tax payer owes the taxation office €10,550.
Tax on benefits in kind
Every individual has to pay for any perks or benefits they receive from an employer, which includes, for example, the use of a car. This applies to private car usage too if the car is owned by a company or a self-employed individual. In the case of cars, this is based on either a log-book method or a flat-rate method, which depends on the gross-list-price of a car rounded down to the next 100 EUR. This means the original list-price without any reduction or discount at the time of first original use, whether or not the car is used or some years old. VAT and every extra features need to be included. Tax is paid on one per cent of this basis as the taxable amount every month.Example:
Gross-list-price: 45,000 EUR
Additional taxable income: 450 EUR each month
Withholding taxes
Tax on income from employed work and tax on capital income are both retained by being deducted at source. Here, an amount of tax is retained directly by the employer or by the bank before the earnings are paid out.The taxation at source for employment income will be carried out based in taxation classes based on the personal status. The tax classes essentially differ by the exemption threshold that is applied. Married couples face a decision of opting for a combination of classes III/V or IV/IV. In the former case, the spouse with higher earnings receives the twice the basic exemption rate, while the second earner is taxed at very low earnings. In the latter case, both spouses are taxed based on the standard exemption rate. The choice of tax classes only matters for the withholding tax and hence for the income that is immediately at disposal. After the income tax assessment, which happens a few months after the tax year has ended, the tax rebate is not affected by the choice of tax class. Beyond, employers are also liable to deduct the contributions to the social security system at source.
Taxation classes
The taxation at source for capital income will be done with a flat tax rate of 25%.
Property sales tax
Aside from standard yearly property taxes, known as Grundsteuer, On property sales in Germany there is a state level sales tax on the declared purchase amount.Transfer of German property is subject to a transfer tax –the equivalent of UK stamp duty. Since 2007 this tax is no longer set at federal level and comes under authority of Länder governments. The current level of property transfer tax is Germany's federal states is Baden-Württemberg 5% Bavaria: 3,5% Berlin: 6% Bremen: 5% Brandenburg: 5% Hamburg: 4,5% Hessen:6% Mecklenburg-Vorpommern: 5% Lower Saxony: 5% North Rhine-Westphalia: 6,5% Rhineland-Palatinate: 5% Saarland: 5,5% Saxony: 3,5% Saxony-Anhalt: 5% Schleswig-Holstein: 6,5% Thuringia: 5%
Vendor profit from real estate sales in Germany is considered capital gains, if the real estate has been held for less than 10 years.
Deductions
German income tax law allows a considerable number of taxpayer's costs to be deducted from income when computing taxable income. This applies in particular to costs immediately related to earnings. Apart from this, other costs are also deductible, e.g., certain insurance payments, costs incurred by sickness, costs for home help, and maintenance payments. In addition to the possibility of deducting costs, there are also numerous allowances and lump-sum amounts which reduce taxable income, e.g., an allowance for capital earnings currently at €801 and a lump sum of €1000 is deducted from income from employed work.Tax allowance for children
Expenditure on child support and on children's vocational training is taken into account with a special tax allowance, with allowances for costs expended on child supervision, education and training, and with child benefit payments.Flat rate tax on private income from capital and capital gains ("Abgeltungsteuer")
Since 2009-01-01 Germany levies a flat rate tax on private income from capital and capital gains called the Abgeltungsteuer. The tax rate is 25% plus 5.5% solidarity surcharge. The tax is levied at German sources as capital yields tax. A tax refund is possible if the personal income tax rate is below 25%.The Abgeltungsteuer replaces the earlier that had been in effect in Germany since 2001.
Tax return
The obligation to file an income does not apply to everybody. For example, single assessed tax payers who exclusively earn income subject to withholding tax are exempt from this obligation, because their tax debt is deemed to be at least settled by the withholding tax. Nevertheless, any person having full tax liability is allowed to file a tax return, taking into account the tax already withheld at the source and possible deductions. In many cases, this may result in a tax refund.Married couples can apply for joint assessment to be taxed at a more favourable rate. In this case, they must file the annual tax return as it is possible that the tax paid through withholding tax was not sufficient.
