Taxes in Germany

Germany's tax system is complex and multi-level, with taxes imposed by the federal government, states and local councils.

The importance of understanding the tax system in Germany

Understanding Germany's tax system is crucial for individuals and businesses alike. It is not just a matter of filing tax returns and paying taxes, it is about understanding the legal obligations and financial implications of these taxes.

From this standpoint, several reasons can be identified for the importance of understanding the tax system in Germany:

1. The German tax system requires strict compliance with tax-related laws and legislation. Therefore, individuals and businesses need to understand these laws to avoid potential penalties and fines.
2. Understanding Germany's tax system helps individuals and businesses determine how to better manage their money and plan expenses and investments based on expected tax liabilities.
3. Individuals and businesses can sometimes benefit from tax refunds, which requires a good understanding of the laws and requirements involved.
4. The tax system affects important financial decisions such as investments, employment, and property purchases, and therefore requires a careful understanding of the system to make appropriate decisions.
5. Failure to understand the tax system in Germany can lead to unwanted surprises in the form of fines and penalties, so you must be prepared and prepared for these tax obligations.
6. The German government provides resources and assistance to those who need a better understanding of the tax system, such as tax advisors, government websites and informational publications.

Understanding Germany's tax system is an essential foundation for ensuring compliance with the law and proper financial planning. It is an essential factor in building individual and business financial stability in the country.

Entities responsible for collecting taxes in Germany

The tax collection process in Germany is managed at three levels:

1. Federal level:

• Federal Ministry of Finance (Bundesministerium der Finanzen):
  • The Ministry sets general tax policy and supervises federal tax administration.
• Central Federal Tax Office (Bundeszentralamt für Steuern – BZSt):
  • It is responsible for administering VAT, corporate tax and income tax for certain taxpayers, such as large corporations and foreign companies.

2. State level:

• State tax administrations (Finanzämter):
  • It is responsible for administering income tax for most individual taxpayers, as well as estate tax, inheritance tax and other specific taxes.

3. Local level:

• Local councils (Gemeinden):
  • It is responsible for collecting property tax, waste tax and other local fees.

Tax categories

Income tax in Germany depends on the tax category to which the taxpayer belongs. There are five tax categories in Germany, each with a different tax rate. The first category is the lowest, and the fifth category is the highest.

The most important types of taxes in Germany:

• Income tax (Einkommensteuer).
• Corporate tax (Körperschaftsteuer).
• Value added tax (Mehrwertsteuer).
• Real estate tax (Grunderwerbsteuer).
• Solidarity tax (Solidaritätszuschlag).
• Church tax (Kirchensteuer).

Income tax in Germany (Einkommensteuer)

Income tax is one of the most important types of taxes in Germany, as it is imposed on all individual income obtained within Germany or from German sources.

Who is subject to income tax in Germany?

• All residents of Germany:
  • Regardless of their nationality, all persons permanently residing in Germany are subject to income tax on their worldwide income.
• Some non-residents:
  • People who are not permanently resident in Germany may be subject to income tax on their German income, such as income from work, rent or investments.

What is the tax basis for income tax?

• The tax basis of income tax includes all types of income, including:
  • Wages and pensions
  • Self-employment income
  • Income from investments
  • Rentals
  • Profits from selling real estate
  • Some other types of income

What are the income tax brackets?

• Income tax in Germany is subject to a progressive scale, with individuals with higher incomes paying higher tax rates.
• Starting in 2023, income tax brackets start as follows:
  • From 0 to 10.908 euros: tax free
  • From 10.909 to 14.407 euros: 14%
  • From 14.408 to 56.352 euros: 22%
  • From 56.353 to 94.716 euros: 42%
  • More than €94.717: 45%

Discounts and discounts:

Individuals and families can claim several deductions and deductions to reduce their taxable income, including:

• Personal Deduction: Each individual is allowed to deduct a specific amount from his income.
• Professional Costs Deduction: Employees and self-employed individuals are allowed to deduct their professional costs related to their income.
• Deducting care costs: Individuals who care for disabled children or relatives are allowed to deduct care costs.
• Insurance deduction: Individuals are allowed to deduct premiums for health insurance, welfare insurance, and retirement insurance.

Submitting a tax return:

• All income taxpayers in Germany must submit an annual tax return to the tax office.
• The deadline to file a tax return is usually July 31, but it may be extended in some cases.
• Individuals who do not comply with income tax rules or do not file a tax return on time may be fined.

Corporate tax (Körperschaftsteuer).

Corporate tax in Germany (Körperschaftsteuer) is one of the main taxes imposed on companies and institutions in the country. This tax is an essential part of the German tax system and aims to finance public expenditures and boost the economy.

