TaxTo tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
es in GermanyGermany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
—being a
Federal RepublicA federation , also known as a federal state, is a type of sovereign state characterized by a union of partially self-governing states or regions united by a central government...
—are levied by the Federation (
Bund), the
StatesGermany is made up of sixteen which are partly sovereign constituent states of the Federal Republic of Germany. Land literally translates as "country", and constitutionally speaking, they are constituent countries...
(
Länder) as well as the
MunicipalitiesMunicipalities are the lowest level of territorial division in Germany. This may be the fourth level of territorial division in Germany, apart from those states which include Regierungsbezirke , where municipalities then become the fifth level.-Overview:With more than 3,400,000 inhabitants, the...
(
Gemeinden). Many direct and indirect taxes exist, whereof
income taxAn income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
and
VATA value added tax or value-added tax is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the "value added" to a product, material or service, from an accounting point of view, by this stage of its...
are the most relevant. The German word for tax is
die Steuer which originates from the
Old High GermanThe term Old High German refers to the earliest stage of the German language and it conventionally covers the period from around 500 to 1050. Coherent written texts do not appear until the second half of the 8th century, and some treat the period before 750 as 'prehistoric' and date the start of...
word
stiura meaning
help. It should not be confused with the word
das Steuer, which means
steeringSteering is the term applied to the collection of components, linkages, etc. which will allow a vessel or vehicle to follow the desired course...
or
helm.
Taxation principles
The German constitution (
Grundgesetz) lays down the principles governing taxation in the following articles:
- The ability-to-pay principle (Art. 3 para. 1 Grundgesetz)
- Equality in taxation (Art. 3 para. 1 Grundgesetz).
- The lawfulness of taxation (Art. 2 para. 1 and Art. 20 para. 3 Grundgesetz)
- The welfare state principle (Art. 20 Grundgesetz)
The right to decide on taxes is subdivided:
- The federation has the right on customs
Customs is an authority or agency in a country responsible for collecting and safeguarding customs duties and for controlling the flow of goods including animals, transports, personal effects and hazardous items in and out of a country...
. (Art. 105 para. 1 Grundgesetz)
- 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. (Art. 105 para. 2 Grundgesetz)
- The states decide on local excise
Excise tax in the United States is a indirect tax on listed items. Excise taxes can be and are made by federal, state and local governments and are far from uniform throughout the United States...
taxes. (Art. 105 para. 2a Grundgesetz)
- The municipalities and the districts
The districts of Germany are known as , except in the states of North Rhine-Westphalia and Schleswig-Holstein where they are known simply as ....
(Kreise) can decide on some minor local taxes like the taxation of dogs (Hundesteuer).
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 (Art. 106 Grundgesetz):
- The federation receives exclusively the revenue of:
- Customs
- Taxes on alcopop
Alcopop is a colloquial term describing certain flavored alcoholic beverages, including:#malt beverages to which various fruit juices or other flavorings have been added...
s, cars, distilled beverages, coffee, mineral oil products, sparkling wine, electricity, tobacco, and insurances
- Supplement on income taxes so-called solidarity surcharge (Solidaritätszuschlag)
- The states receive exclusively the revenue of:
- Inheritance tax
An inheritance tax or estate tax is a levy paid by a person who inherits money or property or a tax on the estate of a person who has died...
, real property transfer tax
- Taxes on beer and gambling
- Fire protection
Fire protection is the study and practice of mitigating the unwanted effects of fires. It involves the study of the behaviour, compartmentalisation, suppression and investigation of fire and its related emergencies, as well as the research and development, production, testing and application of...
tax
- The municipalities and/or districts receive exclusively the revenue of:
- Real property tax
- Taxes on other beverages, dogs, and inns.
Most of the revenue is earned by income tax and VAT. The revenues of these taxes are distributed between the federation and the states by quota. The municipalities receive a part of the income of the states. In addition, there is a compensation between rich and poor states (
Länderfinanzausgleich, Art. 107 para. 2 Grundgesetz).
Structural organisation of fiscal administration
Germany’s fiscal administration is divided into federal tax authorities and state tax authorities. The local tax offices (
Finanzämter) 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 (
Föderalismusreform) the Federation will further on also administer some taxes. The competent authority is the Federal Central Tax Office (FCTO) which is also competent authority for certain applications of tax refund from abroad. Since 2009 FCTO also allocates an identification number for tax purposes to every taxable person.
