Income Tax in Germany
Personal Income Tax:
Tax Return and Compliance:
The calendar year is the tax year and the rerun shall be filed up to 31st May.
In general, income tax is assessed by calendar year after filing an individual tax return. Married couples can file tax returns jointly or as separate individuals.
Returns for the preceding calendar year must be filed with the local tax office by 31 May. An extension until 31 December will be granted without application where a professional tax adviser prepares the return. A further extension may be available by special request. However, the tax authorities may request, on an individual basis, that the return be filed before these dates.
If the tax return is not filed on time, the tax authorities may assess penalties. The penalties are at the discretion of the tax authorities but must not exceed 10 percent of the tax.
If the employer is a German company or a foreign enterprise with a permanent establishment or a representative in Germany, the employer is legally obliged to withhold taxes from an employee’s salary and to remit the taxes to the tax office monthly.
From 2004 onwards, a German entity is also obliged to withhold wage taxes from an employee’s salary that is paid abroad if the salary costs are economically borne by the German entity.
The income tax is not payable at the time the tax return is filed. The tax authorities will issue a final tax assessment notice once they have processed the return. Any balance due is payable within one month after receipt of the tax assessment notice. Interest is charged or credited on final payments if the tax assessment notice is not issued within 15 months after the end of the respective calendar year. The applicable rate is 0.5 percent for each full month after the 15th month. Penalties for late payment after receipt of the tax assessment notice are 1 percent per month of the unpaid amount.
The tax office can assess quarterly prepayments based on the prior year’s tax or on estimates of income not subject to withholding tax. These prepayments are due quarterly on 10 March, 10 June, 10 September, and 10 December.
Non-residents are subject to tax on certain categories of income from German sources under the concept of limited tax liability. If the income from employment is subject to wage tax withholding, the tax obligations are fulfilled with the withholdings and no German tax return needs to be filed.
All resident individuals are taxed on their worldwide income. Non-resident individuals are taxed (usually by withholding) on German source income only.
Taxable income covers income from the following categories:
· Agriculture and forestry.
· Trade or business.
· Independent professions.
· Capital investment.
· Rents and royalties.
· Other income (as defined by tax law).
Net income is based on all gross earnings received during a calendar year and reduced by income related expenses during the same period for each of the above categories. Losses from one of the seven basic income categories - except capital investment - can fully be offset against positive income from another income category (exceptions for 'other income' may apply).
The total income after deductions in each category, which may be further reduced by lump-sum deductions or, within limits, by actual payment for special expenses defined by tax law, represents the taxable income.
Personal income tax rates:
Germany has progressive tax rates ranging as follows (2017 tax year):
Taxable Income for Single Tax Payers in EUR
Taxable Income for Married Taxpayer in EUR
Tax Rate (%)
* Geometrically progressive rates start at 14% and rise to 42%.
Surcharges on income tax:
To improve the economic situation and infrastructure in the five 'new' eastern states of Germany, the German government is levying a 5.5% solidarity surcharge tax for an indefinite period. The surcharge is imposed as a percentage on all individual income taxes.
Members of officially recognised churches pay church tax as a surcharge on their income tax. The rates are either 8% or 9%, depending on the federal state where the individual resides.
Trade income tax:
Trade income tax is levied on business income, whereas for individuals and partnerships a tax-free amount of EUR 24,500 has to be considered (i.e. not for corporations).
The respective municipality is responsible for the final tax assessment. The rate fixed by the municipality ('Hebesatz') is between 200% and approximately 450% of the basic amount, which is 3.5% of the business income.
Local and state income taxes:
There are no local or state income taxes levied in Germany.
An individual is considered resident if he/she maintains a domicile or habitual place of abode in Germany. A domicile is a home or dwelling owned by or rented to the taxpayer who has full control over that property. Domicile is a question of fact and is not determined by the intention of the taxpayer.
The habitual place of abode is established when an individual is physically present in Germany on a long-term basis. Long-term is defined as more than six months.
The habitual place of abode is established when the individual is physically present in Germany for a continuous timeframe of more than six months. A continuous abode is established and maintained if the interruptions are for a short period only (such as holidays, journey home, and business travel), so that the stay is still regarded as one continuous stay.
For determining the habitual abode, the continuous period of six months will be considered as explained above.
Salaries paid under the German payroll are subject to wage withholding tax (WHT), which is withheld by the employer and credited against the final annual income tax charge. Account is taken of the personal situation by the application of certain tax classes and certain deductions are applied.
Salaries that are paid by a foreign employer (who does not have a permanent establishment in Germany) but recharged to the German company are also subject to WHT. The German company is deemed to be the 'economic employer' and thus obliged to calculate and transfer the appropriate wage tax return to the tax office on a monthly basis.
Salaries that are paid by a foreign employer but not charged to the German company are generally not subject to WHT. As with other income, tax for these employees is levied by assessment generally following the first annual return. Pension income is also taxable, subject to further allowances.
Stock options are basically taxable when exercised. Taxable income is computed at the time of exercising the option, normally as the difference between the market price of the shares and the exercise price. Tax exemption may be granted if during the period between grant and vesting employment was not performed in Germany and thus the employment income was not taxable in Germany. The stock option benefit is sourced based on workdays between grant and vesting.
