Germany has been changing income tax laws since 1964 to keep pace with the changing industrial scene in the world. Its complex income tax structure and progressive tax rates are explained in this article. With the opening up of their economy for working professionals from software super power like India, Indian professionals have started learning in German universities and started working in high tech companies. This article would open up the tax system in Germany for these brilliant young professionals. Your kid may be one of them to do business or work in one of their high- tech industries.
What is an income?
Our whole discussion will be based on the information published by “Federal Ministry of Finance, Government of Germany” titled by name “ABC of Taxes”. Serious research minded, actual professionals who have to file taxes or students other than general tax professionals like myself do read the book to update their knowledge and apply wherever needed. The above web site address is given at” reference”.
It consists of the following chapters:
Taxation A to Z
- Alcopops duty, Aviation tax, Beer duty, Betting and lottery tax, Beverage duty, Church tax, Coffee duty, Corporation tax, Customs duties, Dog tax, Electricity duty, Energy duty, Entertainment tax
- Excise duties, Final withholding tax, Fire protection tax, Gaming casinos levy, Hunting and fishing tax, Import VAT, Income tax, Inheritance Insurance tax, Intermediate products duty, Licensing tax,
- Local taxes, Motor vehicle tax, Nuclear fuel duty, Real property tax, Real property transfer tax, Secondary residence tax, Solidarity surcharge, Sparkling wine duty, Spirits duty, Spirits monopoly,
- Tax identification number, Taxes on income, property and transactions, Tobacco duty, Trade tax, VAT Wages tax, withholding tax on construction work, withholding tax on income from capital, Withholding taxes on the income of non-residents.
I counted only 39 taxes’ names in the above list. Does a tax payer in Germany cry over payment of above taxes at one level or other? No, he happily helps the government in tax mopping up. The obvious reason lies in the answer that like I have written in many of articles on European tax system on which German laws are also based, from cradle to cemetery a citizen gets unadulterated attention from the government either in hospital, schooling, employment, unemployment, disabled position, old age or even cemetery charges after death. Every thing costs just money and the state takes care of the citizen.
What does an income tax consist of for an individual?
Income from the following sources is subject to income tax:
- agriculture and forestry
- commercial business activity
- self-employment
- employment
- capital assets „ renting and leasing
- other income designated in section 22 of the Income Tax Act (e.g. income from statutory pensions or income from private sales transactions)
In case, I have income from a gift, the sale of objects of everyday use, or a lottery win, it is not liable for income tax. Expenses related to such income will not help in calculating income tax. The whole amount may fall under tax purposes. While day to day living expenses like food, rent, expenses like electricity, water, or taxes to government on real estate related to personal properties do not help in arriving at profit figures for business; any- thing related to business will, however, qualify as expenses.
What are the deductions automatically emerging out of social considerations?
To arrive at the actual earnings eligible for tax purposes, profits/surpluses from various sources do account for losses from other sources of business. Losses that can’t be wiped out may be carried forward to next tax year or backward subject to rules and regulations.
From the resulting income, seniors of age of over 64 years may deduct Euro 1,900 as old age relief. Single parents tax payers with children may deduct euro 1,903 for the first child and euro 240 additionally for each subsequent child per year from the income.
Total income is calculated as the balance of profits/surpluses and losses from the different sources of earnings. Losses from one source of earnings may be offset against earnings from the same category or from a different source. Special rules restricting offsetting and loss deduction apply. If losses cannot be offset during a tax assessment period (generally the calendar year), the loss is carried forward or back.
From the resulting total income, taxpayers over the age of 64 may, under certain conditions, deduct an amount of up to €1,900 annually as old-age relief. Taxpayers who are single and have children are also entitled to deduct a certain amount. From 2015 onwards, this relief for single parents amounts to €1,903 for the first child plus €240 per year for each subsequent child that meets the criteria.
Now the time to look at tax slabs to have a real feel of the income tax
Income tax table for 2018
| Taxable income bracket | Taxable income bracket | Tax rate on income in bracket |
| From EUR | To EUR | Percent |
| 0 | 9,000 | 0 |
| 0 | 18,000 | 0* |
| 9,001 | 54,949 | 14-42 |
| 18,001 | 109,898 | 14-42* |
| 54,950 | 260,532 | 42 |
| 109,899 | 521,064 | 42* |
| 260,533 | No limit | 45 |
| 521,065 | No limit | 45* |
*Married filing jointly.