Jurisdiction
There is normally at least one fiscal court in every State (Berlin and Brandenburg share a court, in
CottbusCottbus is a city in Brandenburg, Germany, situated around southeast of Berlin, on the River Spree. As of , its population was .- History :...
). Appeal instance is the Federal Fiscal Court in Munich.
Fiscal Code
The common rules and procedures applying to all taxes are contained in the fiscal code (
Abgabenordnung) 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" (
Bundeszentralamt für Steuern).
Tax revenue
In 2007, German
tax revenueTax revenue is the income that is gained by governments through taxation.Just as there are different types of tax, the form in which tax revenue is collected also differs; furthermore, the agency that collects the tax may not be part of central government, but may be an alternative third-party...
totaled €538.2 billion.
Tax revenue is distributed to
GermanyGermany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
’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 (i.e., value-added tax and
income taxAn income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
). For this reason, these takes 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 resident 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 (principle of world income).
Taxation classes (tax groups, Lohnsteuerklasse aka Steuerklassen)
- class I = single
- class II = single parent
- class III = married and and spouse has no income or lower income
- class IV = married and similar income to spouse
- class V = opposite of class III, ie this is the class your lower earning spouse has if you have III
- class VI= for a second job.
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:
- Income from agriculture and forestry
- Income from business operations
- Income from self-employed work
- Income from employed work
- Capital income
- Income from letting property
- Miscellaneous income.
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 game show, for example.
Income tax
The rate of income tax in Germany ranges from 0% to 45%. The German income tax is a
progressive taxA progressive tax is a tax by which the tax rate increases as the taxable base amount increases. "Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate...
, which means that the average tax rate (i.e., the ratio of tax and taxable income) increases monotonically with increasing
taxable incomeTaxable income refers to the base upon which an income tax system imposes tax. Generally, it includes some or all items of income and is reduced by expenses and other deductions. The amounts included as income, expenses, and other deductions vary by country or system. Many systems provide that...
. Moreover, the German taxation system warrants that an increase in taxable income never results in a decrease of the
net incomeNet income is the residual income of a firm after adding total revenue and gains and subtracting all expenses and losses for the reporting period. Net income can be distributed among holders of common stock as a dividend or held by the firm as an addition to retained earnings...
after taxation. The latter property is due to the fact that the marginal tax rate (i.e., the tax paid on one euro additional taxable income) is always below 100%.
Income tax rate in 2010
No
income taxAn income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
is charged on the basic allowance, which is €8,004 for unmarried persons and €16,008 for jointly assessed married couples. Beyond this threshold, the marginal tax rate increases linearly from 14% to 24% for a taxable income of €13,469 (€26,938 for married couples). In the subsequent interval up to a taxable income of €52,881 (€105,762 for married couples), the marginal tax rate increases linearly from 24% to 42%. The last change of rates occurs at a taxable income of €250,730 (€501,460 for married couples) 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.
Solidarity surcharge
On top of income tax, the so-called solidarity surcharge (
Solidaritaetszuschlag) is levied at a rate of 5.5% of the income tax for higher incomes. Up to €972 (€1,944 for married couples) annual income tax, no solidarity surcharge is levied. Above this threshold, the solidarity surcharge rate increases continuously until it reaches 5.5% when the annual income tax is €1,340.69 (€2,681.38 for married couples).
For example, if €10000 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 €10550.
Solidarity surcharge is also imposed on withholding taxes on income e.g. wages tax and capital yields tax.
Withholding taxes
Tax on income from employed work and tax on capital income are both retained by being deducted at source (pay-as-you-earn tax, wages tax, or withholding tax). Here, an amount of tax is retained directly by the employer or by the bank before the earnings are paid out.
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 (€1,601 for married couples) and a lump sum of €920 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 gainsThe flat rate withholding tax is a german flat tax on private income from capital and capital gains. It was introduced through the Unternehmensteuerreformgesetz 2008 that passed the German Parliament on 14 August 2007...
. 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 %.
Tax return
The obligation to file an income
tax returnA tax return is a tax form that can be filed with a government body to declare liability for taxation in various countries:* Tax return * Tax return * Tax return * Tax return...
does not apply to everybody. For example, single assessed tax payers who exclusively earn income subject to
withholding taxWithholding tax, also called retention tax, is a government requirement for the payer of an item of income to withhold or deduct tax from the payment, and pay that tax to the government. In most jurisdictions, withholding tax applies to employment income. Many jurisdictions also require...
