Understanding the German tax system
The scope of German taxation
1) Anyone taking up residence in Germany or having his/her customary place of abode there, will become subject to unlimited tax liability on worldwide income earned during that period. Any person not residing in Germany or staying for less than six months is subject to limited income tax liability, restricted to income from German sources. The source of employment income is considered to be where the employment is carried out and not from where the salary is paid. EU nationals who are non-residents may apply to be treated as residents under certain conditions (mainly that as least 90% of their total income is from a German source).
The tax year
2) The tax year is the same as the calendar year. Salary income is taxed in the year in which the payment or benefit is actually received.
Methods of calculating tax
3) A resident with unlimited tax liability will receive an income tax assessment based on his/her return filed. There is no self-assessment. A non-resident tax payer will have to file a return and receive an assessment only if his/her German income is not subject to withholding tax. Where income is subject to withholding tax, the income tax liability is normally settled through the withholding system and no returns or assessments are required (non-German residents and EU-nationals have the possibility to file a return upon application).
Husband and wife
4) Married tax payers may choose between filing jointly (splitting tariff) or separately. Generally, it is more advantageous to file jointly. The splitting tariff for married persons is, however, granted only if both husband and wife are resident in Germany (An exception is available for EU nationals under certain conditions). Income earned by dependent children is not included in the joint tax return. They are liable to file their own tax return.
Residence and customary place of abode
5) To be resident means to have a dwelling and to retain and use it as a dwelling. Customary place of abode means a presence of more than six months (e.g. from 1 October to 15 April, even with three weeks of Christmas holidays in the home country). A person can be resident in more than one country. A summary of regulations covering residence permits and work permits is given below paragraphs 40-44 respectively.
General remarks
6) Taxable income covers income from: agriculture and forestry trade or business independent professions employment capital investment rents and royalities other income (as defined by tax law) Any income not falling within these categories is not taxable (e.g. lottery gains).
7) Net income is based on all earnings received during a calendar year and reduced by income related expenses for the period for each of the above categories. Full offset of losses from one of the seven basic income categories against positive income from another income category has been limited to 51.500 € per year for single tax payer and 103.000 € per year for married couples filing jointly. In excess of these limits, in general only half of the positive income can be offset by negative income from other income categories but subject to further detailed limitations.
8) The total income after deductions in each category represents the adjusted gross income, which may be further reduced by lump sum deductions or, within limits, by actual payments for special expenses, such as insurance payments or extraordinary burdens, to arrive at the taxable income. Losses not offset in the year in which they occur can be carried back to the previous year up to 511.500 € subject to the same restriction as described).
9) Germany has progressive tax rates ranging as follows:
Yearly income from 7.000 € / 14.000 € (Single/Married) up to 55.000 € /110.000 € the Tax rate goes from 21,1% up to 48,5% .
In addition, a solidarity surcharge of 5,5% is kevied on the actual income tax amount.
The taxation of employment income
10) Employment income is subject to wage withholding tax, as explained in step 4. Special regulations may apply if there is no domestic employer.
The taxation of self-employment income
11) Tax on net income from professional activities or from carrying on a trade or business is collected by assessment. Quarterly instalments might be assessed on an estimated basis and credited against the final income tax burden.
12) Dividends and interest received from German or from non-German sources, are taxable for German residents, in excess of 1.550 € for single filers and 3.100 € for married couples filing a joint return. They are subject to taxation at individual progressive rates. German withholding tax on dividends (25%), on interests paid by banks (30%), and corporation tax (30%) are credited against the tax liability. The solidarity surcharge (5,5%) is withheld at source. Foreign tax may also be credited.
The taxation of rental income
13) Rents received less allowable expenses form part of taxable income. Under tax treaty provisions rental income from sources abroad is mostly exempt, but is taken into account in assessing the personal tax rate. Foreign rental losses cannot reduce the tax rate on other income.
Capital gains tax
14) As a rule, capital gains are taxable in Germany (at individual progressive rates), only if the sale is within one year (for movable assets, e.g. shares) or ten years (for property) after the purchase date. This applies for all sales after 31 December 1998. Special rules apply where a tax payer has an interest of 10% or more in a corporation.