In addition to the income tax rates indicated above, the following taxes and surcharges are additionally levied on all types of income:
- solidarity surcharge: 5.5 percent of the income tax
- church tax: 8.0 or 9.0 percent of the income tax – church tax is only levied if the taxpayer is a member of a church that is recognized for church tax purposes
Tax-exempt income
Areas which are exempt from tax:
- If you have stretched your imagination and got certain payments for health or accident insurance, certain social security benefits under unemployment and maternity grants and within limits kinder garden fees, as income exempt from tax, you have done your home- work correctly.
Other types of compensation taxable
Though one can categorize any type of remuneration received as eligible for taxation, the following are to be mentioned in particular.
- Reimbursements or payments of foreign or home country taxes, reimbursements or payments of school tuition fees,
- Reimbursements or payments of tax return preparation fees/home leave costs.
- Cost of living allowances/expatriate premiums/housing expenses and imputed value of housing provided by employer or benefits of kinds received from employers
- “Yes, as per international standards, my company provides me a car which I use obviously for official purposes and personal use also. What additional taxes would I pay? “You would not be charged any thing for usage as official purposes but do invite additional 1% of cost of car per month along with actual amount for commuting.
- There is nothing abnormal with these rates of taxation since it is as per international standards. Most of the German companies have been sending or receiving executives for their international business.
- What happens when stock options are offered to employees? Only when the options are encashed after conversion, the income tax rules come into play.
Other non-income-based deductions
- Standard deductions—single-801; married-1602; standard employment deduction-1000(all amounts in Euro).
- Contributions to public pension insurance which is mandatory.
- Payments for health insurance, either private or public.
- 30% of contributions to private school or Euro 5000 whichever is lower.
- Church taxes for one who actually pays.
- Charitable contributions with proper receipts up to 20% of income or actual contributions whichever is lower.
- Alimony payments to ex-spouse actual or Euro 13805 whichever is lower provided the recipient pays the tax.
- World wide investment income is subject to German income tax of 25% plus solidarity surcharge/church tax and tax is withheld at source. A standard deduction of Euro 1602 is allowed for married filing jointly.
- Capital gains tax is not applicable for properties sold after holding for more than 10 years.
- Rental income is taxable unless exempt under a double tax treaty.
- Gift tax and inheritance tax is levied on transfers of property by the acts like gifts during life time, death as well as on the net worth of certain families. These calculations need the consultancy of experienced tax consultants like CPAs.
Corporation Tax (Details actually taken from government web site “Key data-German taxation”
CORPORATION TAX
Tax rate: 15 % Dividends and yields from the sale of holdings in German or foreign incorporated companies are only subject to 5 % of the tax at recipient business level.
TRADE Tax rate: 7 % to 17.15 % (tax rate depends on the municipality)
Tax allowance for sole proprietorships and partnerships: EUR 24,500
VALUE-ADDED TAX: General tax rate: 19 % Reduced tax rate: 7 %
NO WEALTH TAX
INHERITANCE TAX
GIFT TAX Assets are taxed according to the current market value
Example: Filing status I (Spouses, civil partners, children, grandchildren et al.)
1. Personal allowance
EUR 500,000 – Spouses, civil partners
EUR 400,000 – Children
EUR 200,000 – Grandchildren
2. Graduated tax rate 7 % Minimum tax rate
30 % Maximum tax rate (taxable transfer more than EUR 26 million)
I thought with the liberalization in Indian economy, the above information may be useful for any industrial unit planning for expansion in Germany.
Conclusion
The basic purpose of this article is to introduce one to the basic tenets of the tax system of Germany, one of the frontal nations in Europe, considered as the back bone of Europe’s economic growth. Even in the recent immigrant rush of many nations, Germany accommodated as many as it could afford. Many of the terrorist attacks did not deter it or waver it from its noble goals. I did not cover detailed tax systems on industries, NGOs and other complicated transfer pricing models. I do expect any tax paying executive from India to engage an expert CPA from Germany to take care of his/her tax issues. Many of the tax forms involve German language. Unlike many parts of the world, Germany due to historical and in genuine national interest encourages usage of German language. As a nation, we do need learn from their experiences.
Finally, I would like to remind that contacting a good CPA to resolve your tax issues is the best professional advice. He would keep your records for a long time and also send advice even after return from Germany. Obviously, my reference to their legal web sites from government along with this article may enlighten you for a tax worries free future.
Herzlichen Glückwunsch! Viel Gluck! (Congratulations! Good luck!)
Reference
1 Federal Ministry of Finance, Germany, “An ABC of taxes, 2016” publications, web address
2 Federal Ministry of Finance, Germany, “Draft 2018 budget and financial plan to 2021”, web site
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