INTRODUCTION

In Germany, typically the calendar year is the tax year (or: Fiscal Year, “FY). 

Hence, income taxes by individuals, for instance, are filed per calendar year (for individuals/income tax, see I. below). The same is the case for VAT returns (assuming that you are an “entrepreneur” in terms of German VAT laws, for VAT, see III. below).

Nonetheless, under German accounting laws a business or a company may have a deviating business year (e.g. ending on 31 March, 30 April, and so on). As a consequence, the entire business years’ income will be taxed as of the date in which that business year ends (for business taxation, see II. below).

Therefore a company (such as a GmbH, an AG or a GmbH & Co. KG partnership) might want to effectively change its business year from the calendar year to a deviating business year in order to trigger a “tax pause”, moving the taxable income to a later tax year. However, corporate law steps (usually notary involvement) and, not to be forgotten, the approval of the tax office are needed for such change to be tax-effective.

I. INDIVIDUALS

If you live in Germany, irrespective of your nationality, you will be subject to resident income taxation on the basis of your world-wide income, unless tax-treaty protection applies.

1. Income tax rates and free amounts

In 2023, a taxable income of EUR 10,908 is income tax exempt (twice that amount for a married couple), as of 2024 to be raised to EUR 11,604 (FY 2021: 9,744 FY 2022: 9,984). Income portions exceeding that amount up to EUR 62,810 (single payer – twice that amount for married couples filing joint returns) are taxed progressively, with rates increasing from 14% to 42%.

In FY 2023, income portions exceeding EUR 62,810 (single payer) up to EUR 277,826 (single payer) are taxed at the regular 42% top rate (for capital income see 4. below).

2. “Rich tax” rate

Finally, a specific tax rate, also called the “rich tax rate” applies for income portions exceeding EUR 277,826 (single payer – twice that amount for married couples filing joint returns) at a rate of 45%.

In other words, the top income tax rate in Germany (in 2023: capturing income portions exceeding EUR 277,826 for a single payer) is 45% (for capital income see 4. below).

On top, the solidarity surcharge (Solidaritätszuschlag, SoliZ) needs to be considered (details below, under 5.).

3. Income tax calculation example

You are a resident of Germany and unmarried (irrespective of your citizenship). Your taxable (worldwide) income, after all deductions, in FY 2023 is EUR 300,000.

German tax burden for FY 2023:

• EUR 116,692.00 income tax (ESt) = 38.90 %
• EUR 6,418.06 solidarity surcharge (SoliZ) = 2.14 %
• EUR 123,110.06 total tax burden (income tax + SoliZ) = 41.04 %

4. Capital income – flat 25% tax rate

However, the income tax liability is different if your taxable income includes capital income (e.g. capital gains on disposal of shares, interest income, dividends). Effective as of 2009 and as an exception to the general income tax rate for all other types of income, a preferential 25% flat income tax rate (including solidarity surcharge of 5.5% thereof: in total 26.375%) applies.

In many cases (dividends, interest payments and/or other capital income portions paid out by a German financial institution) that tax is automatically withheld at the source – and  that is it.

However, if such capital income was earned by a German tax resident without any tax withholding at the source (e.g. interest from private loans or earned from investment accounts or bank accounts outside Germany) it needs to be declared with the income tax declaration.

In the example above (3.) it may well be that on top of the EUR 300,000 income the individual earns capital income taxed at the flat 25% capital income tax rate, withheld and paid at the source (“Abgeltungsteuer”). More precisely, the tax burden on the capital income is 26.375% including the solidarity surcharge.

For registered members of one of the German churches, church tax comes on top.

To add complexity: The 25% capital income flat tax rate will not apply if you own a substantial amount in a company – for instance 30% in a GmbH. If you receive a dividend from such GmbH, 40% of it is exempt and 60% (not 100%) is taxable at your general income tax rate. In other words, if the 25% rate is not available, you will usually at maximum pay 0.6×45% = 27% income tax (partial income system “Teileinkünfteverfahren”), as the case may be increased by Solidarity surcharge and church tax.

The determination on whether capital income falls under the 25% rate or the general income tax rate (in most cases with 60% exemption) is complex and should be assisted by a tax law professional.

5. Solidarity surcharge (SoliZ)

Introduced in 1991 by Helmut Kohl’s government, the solidarity surcharge (Solidaritätszuschlag) of 5.5% may be added to the income tax charge (and to the corporate income tax paid by companies). Hence: Multiply your tax rate by 0.05 to calculate the additional solidarity surcharge burden (as in the example sub 3. above). The sum of the income tax and SoliZ is your final income tax burden in Germany. There is no further “local” income tax (except for trade tax  – potentially to be credited against income tax – for certain business income).

