Germany or Federal Republic of Germany is the most populous member state of the European Union and the second most populous country in Europe. Another advantage is that it is a country with the largest economy in Europe and stands firmly as the third in the ranking of exporters and importers. These and more are reasons why many people consider moving and working or establishing their own business in Germany, however no matter how attractive the country situation may be, there is a topic that cannot be avoided – taxes. In this article we will provide basic information about German tax system, which will hopefully help you avoid trouble with Federal Central Tax Office. Please, keep in mind that information used is up to date at the time of writing this article and may be subject to change with time.
The basic ideas behind the tax system in Germany are very simple. If you are a resident, you pay taxes from your worldwide income, meanwhile as a non-resident subject to taxes is only Germany-sourced income. Do keep in mind, that those who have neither a residence in Germany nor stay there for more than 183 days (longer than six months) in a year are subject to limited income tax liability, which essentially means paying taxes without various benefits otherwise available on the account of personal or family situation. Caution is advised, as without care it is possible to lead to situation, where your gross income will be hit with taxes far higher than they could be.
For employed people, the matter is very simple due to the fact that taxes are deducted from your wages by your employer, which is referred to as withholding tax. At the end of the year Federal Tax Office will check whether the tax was correctly calculated and paid and in case of surplus – reimburse you with tax refund, which might happen if your employer overpaid your dues. This process is done without much input from the employee with employer doing all the calculations and paying payroll tax. Employers are obliged to withhold income tax, health insurance, unemployment insurance and social security contributions as well as solidarity surcharge.
Freelancers are required to submit tax declaration on their own, as such it is generally recommended to make use of services of accounting office, effectively solving the worry about tax calculation. One simple rule to go by would be, if you are earning money while living or working in Germany you should be paying taxes. Keep in mind that as freelancer, self-employed worker or tradesperson you are typically required to file income tax return should your income exceed the limits of tax exemption.
One important thing to keep in mind is that regulations concerning income tax in Germany are much more accommodating for married taxpayers. It does not mean that you can avoid having to pay income tax but being subjected to lower rates on your wage tax is certainly something to look forward to.
Your taxable income is subjected to individual income taxes, rates of which are decided not only by your employment income, but also by tax class to which you belong. There are six tax classes with very clear jurisdictions:
- Class I – The widest class including single, widowed, civil partnership, divorced and married people who are not part of tax class II, III and IV.
- Class II – Single people entitled to single parent allowance
- Class III – Married, with significantly higher income than spouse / with spouse without income / with spouse recently deceased (both spouses working in Germany)
- Class IV – Married, both spouses working in Germany and achieving similar income
- Class V – Married, achieving significantly lower income than the spouse
- Class VI – Individuals receiving multiple wages from more than one employer
Tax class can be changed, however in normal circumstances it is allowed only once per year. If exceptional circumstances arise, it is possible for second change to be permitted. During COVID-19 pandemic multiple changes in tax class were allowed during the year in order to adjust the tax bracket according to the living conditions affecting the rate of individual income taxes.
Types of taxes
There are several types of taxes in Germany, with three being the most important:
- Income tax – a well-known tax that applies to taxable income – income after all available tax deductions and exemptions are applied such as income related expenses lump sum, which from 2022 allows to deduct up to 1,200.00 EUR annually for any costs incurred through your work, etc.
- VAT – value added tax imposed on goods and services
- Trade tax – applicable to all commercial business operation in Germany at 3,5% rate multiplied by the trade tax rate established in the municipality
Other taxes that you might encounter:
- Church tax – quite infamous tax, due to implications it might lead to. Anyone who does not declare himself to be konfessionslos – atheist, is required to pay this tax. What might come as a surprise to anyone who decides to stay for longer in Germany is that your declaration might be checked by relevant church authorities. It means that despite declaring yourself atheist, if you have not finalized formalities involving leaving the faith – you might be required to pay all the missed payments and be obliged to keep paying, should authorities receive a proof such as baptism certificate, etc. For those who decide to go forward with the notion of leaving the Church just for the sake of avoiding the tax, which can be done easily through a simple form called Kirchenaustritt, an unpleasant surprise awaits – from time-to-time authorities feel obliged to inform the Church in your home country so do not be disturbed, when your family members ask for reasons why you abandoned your faith. It is recommended to seek counsel of experts, if you are in doubt whether just declaring yourself atheist is sufficient or filling Kirchenaustritt is necessary in your case.
- Licence fee – compulsory tax upon registering your address in Germany, it is TV and radio licence fee that you have to pay regardless of whether TV or radio device is in your possession.
- Motor vehicle tax – tax that applies to anyone owning a car, depending on engine size and fuel type. For cars registered after 2009 taxing is done according to the carbon dioxide emission.
- Dog tax – upon registering dog at your local tax office, which is obligatory in Germany, you will be subjected to this tax, which increases with the number of dogs. Rationale behind this tax is to discourage taxpayers from having too many dogs. Good news, however, is that service animals are exempt from this tax.
- Property sales tax – applied when property with value over 2,500 EUR changes owners.
- Real property tax – rate depending on the value of property and local tax rate.
- Inheritance and gift tax – rate depending on the value of inheritance/gift.
- Capital and capital gains tax – applied to income made from capital like dividends, interests, investment funds income and sales of shares or stakes in companies.
- Solidarity surcharge – unique to Germany additional fee applied on income tax, capital gains tax and corporate tax originally implemented in 1991 in order to finance public investment in former East Germany.
German income tax law establishes a progressive income tax rate, in other words – higher income means higher income tax rate:
- For 10,347.00 EUR or below annual income and 20,694.00 EUR for married taxpayers, tax rate – 0%
- For annual income between 10,347 and 58,596 EUR and 20,694 – 117,192 EUR for married taxpayers – incremental tax rate between 14% to 42%
- Within range of 58,596 EUR to 277,825 EUR for singles and 117,192 EUR to 555,650 EUR for married taxpayers applicable is 42% rate
- For annual income exceeding 277,825 EUR for single and 556,650 EUR for married taxpayers – 45% rate
From this it can be clearly seen that German tax system is one of the ways to encourage setting up families and there are many more family-oriented benefits in stock. There is no doubt that married taxpayers are advantageous, when it comes to tax laws.
Tax system in Germany is certainly not the most simplistic it could be and there are many aspects of it that could cause a headache for a taxpayer. This topic is even more troubling for self-employed workers, freelancers or business owners, who may find relief in making use of services of accounting offices and other firms offering their help in such matters.