All companies registered in Germany are subject to corporate tax on their profits, including German companies and foreign companies with branches in Germany. The tax basis of corporate tax includes profits from business operations, investments and sale of assets.

The corporate tax rate in Germany is 15%, plus an additional 5.5% solidarity tax used to finance German reunification. It allows companies several deductions and reductions to reduce their taxable income, such as deductions for expenses, depreciation and investment losses.

Companies must submit an annual tax return to the tax office by a specified deadline. Fines may be imposed on companies that do not adhere to corporate tax rules or file a tax return on time.

Corporate tax in Germany is a vital part of the tax system and requires careful compliance and good financial planning by companies to achieve legal compliance and minimize the financial impact.

To calculate corporate tax in Germany, you must follow these steps:

1. Determination of taxable profits:

• Calculating corporate tax begins with determining the company's taxable profits.
• Taxable profits include all of a company's profits, including:
  • Profits from business operations
  • Profits from investments
  • Profits from selling assets

2. Deducting expenses:

• Corporations can deduct all expenses related to their business from their taxable profits.
• Allowable expenses include:
  • Rental costs
  • Staff salaries
  • Production costs
  • Marketing expenses
  • Interest paid

3. Calculating net profit:

• To calculate net profit, all allowable expenses are subtracted from taxable profits.
• Net profit is the amount on which a company is subject to corporation tax.

4. Application of corporate tax rate:

• The net profit is multiplied by the corporate tax rate to calculate the corporate tax payable.
• The corporate tax rate in Germany is 15%.
• There is also an additional solidarity tax of 5.5% corporate tax, which is used to finance German reunification.

5. Deduction of tax credits:

• Businesses can deduct some tax credits from the corporate tax owed.
• Available tax credits include:
  • Research and development tax credit
  • Tax credit for investing in renewable energy

6. Final corporate tax calculation:

• To calculate the final corporate tax, all tax credits are subtracted from the corporate tax due.
• This is the amount that the company must pay to the tax office.

Example:

• We assume that a company has taxable profits of €100.000.
• The company also has allowable expenses of €80.000.
• The company's net profit is €100.000 – €80.000 = €20.000.
• The corporate tax payable is €20.000 * 15% = €3.000.
• Suppose the company also has a R&D tax credit of €1.000.
• The final corporate tax is €3.000 – €1.000 = €2.000.

Value added tax (Mehrwertsteuer)

Value-added tax (Mehrwertsteuer – MwSt) is a general consumption tax levied on most goods and services sold in Germany. All companies and individuals who sell goods or services in Germany are subject to VAT, including German companies and foreign companies with branches in Germany.

The tax basis for VAT includes the value of the sale of the good or service. The standard VAT rate in Germany is 19%. There are also reduced tax rates of 7% or 0% on some goods and services.

VAT is usually included in the selling price of the good or service, and sellers collect the tax from customers and pay it to the tax office.

All companies and individuals whose annual income from sales of goods or services exceeds €17.500 must register for VAT with the Tax Office. All companies registered for VAT must submit an annual tax return to the Tax Office, and the deadline for submission is usually May 31.

Businesses and individuals who do not comply with VAT rules or do not file a tax return on time can be fined.

Real estate tax (Grunderwerbsteuer)

Property tax is a tax imposed on the purchase of real estate in Germany, and is considered an important part of the costs associated with the purchase.

All buyers of real estate in Germany are subject to estate tax, including individuals and companies. The tax basis for real estate tax includes the purchase price of the property. Property tax rates also vary from state to state in Germany, usually ranging between 3.5% and 6.5% of the purchase price.

Real estate tax is collected by the tax authorities in the state in which the property is located, and buyers must pay the tax to these authorities within a few weeks of purchasing the property.

Some property tax exemptions are available in some cases, such as the purchase of real estate for residential or commercial purposes by small businesses.

Property tax is an essential part of the costs of purchasing property in Germany, and buyers must be aware of it and ensure compliance with its regulations.

Solidarity tax

The Solidarity Tax (Solidaritätszuschlag) is an additional tax imposed in Germany with the aim of financing the costs resulting from the reunification of the country between West and East Germany after the fall of the Wall in 1989. This tax was initially implemented as a temporary measure, but it continued in the following period, reflecting the continuing economic and social challenges. .

The solidarity tax rate is usually 5.5% of gross income tax. However, there is an exception for those who pay low income tax, as they are exempt from paying the solidarity tax.

The solidarity tax is added to the total income tax and is paid when submitting the annual tax return. In 2021, the solidarity tax was phased out for most people who pay low income tax. This tax is scheduled to be completely eliminated by 2025 for individuals who pay low income tax.

The solidarity tax is an important part of the German tax system and represents an essential source of financing for economic and social challenges. Therefore, abolishing this tax could affect the state’s fiscal balance and raise a debate about how to finance future challenges.