Income tax for non-residents
Individuals who are neither resident of Germany nor have their normal place of abode there are only liable to pay tax in Germany if they earn income there which has a close domestic context. This includes in particular income from real estate in Germany or from a permanent establishment in Germany.Double taxation agreements
Germany has reached tax treaties with about 90 countries to avoid double taxation. These agreements fall under public international law and aim to avoid that one taxpayer is charged similar taxes more than once on the same income for the same period. The basic structure of the double taxation agreements which Germany has signed follows the "Model Tax Convention" drawn up by the OECD.Social Security Contributions
Employment income earned in Germany is subject to different insurance contributions covering health, pension, nursing and unemployment insurance. Contributions are levied as a percent of income until a certain ceiling shared equally between employee and employer. Table of contributions for 2018:| Insurance policy | Yearly ceiling | Employer % | Employee % |
| Pension Insurance | West: 78,000.00 €/ East: 69,600.00 € | 9.30% | 9.30% |
| Unemployment Insurance | West: 78,000.00 €/ East: 69,600.00 € | 1.5% | 1.5% |
| Nursing Insurance | 53,100.00 € | 0.775–1.275% | 1.275%–1.775% |
| Health Insurance | 53,100.00 € | 7.3% | 7.3% |
| Additional employee contribution depending on health insurance company | up to 0.9% |
see also Payroll tax / section Germany
Corporation tax
is charged first and foremost on corporate enterprises, in particular public and private limited companies, as well as other corporations such as e.g. cooperatives, associations and foundations. Sole proprietorships and partnerships are not subject to corporation tax: profits earned by these set-ups are attributed to their individual partners and then taxed in the context of their personal income tax bills.Corporations domiciled or managed in Germany are deemed to have full corporation tax liability. This means that their domestic and foreign earnings are all taxable in Germany. Some corporate enterprises are exempted from corporation tax, e.g. charitable foundations, Church institutions, and sports clubs.
As of 1 January 2008, Germany's corporation tax rate is 15%. Counting both the solidarity surcharge and trade tax, tax on corporations in Germany is just below 30%.
Assessment base
The assessment base for the corporation tax charged is the revenue which the corporate enterprise has earned during the calendar year. Taxable profits are determined using the result posted in the annual accounts drawn up under the Commercial Code. What is deemed income under tax law sometimes diverges from the way earnings are determined under commercial law, in which case tax law provisions prevail.Dividends
When dividends are paid to an individual person, capital yield tax at a rate of 25% is charged. Since 1 January 2009, this tax is final for individuals who are residents of Germany. Solidarity surcharge is also imposed on capital yields tax.When dividends are paid to an enterprise with full corporation tax liability, the recipient business is largely exempted from paying tax on these revenues. In its tax assessment, merely 5% of the dividends are added to profits as non-deductible operating expenses. The same applies if a taxable corporate enterprise sells shares in another company.
Deducting tax from dividends paid by a subsidiary with full tax liability to a foreign parent domiciled in the EU is waived on certain conditions, e.g., the parent company has to have a direct holding in the subsidiary of at least 15%.
Integrated fiscal units (group taxation)
Under German tax law, separate companies may be treated as integrated fiscal units for tax purposes. In an integrated fiscal unit, a legally independent company agrees under a profit and loss pooling agreement to become dependent on another business in financial, economic and organisational terms. The controlled company undertakes to pay over its entire profits to the controlling company. Another requirement is that the controlling company has to hold the majority of voting rights in the controlled company.In tax terms, recognition of a fiscal unit means that the income of the controlled company is allocated to the controlling company. This provides an opportunity to balance profits and losses within the integrated fiscal unit.
Trade tax
Entrepreneurs engaging in business operations are subject to trade tax as well as income tax/corporation tax. In contrast to the latter, trade tax is charged by the local authorities or municipalities, who are entitled to the entire amount. The rate levied is fixed by each local authority separately within the range of rates prescribed by the central government. As from 1 January 2008, the rate averages 14% of profits subject to trade tax.Assessment procedure
The business entity has to file the trade tax return with the tax office, like its other tax returns. Taking any allowances into account, the local tax office calculates the trade earnings and then gives the applicable figure for a trade tax assessment to the local authority collecting the tax. The underlying profit base, as well as the book-tax differences for the local trade tax jurisdictions, may differ from that used for the corporation tax. On the basis of the collecting rate in force in its area, the local authority calculates the trade tax payable.Unincorporated enterprises
One-man businesses and members of a partnership may deduct a large portion of trade tax from their personal income tax bill.Incorporated enterprises
As from 1 January 2008, corporate entities may no longer deduct trade tax from their taxable profits.Value-added tax
As a matter of principle, all services and products generated in Germany by a business entity are subject to value-added tax. The German VAT is part of the European Union value added tax system.Exemptions
Certain goods and services are exempted from value-added tax by law; this applies for German and foreign businesses alike.For example, the following are exempted from German value-added tax:
Tax rate
The rate of value-added tax rate generally in force in Germany is 19%. A reduced tax rate of 7% applies e.g. on sales of certain foods, books and magazines and transports. Due to COVID-19 reason, government accepted a lowering from 1st of July 2020 until 31st of December 2020 for the rates. Thus standard rate currently lowered to 16% and reduced rate become 5%.Payment of the tax
Within 10 days of the end of each calendar quarter, the business entity has to send the tax office an advance return in which it has to give its own computation of the tax for the preceding calendar quarter. The amount payable is the value-added tax it has invoiced, minus any amounts of deductible input tax. Deductible input tax is the value-added tax which the entrepreneur has been charged by other business entities.The amount thus calculated has to be paid to the tax office by way of an advance. By this is meant that the amount due must be paid in full before the next fiscal quarter. Larger businesses have to file the advance return every month. For entrepreneurs who have only just taken up professional or commercial operations, the monthly reporting period likewise applies during the first calendar year and in the year after that.