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 (German) context. This includes in particular income from real estate in Germany or from a
permanent establishmentA permanent establishment is a fixed place of business which generally gives rise to income or value added tax liability in a particular jurisdiction. The term is defined in many income tax treaties and most European Union Value Added Tax systems. The tax systems in some civil law countries...
in Germany.
Double taxation agreements
Germany has reached
tax treatiesMany countries have agreed with other countries in treaties to mitigate the effects of double taxation . Tax treaties may cover income taxes, inheritance taxes, value added taxes, or other taxes...
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.
Business taxes
As of 1 January 2008, Germany’s corporation tax rate is 15%. Counting both the solidarity surcharge (5.5% of corporation tax) and trade tax (averaging 14% as of 2008), tax on corporations in Germany is just below 30%.
Corporation tax
Corporation tax is charged first and foremost on corporate enterprises, in particular public and private limited companies, as well as other
corporationA corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
s 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.
Exemptions
Some corporate enterprises are exempted from corporation tax, e.g. charitable foundations, Church institutions, and sports clubs.
Flat rate tax
The corporation tax charged at corporate level is 15% (flat rate tax).
Solidarity surcharge as above income tax / tax rate.
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 (
balance sheetIn financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
and
Income statementIncome statement is a company's financial statement that indicates how the revenue Income statement (also referred to as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement that...
) 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
subsidiaryA subsidiary company, subsidiary, or daughter company is a company that is completely or partly owned and wholly controlled by another company that owns more than half of the subsidiary's stock. The subsidiary can be a company, corporation, or limited liability company. In some cases it is a...
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 (Organschaft). In an integrated fiscal unit, a legally independent company (the controlled company) agrees under a profit and loss pooling agreement to become dependent on another business (the controlling company) 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, 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 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 (
Hebesatz) 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 (VAT). The German VAT is part of the
European Union value added taxThe European Union value added tax is the system of value added tax adopted by nations in the EU VAT area. The European Union itself does not collect the tax, but EU member states are each required to adopt a VAT that complies with the EU VAT system...
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:
- export deliveries
- intra-Community supply of goods
- services provided by certain professional groups (e.g. doctors)
- financial services (e.g. granting loans)
- letting real estate in the long-term
- cultural services provided to the public (e.g. by public theatres, museums, zoos, etc.),
- value-added by certain institutions providing general education or vocational training
- services provided in an honorary or voluntary capacity.
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, flowers and transports.
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. 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 (plus the value-added tax on it) has not exceeded EUR 17,500 in the preceding calendar year and is not expected to exceed EUR 50,000 in the current year (small enterprises), 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.
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 %.
BerlinBerlin is the capital city of Germany and is one of the 16 states of Germany. With a population of 3.45 million people, Berlin is Germany's largest city. It is the second most populous city proper and the seventh most populous urban area in the European Union...
and
Hamburg-History:The first historic name for the city was, according to Claudius Ptolemy's reports, Treva.But the city takes its modern name, Hamburg, from the first permanent building on the site, a castle whose construction was ordered by the Emperor Charlemagne in AD 808...
use a tax rate of 4.5 %.
Inheritance and gift tax
Inheritance tax and gift tax are regulated in one law. Taxable is either a transfer by reason of death or a gift amongst livings. There are depreciations e.g. for family houses, families as well and for entrepreneurs (up to 100 %). The tax rate is from 7 % up to 50 %.
Capital gains tax
In Germany there is no special
capital gains taxA capital gains tax is a tax charged on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property...
. Only under certain conditions gains from
private disposal may be taxed. Since 2009-01-01 Germany levies a final tax (Abgeltungsteuer) that may take effect like a capital gains tax for resident persons e.g. disposal of shares.
Aviation Tax
From 2011-01-01 on, 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 2,500km away will incur a tax of €8 per passenger. The amount increases to €25 for distances of up to 6,000km 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.
Financial crisis 2009
Existing depreciations e.g. for certain private housekeeping expenses and for small and medium sized enterprises have been enhanced. A declining
depreciationDepreciation refers to two very different but related concepts:# the decrease in value of assets , and# the allocation of the cost of assets to periods in which the assets are used ....
for movable
assetIn financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
s has been reintroduced for two years (2009-2010). Businesses are allowed to carry back losses and to claim refund of paid corporation / income tax. As a result they get liquidity improvement. From 2010-01-01 on the VAT tax rate concerning hotel accommodation is reduced to 7 %.
See also
External links