The most important tax types

Status as of January 2017

The income of private individuals is subject to personal income tax. Income is de­fined as: the total income from all sources during one calendar year after deductions of losses and certain personal expenditures. The German Income Tax Law specifies seven sources of income.

Earnings from the above sources of income are calculated by the comparison of ac­counting books and balance sheets.

Earnings from these forms of income are calculated according to account balances, once expenses have been deducted.

The tax rates are provided in income tax tables. A basic allowance of 8,820 euro is exempted from taxation. Taxable income between 8,821 euro and 54,057 euro is taxed at a progressive rate ranging from 14 to 42 percent (plus a tax on the rich (Reichensteuer) – the top rate rising from 42 to 45 percent for taxable incomes exceeding 256,304 euro / 312,608 euro for married couples). For married couples filing joint-tax returns, the amount of taxable income exempted from tax and the amount to which tax progression is applied is double that of a single individual while the percentage remains the same.

A specific procedure is used for the collection of taxes on wages and salaries (in­come of non-self-employment). Employers, including foreign employers, must calcu­late the tax from wages and salaries of each employee and forward that amount di­rectly to the appropriate Tax Office.

This procedure applies only to foreign employers with business operations in Germany. The amount of tax to be withheld from wages and salaries, corresponds to the rates applicable to personal income tax as stated in the tax rate for wages and salaries table.

Additionally, income received by foreigners from other sources, such as dividends, royalties, and membership contributions to the supervisory board, is also subject to tax deduction at the source.

Corporate income (i. e. a joint-stock company (AG) or GmbH or Unternehmergesellschaft (UG)) is subject to corporate income tax. Corporate tax is calculated from net income, as specified by the regula­tions of the Income Tax Law and of the Corporate Income Tax Law. All normal and reasonable business expenses, including the payment of the manager or manage­ment board, are tax deductible. Personal taxes, fines, and similar legal penalties, as well as 50 percent of the payment to the supervisory board are not tax-deductible. As of January 1, 2008, undistributed and distributed profits are taxed at a rate of 15 percent.

As of January 1, 2009, there is a special Flat Rate Tax (Abgeltungssteuer) on dividends and interests at a rate of 25 %, excluding dividends and interests from corporate Income Tax.

Between 1995 and 1997, an unlimited solidarity surcharge of 7.5 percent of the taxes due was imposed as a surtax on personal income and corporate income taxes. This solidarity surcharge is designed to help finance the costs of German reunification. Tak­ing effect on January 1, 1998, this amount was reduced to 5.5 percent of taxes due.

Trade Tax (Gewerbesteuer) is to be paid by every stationary business operating in Germany and is calculated on the basis of the business–earnings.

Business earnings are composed of profits from business activities, as determined by the Income Tax Law or by the Corporate Income Tax Law and adjusted by the deduction and addition of certain items.

The level of taxation is dependent on the locality. For Trade Tax it ranges between 13 and 15 percent. The final tax rate at which a busi­ness will be taxed is about 30 percent of business earnings.

All supplies and services rendered by an enterprise in the course of its domestic business activities are subject to the VAT. Foreign enterprises, including those with no permanent establishment or representative in Germany may also be subject to the VAT. In addition to supplies and services, VAT will be levied on goods imported from non-EU countries and on the application of goods from a business enterprise for private purposes. Additional regulations apply to supplies and services rendered between EU member states. The sales tax is calculated on the basis of the tax free sales price or on the declared import value.

The general VAT rate is 19%. For certain goods and services, particularly agricultural products, food stuffs, and books, the tax rate is reduced to 7 percent.

The VAT of goods and services supplied to another business, which is itself respon­sible for paying the value added tax, must be listed separately on the invoice. The purchasing business of these goods or services may de­duct this tax amount from its own tax payments as a so called pre-paid tax-in order to avoid paying the value added tax twice. In the case where a foreign business is unable to claim this tax amount as a pre-paid tax on its own tax declaration, a special pre-paid tax refund procedure applies.

The payment made to the Internal Revenue Service in this case is the difference between the amount of taxes owed due to the value added tax and the value added tax amount already paid to the suppliers.

Exports to countries not belonging to the European Union are not subject to VAT. The exporter is, however, entitled to deduct the amount of pre-paid taxes and, thereby, receive considerable reimbursements from the Internal Revenue Service. Special regulations also apply to transport across borders within the EU.

Real-Estate transfer tax (Grunderwerbsteuer) is imposed on all transfers of real-estate located within the Federal Republic of Germany. Possession of real-estate is also transferred in cases where all the shares of a company in possession of real-estate are transferred in a single or in several transactions.

In most cases, the rate of taxation is calculated from the purchase price. This is also the case, since January 1, 1997, in the event that the real-estate itself is not transferred, rather only the shares of the company in possession of the real-estate. The rate of taxation in both cases in the Federal State of Baden-Württemberg is 5 percent.

Real Estate Tax (Grundsteuer) is imposed by local authorities on real estate. The rate of taxation depends on the type of real estate. For most real estates it is 3.5 percent. Higher rates apply to agriculture and forestry. Family homes are assessed a bit lower. The level of taxation is dependent on the locality.

In addition to the above mentioned taxes, a multitude of taxes within the Federal Republic of Germany still exists. Among tax types which have so far not been mentioned are the inheritance tax, gift tax, church tax, motor vehicle tax, insurance tax, and indirect taxes such as taxes on petroleum products, coffee, tobacco, beer, sparkling wine and spirits.

The tax legislation provides various forms of tax concessions, to which individuals with limited tax liability are also eligible. In general, such tax concessions are granted to those investments and business activities which are considered especially beneficial to the German economy as a whole.

On the Homepage of Bundeszentralamt für Steuern (BZSt) foreign investors can find further information about German tax law (Foreign Investors Help Desk).