At the end of the calendar year, the entrepreneur has to file an annual tax return in which it has again calculated the tax.
Small businesses
Entrepreneurs whose turnover has not exceeded EUR 17,500 in the preceding calendar year and is not expected to exceed EUR 50,000 in the current year, do not need to pay value-added tax. However, these small enterprises are not allowed to deduct the input tax they have been billed.Real property tax
Municipalities levy a tax on real property. The tax rates vary because they depend on the decision of the local parliament. The tax is payable every quarter. In 2018, the German Constitutional Court ruled the current property tax as not in line with the constitution. This is because properties are taxed based on their value from the early 1960s, violating the horizontal equity principle.Real property transfer tax
Transfers of real property are taxable. The vendee and the vendor are common debtors of the tax. In general the vendee has to pay the tax. The tax rate is defined by the individual States. In general the tax rate is 3.5%, but all States except Bavaria and Saxony have increased it since 2011. Most States now have a taxrate of 4.5% or 5%, the highest are North Rhine-Westphalia, Saarland and Schleswig-Holstein with 6.5%.Real estate investors are also impacted by the speculation tax. This tax applies to gains generated on real estate investments, if sold less than 10 years after purchase. Depreciation deductions of prior years are added to the sales price of the home, to derive a higher taxable gain.
Inheritance and gift tax
A single law regulates both inheritance tax and gift tax, requiring the payment of rates from 7% to 50% both on transfers following death and on gifts among the living. In contrast to the U.S. Estate Tax, the inheritance and gift tax is paid by the recipient of the transfer. The tax rates depend on the amount and on the relationship between donor and recipient. There are also substantial exemption rates, amounting to €500,000 for transfers between married partners and €400,000 for transfers to own children. Deductions as high as 100% apply to cases such as family houses and the possessions of entrepreneurs.Capital gains tax
In Germany there is no special capital gains tax. Only under certain conditions gains from private disposal may be taxed. Since 2009-01-01 Germany levies a final tax amounting to 25% that may take effect like a capital gains tax for resident persons e.g. disposal of shares.Aviation tax
Starting 1 January 2011, all passenger flights departing from Germany will be subject to the aviation tax. The amount of tax to be paid depends on the distance to the final destination. Flights to a destination up to 2,500 km away will incur a tax of €8 per passenger. The amount increases to €25 for distances of up to 6,000 km and €45 for distances beyond this. The distance taken into account is that for the entire journey as booked. For flights involving a transfer or short stopover, this means that the tax only becomes chargeable on the initial departure.Motor vehicle tax
A tax is imposed on the owners of motor vehicles. It is levied depending on the type of vehicle. The tax is due annually after the registration of the vehicle.With cars, the tax is different for gasoline and diesel engines. Diesel powered cars are taxed higher. The tax amount also depends on the emissions class, whether a diesel car has a soot particle filter, and the initial date of vehicle registration.
| Initial registration | Taxation based on | Tax free CO2 threshold |
| – 30 June 2009 | displacement in cc | – |
| 1 July 2009 – 31 December 2011 | displacement in cc + CO2 emission | 120g/km |
| 1 January 2012 – 31 December 2013 | displacement in cc + CO2 emission | 110g/km |
| 1 January 2014 – | displacement in cc + CO2 emission | 95g/km |
Purely electric vehicles are exempt from taxes for at least five years after initial registration.