Shares provided free of charge or at a low-price may be tax-free up to an amount of EUR 360 per annum if certain conditions are fulfilled. This relief is granted for shares of the employing company and of the parent company controlling and consolidating its subsidiary.
A favourable tax rate may apply if the period between grant and exercise exceeds 12 months and if the employee is employed with the granting company at least for the first 12 months of this period.
Tax on net income from professional activities or from carrying on a trade or business is collected by assessment. Quarterly instalments might be assessed on an estimated basis and credited against the final income tax burden.
Capital gains (sale of shares) are subject to a flat tax rate of 25% plus a solidarity surcharge which is basically withheld at source. Special rules apply on the taxation of capital gains from the sale of a significant interest in a business (1% or more). Capital gains qualify for an 'investor's allowance' of EUR 801 per taxpayer but related expenses cannot be deducted. This amount is doubled in the case of married taxpayers filing jointly.
Other capital gains are taxable in Germany at individual progressive rates only if the sale is within one year (for movable assets) or ten years (for real property) after the purchase date. These capital gains are only taxable if the profit exceeds EUR 600 per annum. Further tax relief may be applicable if the property was used for private purposes.
Dividend income is subject to a flat tax rate of 25% plus solidarity surcharge which is basically withheld at source. Dividend income qualifies for an investor's allowance of EUR 801 per taxpayer, whereas related expenses cannot be deducted. This amount is doubled in the case of married taxpayers filing jointly.
Interest income is subject to a flat tax rate of 25% plus solidarity surcharge which is basically withheld at source. Interest income qualifies for an investor's allowance of EUR 801 per tax payer, whereas related expenses cannot be deducted. This amount is doubled in the case of married taxpayers filing jointly.
Note that the investor's allowance is only provided one time for the total of interest and dividend income and capital gains.
Rents received less allowable expenses form part of taxable income. Under treaty provisions rental income from sources abroad is mostly exempt. Tax exemption with progression will be applicable if sources are not located within the EU/EEA.
Are there any areas of income that are exempt from taxation in Germany? If so, please provide a general definition of these areas.
The following categories of income are exempt from tax:
· Certain payments from health or accident insurance.
· certain social security benefits including unemployment benefits and maternity grants.
· kindergarten fees if certain conditions are met.
In case a secondary household is established in Germany for business purposes, the following payments are exempt under certain circumstances:
· home trips
· meal allowances up to certain amounts and subject to certain time limits
· rent at the place of work (actual cost limited to EUR 1,000 per month).
If certain other conditions are met, rental cost incurred for the employee, meal allowances and commuting expenses can be reimbursed tax-free, in general.
Taxes on corporate income:
Germany taxes its corporate residents on their worldwide income. However, most DTTs exempt income attributable to a foreign permanent establishment (PE). Non-residents with PE or property income are taxed by assessment on German-source income; those earning royalties and dividends are taxed by withholding at source. Interest paid abroad is, in most cases, free of German tax altogether.
German business profits are subject to two taxes, corporation tax and trade tax.
Corporation tax is levied at a uniform rate of 15% and is then subject to a surcharge of 5.5% (solidarity surcharge). This results in a total tax rate of 15.825%.
The trade tax rate is a combination of a uniform tax rate of 3.5% (base rate) and a municipal tax rate depending on where the PEs of the business are located. Currently, municipalities with at least 80,000 inhabitants levy trade tax at a rate of between 12.6% and 19.25%.
The basis for this tax is the adjusted profit for corporation tax purposes: in particular, 25% of all financing costs over 100,000 euros (EUR), including the implicit financing costs in leasing, rental, and royalty payments, are added back to taxable income.
If the basis for the two taxes is identical (unlikely in practice), the overall burden on corporate profits earned in Munich would be 33%. In Frankfurt, the burden would be 32%. In Berlin, it would be 30.2%.
The taxable income is generally determined on the basis of a tax balance sheet, which in turn is based on the statutory accounts according to German generally accepted accounting principles (GAAP). There are certain specific tax law and accounting adjustments to be made to the statutory accounts, and additional accounting options are available. If accounting options are exercised in the tax balance sheet that diverge from the financial statements according to German GAAP, a register must be kept of the resulting variances between the financial statements and the tax computation showing the basis on which each arose and its reversal. International Financial Reporting Standards (IFRS) financial statements are not accepted as a basis for computing taxable income.
Inventories normally are valued at the lower of actual cost, replacement cost, and net realisable value. However, any write-downs below actual cost must be for specific reasons. If specific identification of the inventories is not possible, valuation at either standard or average cost is acceptable. The last in first out (LIFO) method is accepted as an option. First in first out (FIFO) is not accepted unless its assumption accords with the facts.
Long-term liabilities and accruals:
Non-interest bearing liabilities with a remaining term of 12 months or more as at the balance sheet date, other than advance payments received, must be discounted at 5.5% per year. A similar provision applies to refurbishment (to restore an asset to its original condition) and other accruals that accumulate over time.