Church tax (Kirchensteuer)

Church tax or Kirchensteuer is a type of tax imposed in Germany on members of Christian churches. It aims to finance the activities and services provided by churches.

Members of Christian churches in Germany, such as Catholics and Protestants, are subject to paying church tax. This tax is calculated based on the individual's personal income.

Church tax is calculated as a small percentage of an individual's total income tax, and this percentage varies from one church to another.

The tax authorities collect the church tax in cooperation with the church in question, dividing the amount received by the church based on the person's membership in the church.

Church tax revenues are used to fund many social and charitable activities provided by churches, such as social work and aid to those in need. Individuals can also submit a request to waive paying church tax if they do not wish to support the local church, and the procedures required for this may vary from one church to another.

The church tax is an important part of the tax system in Germany, and is considered an essential source of funding for the activities of churches and the services they provide to their members and to society in general.

Taxes in Germany for married couples

Married couples in Germany enjoy certain tax advantages compared to unmarried individuals. These advantages are:

• Married spouses can file a joint tax return, which may result in lower total taxes due.
•  The minimum tax exemption for married couples is increased by 50%.
• Married couples are entitled to deduct certain expenses from their taxable income, such as business expenses, medical expenses, and educational expenses.

Joint tax

A married couple can file a joint tax return, if they were married no later than December 31 of the tax year. The joint tax return must be filed no later than July 31 of the year following the tax year.

When filing a joint tax return, the spouses' taxable income is combined. Tax rates apply to combined income, which may result in lower total taxes due.

Minimum taxes in Germany for married couples

The minimum tax exemption for married couples is increased by 50%. In 2023, the minimum tax credit for an unmarried individual is €9.744. The minimum tax credit for a married couple is €14.616.

Tax deductions

Married couples are entitled to deduct certain expenses from their taxable income, such as business expenses, medical expenses, and educational expenses.

Expenses that can be deducted from a couple's taxable income include:

• Married couples can deduct business expenses, such as travel expenses, transportation, and professional clothing.
• Married couples can deduct medical care expenses, such as medical expenses and medications.
• Married couples can deduct education expenses, such as tuition expenses and textbooks.

What are the differences between the tax system for married couples and the tax system for unmarried individuals?

The main differences between the tax system for married couples and the tax system for single individuals are:

• How to file a tax return: Married couples can file a joint tax return, while unmarried individuals must file a separate tax return.
• Tax rates: Different tax rates apply to married couples and single individuals.
• Tax Deductions: Married couples are entitled to deduct certain expenses from their taxable income, while unmarried individuals are not entitled to deduct these expenses.

May a married couple file a separate tax return?

Yes, married couples may file a separate tax return. However, this may not always be the best option.

If a married couple files a separate tax return, different tax rates will apply to their respective incomes. This may increase the total taxes due.

Therefore, married couples are advised to file a joint tax return, if possible.

Tax filing procedures in Germany

The tax filing process in Germany is necessary for all residents who are required to file a tax return. This process aims to ensure a fair contribution from all individuals and companies to the financing of state public services.

Tax filing deadlines:

• The deadline for filing a tax return in Germany varies depending on the type of tax.
• In general, the deadline for filing a tax return is July 31 of each year.
• However, this deadline may be extended in some cases, such as:
  • In the event of submitting an extension request from the tax office.
  • In the event of exceptional circumstances that prevent the submission of the tax return on time.

Documents required for filing taxes:

• Tax return form.
• Receipts of income from work or pensions.
• Rent payment receipts (if you are a landlord).
• Receipts for care costs (if you are caring for disabled children or relatives).
• Medical bill receipts (if you have paid large medical bills).
• Any other documents that support your information on the tax return.

Different ways to file taxes:

• Taxes in Germany can be filed in several ways, including:
  • Apply online:
    • The German government provides an electronic online tax filing system known as Elster.
    • This option is more convenient and faster than filing a tax return on paper.
  • Apply by mail:
    • The tax return form and its attachments can be mailed to the relevant tax office.
  • Apply in person:
    • The tax return and its attachments can be submitted in person at the relevant tax office.
  • Applying through a tax advisor:
    • A tax consultant can be used to assist you in filing your tax return.

Tax advice in Germany:

It is always advisable to consult with a qualified tax professional in Germany if you have any difficulties in understanding tax laws or filing your tax return. A tax advisor can also help you with:

• Understand complex German tax laws.
• Determine the type of tax you are subject to.
• Fill out the tax return form correctly.
• Collect the required documents.
• File your tax return on time.
• Ensure you receive all deductions and tax refunds due.

It is always recommended to consult with a competent tax professional for specific information about your individual situation and tax filing requirements.