Historically, the SoliZ surcharge was introduced to pay for the German reunification (1990). It was partially abolished effective as of 2021. The new rules (as of FY 2021):

• Up to EUR 65,516 (single payer) or EUR 131,032 annual taxable income (joint filing by married couple): SoliZ abolished.
• More than EUR 65,516 up to EUR 101,285  (single payer), or EUR 131,032 up to EUR 202,570 annual taxable income (joint filing by married couple): partial SoliZ liability.
• More than EUR 101,285 (single payer) or EUR 202,570 annual taxable income (joint filing by married couple) : full SoliZ liability.

On capital income (25% income tax rate, see above 4.), the SoliZ in principle remains unchanged.

6. Wage tax (income tax prepayments on salary) and social security contributions

If you are employed in Germany, the employer will withhold and pay to the tax office not only wage tax (as a prepayment to your annual income tax) but also social security contributions. Technically, unlike in certain other countries, compulsory social security charges are not considered “taxes” and not collected by the tax office. Normally the statutory deductions are for pension, unemployment, health insurance and long-term nursing care. Costs are normally borne equally by employer and employee. The employer’s share of these contributions is not considered as taxable income. The employee’s portion is generally tax deductible.

7. Calculation of the income tax assessment base

Germany allows a number of deductions in order to calculate the tax base for wage taxes. For example, the expenses you incur when getting to your workplace are deductible, even as a lump sum (Pendlerpauschale)

8. Freelancers and income tax prepayments (wage tax does not apply)

Freelancers in Germany will start to pay income tax once the first annual income tax declaration has been filed and processed by the local tax office. The Finanzamt will estimate your tax for the current year and assess quarterly prepayments (Vorauszahlungen) of a quarter of the tax on 10 March, 10 June, 10 September and 10 December. The total tax liability is determined by filing an income tax return, which includes all types of income from all sources.

9.Timeline of income tax filings and assessment

The annual income tax assessment is usually issued by the local Finanzamt between two and six months as of the date the income tax return was submitted.

If you prepare the income tax assessment yourself, the deadline to submit it is usually the 31 July of the following calendar year (equals the tax year).

The filing deadline is extended to the last day of February of the year after the next if a chartered tax advisor is filing the income tax assessment.

Due to the Covid crisis and the related workload of tax advisors, the deadlines for filings for FY 2020 until and including FY 2024 have been extended.

In case of filing without a tax advisor as follows: For FY 2020 and 2021 by three months, for FY 2022 by two months 2022 and by one month for FY 2023. For FY 2024, the regular deadlines of submitting the income tax assessment at the end of July of the following year at the latest will apply again.

If a tax advisor is filing the income tax assessment on behalf of the taxpayer, the deadline is extended by six months for FY 2020 and 2021, by five months for FY 2022, by three months for FY 2023 and by two months for FY 2024.

Moreover, there are specific deadlines for taxpayers with income from farming.

However, certain requirements being met (e.g. late filing of previous returns or expected large tax payments), the tax office may order an earlier filing. But the tax office needs to grant at least four months for filing in such scenarios.

10. Church tax

German individuals being members of a recognized German church (typically protestant, catholic and jewish denominations) will be subject to church tax to be paid on the annual taxable income. The church tax rate depends on the local state (Bundesland).

II. BUSINESSES

Corporations are taxed while partnerships and similar structures are transparent (i.e. taxation at the level of the shareholder/partner, irrespective of a distribution of the profit).

A German corporation (such as a GmbH or AG) is subject to corporate income tax (Körperschaftsteuer, CIT) with its annual taxable profit. The tax rate is 15%, but solidarity surcharge at a rate of 5.5% of that tax needs to be added. Hence, the overall tax charge (including solidarity surcharge) is 15.825%. There is no progression in the CIT rates.

However, many businesses, e.g. family-owned businesses, are structured as GmbH Co & KG. This is a transparent entity with the general partner being a corporation (GmbH). The taxable profits are annually taxed in the hand of its respective shareholders (income tax, unless that shareholder is a coorporation). The limited partner normally has a profit share of nil or close to nil.

The situation is different with German trade tax (TT). The TT burden can be higher than corporate income tax liability.

Each corporation, commercial partnership or branch of a non-resident company is subject to local German trade tax if it (i) pursues business activities (unless exempted) or (ii) qualifies as a deemed business due to its legal form.

The city or municipalities assess individual trade tax rates. For example, a large city such Frankfurt am Main has a trade tax rate of 16.10% (total tax burden, including CIT/solidarity surcharge: 31.925%). The small city next door, Eschborn, levies trade tax at a rate of 11,55% (total tax rate burden, including CIT: 25.625%).  This is a typical pattern in German metropolitan areas. Trade taxes are typically lower if you move out of the city. Berlin is an exception. Berlin’s trade tax rate is 14.35% and significantly lower than in other large German cities.

An option is to set up the company in a neighboring municipality. Many of these communities charge the statutory minimum trade tax rate of 7%. This adds up to a tax charge of 22.825% – the lowest tax burden you can get as a company in Germany, unless you can claim specific tax privileges.

