Taxation in Germany

Below is information on:

The tax system in Germany is one of the most complicated in the world. The revenue gained from tax collection in Germany is used for government spending and can be broken down into the areas of welfare (almost 50 percent), existing debts (approx. 15 percent), defence (approx. 9 percent), transport (approx. 9 percent), federal employees (3 percent) and sciences (3 percent).

With so many different options for employees and freelancers as well as complexities for corporations and businesses, the use of a tax advisor when filling out a tax return is recommended.

Corporate Tax

Businesses are charged a range of taxes, depending on their size and nature. Since 2000, corporate tax revenue has declined markedly, by 2 percent in 2001 and almost 12 percent in 2002.

There are four types of corporate tax:

• Corporate tax (Körpershaftsteuer) on the profits of the business
• Kapitalertragssteuer (capital gains tax) on the transfer of property
• veranlagte Einkommenssteuer (assessed income tax)
• Gewerbesteuer (local business tax)

Corporation taxes are calculated as a multiplier (which differs depending on Federal State) on existing tax payments (between 10 to 16 percent of current tax bill). The calculations of these are complex, and it is best to seek professional advice.

Individual Taxation

Wage tax (Lohnsteuer) is a type of direct income tax which is levied from non-self-employed work. The quantity of wage tax depends on the wage tax bracket which can be found on the wage tax card. Employers are responsible for filling out the wage tax form (Lohnsteuerkarte) and sending it to the respective tax office (Finanzamt).

Income tax (Einkommensteuer) is any source tax which is due on monies earned whether self-employed or not. The different types of income tax include wage tax and capital gains tax.

Every employed person has to fill in a tax return. Exceptions to the rule are:

• Students (receiving formal education)
• Unemployed people receiving social security who have not worked at all during the tax year in question
• Retired people without any investment income

If a tax number has been assigned to someone working freelance, even if the person has not worked during a certain period, it is obligatory to fill in a pre-registration of taxes form (Umsatzsteuer Voranmeldung) on a monthly basis. This can be filled in online. Should this not be done on a regular basis, the tax office will levy monthly fines.

Personal or individual taxation varies and increases progressively depending on the employee's salary. Those earning less than €7,664 per year are exempt from income tax, and the maximum level tax can reach is 42 percent.

There are six different forms of tax brackets in Germany:

• Single or separated workers with no children and no recent divorce/separation/widowing
• Single or separated workers with a child (additional child allowance may also be received)
• Married workers where only one partner is working (or widowed within the first year of wife's/husband's death)
• Married employees both in jobs
• A mixture of the above two (such as married professional couple, one of whom has lost a spouse within the last year)
• Double income employees (with income received in more than one tax bracket)

There are a number of online tax converters which provide calculations for different salary levels.

• For a German Income tax calculator: Click here
• For a German Wage tax calculator: Click here

Other deductions from the salary/wage

Employees must also pay a compulsory fee of approximately 20 percent of their wage for social security (the same amount is also paid by the employer) although this amount is included in the total salary tax percentage. Full time employees must pay the following deductions: social insurance, health insurance, pensions insurance, healthcare insurance and unemployment insurance. These can be broken down as follows:

• Health insurance is around 6.5% of taxable income (before tax, minus deductions)
• Pensions insurance is almost 10% of taxable income
• Unemployment insurance is 3.25% of taxable income
• Healthcare insurance is almost 1% of taxable income (for nursing services in old age)
• Solidarity tax is 5.5% of wage tax (this goes towards rebuilding the former East Germany. The tax amounts to 5.5% of income tax or corporate tax for businesses and must be paid by all companies and self and company-employed workers.)
• Church tax (Kirchensteuer)is 8-9% of wage tax (only relevant if a Catholic or Protestant religion has been stated on the tax form)

This makes about 21 percent of social security contributions which is mirrored by employers who pay the same amount of contributions to the state.

Salary tax card (Lohnsteuerkarte)

Employees require an income tax card (Lohnsteuerkarte) to work in a German company. This card documents tax payments and insurance contributions over the year and must be sent to the tax office along with completed tax return forms. The card can be obtained from the local registration office (Einwohnermeldeamt) and is available for all registered residents.

Double Taxation

Double tax treaties exist that may provide tax relief where a German tax resident also pays income tax in another country.

Differences between residents and non-residents for taxation purposes

Once an employee has resided or worked in Germany for more than six months, they are considered a resident for tax purposes. Other factors obviously include residence permits (depending on the country they come from) or job relevance for the country, for example.

Non-residents working in the country may also be required to pay tax in Germany. For example, if a freelance contractor is sent to Germany to work for a British company local taxes may also be due, depending on the time spent in the country, the amount earned, the field of work and the nationality of the contractor. For more information on individual cases, it is often best to consult a tax advisor in Germany, or a European tax advisor to provide a clear overview on what earnings can and cannot be taxed.