III. VAT

Germany’s value-added tax (VAT) system is similar to the VAT regime of other EU countries. No wonder – the German VAT Act reflects (and must comply with) the European Union’s VAT Directive.

Germany’s regular VAT rate – except for the second half of 2020 – is 19%, the unified reduced rate (e.g. food, newspapers) is 7%.

As part of a corona tax relief package, VAT was lowered to 16% and (reduced rate) 5% for the second half of 2020. The regular rates of 19% / 7% are effective again as of 1 January 2021. The moment of providing the service is decisive, not the point in time the invoice is being issued.

A number of services are VAT-exempt, such as renting a flat or buying a house (this triggers Real Estate Transfer Tax though, see IV.).

If you are a business or an entrepreneur you can reclaim VAT paid, certain requirements being met. Most importantly and broadly speaking, you will generally have to supply services subject to German VAT (e.g. a lawyer advising his clients: 19% VAT).  On the contrary, if the services you provide are exempted from German VAT (such as services provided by medical doctors, banks or insurance company, or selling or renting out real estate to non-business customers) you will not be able to claim input VAT.

Moreover, small entrepreneurs can make use of the small entrepreneur’s rule: If your annual turnover based on the entire calendar year does not exceed EUR 22,000 (as of FY 2023) and your annual turnover for the following FY is not expected to exceed EUR 50,000 you may be exempted from invoicing VAT – but at the same time have no right of claiming input VAT from your suppliers’ invoice.

IV. REAL ESTATE TRANSFER TAX (RETT)

The acquisition of German real estate is VAT-exempt, but subject to real estate transfer tax (“RETT”, Grunderwerbsteuer). RETT is imposed on the agreed consideration (usually purchase price) at a rate of 3.5% up to 6.5%, depending on where in Germany (in which Bundesland) the real property is situated.

It is usually agreed in the notarized purchase agreement that RETT is borne by the purchaser. Hence, the tax authorities usually submit the RETT assessment to the buyer. Upon such notice, RETT needs to be paid within one month in order to avoid fines and penalties.

These are the RETT rates (by Bundesland) as of 14 March 2023

Baden-Wurttemberg	5.0%
Bavaria	3.5%
Berlin	6.0%
Brandenburg	6.5%
Bremen	5.0%
Hamburg	4.5%
Hesse	6.0%
Mecklenburg-Western Pomerania	6.0%
Lower Saxony	5.0%
North Rhine-Westphalia	6.5%
Rhineland-Palatinate	5.0%
Saarland	6.5%
Saxony	3.5%
Saxony-Anhalt	5.0%
Schleswig-Holstein	6.5%
Thuringia	6.5%

V. INHERITANCE AND GIFT TAX (Erbschaftsteuer)

The German inheritance and gift tax (“Erbschaftsteuer”) is the most relevant tax not (yet) explained in this overview, but to some extent in the blog.

In a nutshell, the unified inheritance and gift tax also captures gifts, as the legislator believes that gifts are made to possibly circumvent an inheritance tax liability. Similar to income tax or corporate income tax principles, for German tax residents the worldwide assets are taken into account when calculating an inheritance tax liability.

The tax-free amounts for donations to children are EUR 400,000, for grandchildren EUR 200,000, for spouses EUR 500,000. For other recipients, the tax-free amounts are much lower. In a donation scenario these tax-free amounts are available (again) after ten years.

There are more tax-free amounts available, depending on the respective asset being passed on. The transfer of a business may be fully inheritance or gift tax-exempt, certain requirements being met (for instance, typically the business needs to be continued for a number of years).

Donations or acquisitions by heirs exceeding the free amounts (specified above) are subject to an inheritance/gift tax at a rate of 7% up to 30% (by close relatives) or even 50% (recipient is no close relative).

VI. FINAL REMARKS

Currently, taxes in Germany are probably above international average. But on the other hand, there are certain ways to limit the assessment base of a respective tax. Moreover, some income may be excluded (free amounts) or simply not be taxable (out of the scope of the seven income categories as defined by the German Income Tax Act). Selling a house (used exclusively for own residential purposes or held for more than ten years) or selling a crypto asset (Bitcoin) owned for more than 12 months may not be taxable for German income tax purposes.

Depending on what you own (property tax for real estate owners), what you do (e.g. lottery tax) or what you buy (energy, alcoholic or tobacco products, coffee) other taxes may apply.

Foreign taxes will either be credited on the German tax charge, or foreign sources of income are exempted from German income (or corporate income) taxation, based on applicable tax treaties. For income tax and corporate income tax purposes, Germany has such tax treaties with almost all industrialized countries. For inheritance and gift tax purposes, there are currently six tax treaties in force for Germany (inter alia with the United States).

“Two thirds of the world’s tax literature is in German,” is repeatedly heard in Germany. I do not think this is accurate but who knows. Honestly, the author may be part of this “problem” due to my contributions to German tax and law books and technical periodicals.