Freelancing in Germany

There are two forms of freelancing in Germany, and the major difference between the two is the amount of tax payable. If freelancing takes on any form of a business (for example sales, extra employees, office premises), an immediate liability for corporate or commercial tax is incurred. Working simply for other companies and invoicing services separately is therefore a much cheaper option and one that can be implemented fairly easily.

Freelancers classified as a business

Some freelancers, depending on their type of work, may be classified as a small business and therefore will have to pay Gewerbesteuer (trade tax). This is calculated as a multiplier (which differs depending on Federal State) on existing tax payments (between 10 to 16 percent of current tax bill). Again, it is recommended that a tax advisor is used, as the system is very complex.

Tradesmen are self-employed workers who are a business rather than a service-for-hire. On top of income tax, tradesmen also must pay trade tax (Gewerbesteuer) as above.

Freelancers classified as self-employed

Freelancers are defined as a self-employed person working in the following fields:

• Artistic (music, painting, singing)
• Scientific and engineering
• Professional writing (copywriting, translation, journalism for example)
• Teaching
• Professional services such as physicians, dentists, lawyers

The list is not limited to the above and certainly some jobs mentioned can also be full-time employment jobs; this is purely an example of self-employed status, as recognised under German tax law.

As a freelancer, registration at the local tax office (Finanzamt) is the first step before any work can be undertaken. Workers who previously worked in full-time employment must continue paying their health insurance, unless a decision is made to change to a private health insurance company. The appropriate measures must be taken in this case. The tax office will require the following information:

• Estimated earnings (per month)
• VAT (Mehrwertsteuer - Mwst) – contributions
• Type of job

Once the forms have been filled in, the freelancer will receive a tax number, which must then be written on every invoice.

If the person decides to be VAT-registered, this should also be included as part of every invoice. Failure to do so will result in the tax office demanding the VAT which was not received from the client through the invoice, thereby reducing earnings considerably.

During the first year, freelancers must submit tax returns on a monthly basis. This is standard practice so that the tax office can make sure that freelancers are paying the correct amount of tax for the rest of the year. Tax offices can be found in most towns and the different districts of larger cities. Tax returns can also be filed simply over the Internet using the tax office's (Finanzamt) online service, known as Elster.

• Elster - tax office online tax return service (in German)
• For a full list of tax offices: Click here (in German)

After the first year, the freelancer will be assigned an average tax bracket which is then used as a basis for calculating income tax for following years. In this case, returns need only be made at the end of the year (by 31 May of the following year).

Filing an Income Tax Return

The tax year runs from 1 January to 31 December. The deadline for filing a tax return in Germany is always 31 May of the following year. This can be extended until the end of September if a tax advisor is filing the tax return or on written confirmation from the tax office. Couples may file tax returns on the same form. Married couples are eligible for deductions in line with their lower progressive tax rates and therefore pay less tax than single persons or married persons filing separate tax return forms.

Tax forms can be obtained from the local tax office (Finanzamt) or can be sent directly to the workplace. Tax returns may also be made online using the electronic filing system, Elster.

• To download the relevant software: Click here (in German)

Although it is in German the system is very helpful, offering numerous hints at how tax can be saved and reimbursed.

Tax forms must be filled out to cover all types of income from employment as well as interest on bank accounts, shares and dividends, capital investments and other sources of money-earning.

The paper version has an attachment "N" (Anlage N). This is used to document all deductions, from receipts to bills, invoices and so on. All residents may make deductions totalling up to €2,100, or over this amount, as long as the appropriate invoices and receipts can be presented. This could also be made up of, for example, permanent disability, life or pensions insurance contributions (including social security contributions in the home country). Originals of the relevant documentation must be sent along with the tax returns form, Anlage N and the tax card (Lohnsteuerkarte).

The tax office then determines what, if any, refunds are due or whether additional payments must be made. Depending on the time of year and detail of the tax return, the tax office replies within the next few months with a final tax calculation. This is called the Bescheid über Einkommensteuer (notification of income tax).

Further Information

• German Embassy in London: Living and working in Germany
• Contractor UK: guide to IT contracting in Germany
• MySME: Information for foreign SMEs in Germany
• US Embassy: information on US-German tax treaty

Disclaimer: Tax law is complex and every effort has been made to offer information that is current, correct and clearly expressed. The information in this summary is intended to be no more than a general overview of the position and certain details have been deliberately omitted. The contents of this page should not be taken as an authoritative statement of German tax law and practice. Neither the author nor the publisher are responsible for the results of actions taken on the basis of information contained in this summary, nor for any errors or omissions. This text is not intended to render legal, accounting or tax advice. Readers are encouraged to seek professional advice concerning specific matters before making any decision.

---

Information approved by Kanzlei am Rosa-Luxemburg-Platz
Christian Regnery, Rechtsanwalt
Torstr. 49/Ecke Schönhauser Allee, D-10119 Berlin
Tel: 030 4404 2733, Fax: 030 4404 2777, www.regnery.de