Generally, capital gains realised by a corporate entity from a disposal of business assets are treated as ordinary income. It is possible to postpone the taxation of part or all of the gain on real estate by offsetting the gain against the cost of a replacement property.
Capital gains from the sale of investments in other corporations are exempt from corporation and trade taxes. Corresponding losses are not deductible. However, 5% of the capital gains are added back to taxable income as non-deductible, directly-related expenses where the seller is resident or has a PE/representative in Germany.
Dividends received on significant holdings are exempt from corporation and trade taxes. Portfolio dividends are taxable. For corporation tax and trade tax purposes, different qualified portfolio holdings are applicable. With respect to corporation tax, a minimum shareholding of at least 10% is required and must be met at the beginning of the calendar year. For trade tax purposes, additional requirements need to be fulfilled (e.g. an active income criterion for certain foreign-source dividends) and different rules apply for German-source and foreign-source dividend income from shareholdings of at least 15% (or 10% insofar as the Parent/Subsidiary Directive is applicable).
5% of the tax-free gross dividend is added back to taxable income as non-deductible business expenses.
Note that, for example, banks do not enjoy this exemption on dividends from securities held for trading.
In principle, a declaration of stock dividends (by converting reserves to capital stock) by a company will not lead to taxable income for the shareholder or to other tax effects. Subsequent capital reductions, however, will be treated as cash dividends in most circumstances. In general, there is no German tax reason for distributing a stock dividend as opposed to merely leaving accumulated profits on the books to be carried forward. The decision, therefore, depends upon the situation in the investor’s home country.
Interest received is taxed as part of a company’s ordinary trading income. There is no exemption corresponding to the trade tax disallowance of 25% of the interest expense or to the general tax disallowance of net interest expense in excess of 30% of ‘earnings before interest, tax, depreciation, and amortisation’ (EBITDA) under the interest limitation rule (see the Deductions section). However, since the interest limitation is based on the net interest margin, a company can benefit from earning income as interest as opposed to an interest substitute.
Royalties received are taxed as part of a company’s ordinary trading income. There is no special regime such as an IP Box or the like.
Foreign income, except dividends, received by a German corporation from foreign sources is included in taxable income for corporation tax unless a tax treaty provides for an exemption. Foreign PE income, in most cases, is exempt from corporation and trade taxes, while double taxation on most items of passive income (e.g. interest and royalties) is avoided by foreign tax credit or, at the taxpayer’s option, by a deduction of the foreign taxes as an expense.
Irrespective of any tax treaty, income from a foreign branch or partnership is, in general, not charged to trade tax. However, with effect from the 2017 period of assessment, certain passive income arising to a foreign PE will be deemed to have been earned by a domestic PE for trade tax purposes.
The Foreign Tax Act sets anti-avoidance (including controlled foreign company [CFC]) rules with respect to subsidiaries in certain lines of business subject to a low-tax regime. A low-tax regime is one in which the rate applicable to the income in question is less than 25%. Most forms of passive income fall under the CFC rules, which essentially attribute the income to the German shareholder as though it had been earned directly. Active business income is not generally caught where the business operates from properly established facilities.
Investment income held in an EU/EEA subsidiary is also exempt from attribution, provided the subsidiary is commercially active in its country of operation and maintains at least a minimum establishment.
Other provisions give the tax office the right to insist on full disclosure of all the facts and circumstances surrounding a transaction as a condition for the deduction of a business expense incurred within an essentially tax-free environment for the supplier. This rule operates independently of ownership or shareholding considerations.
A corporation is resident in Germany for tax purposes if either its place of incorporation or its main place of management is in Germany. A corporation meeting neither of these criteria will be regarded as non-resident with tax obligations limited to its income from German sources. These include active business activities through a PE or the letting of property and equipment rental (leasing), as well as investment income and royalties. Income of the first three categories is generally taxed by assessment on the actual net earnings. That of the last two is usually taxed at source by withholding from the gross amount payable. Interest paid to a non-resident is generally tax-free (certain exceptions apply, e.g. in respect to interest on convertible or profit-sharing bonds).
Permanent establishment (PE):
Domestic law defines a PE as any fixed business facility serving the corporate purpose. 'Fixed' is not defined further, but is generally taken to imply duration of at least six months. A permanent representative is someone who 'habitually' deals on behalf of the principal acting on the principal's instructions, again without any specific time limit. In its tax treaty PE definitions, Germany consistently follows the OECD model; consequently, purchasing activities, delivery stores, and independent agents acting in the ordinary course of their business are regularly excluded from the PE concept. Recent tax treaties generally reflect the Authorised OECD Approach to PE income, and Germany has also negotiated corresponding amendments to a number of older treaties. The Authorised OECD Approach has been adopted into domestic law and is generally followed in practice unless doing so would lead to double taxation from continued adherence to the old approach (of treating a PE as part of the same legal entity as its head office) in the other state.
Corporate - Branch income:
Both corporation tax and trade tax are imposed on the taxable income of a foreign company's German branch. The rates are the same for branches as for resident German companies, although the withholding tax (WHT) on dividend distributions by German companies is not deducted from profits transferred by a German branch to its foreign head office.
The tax year in Germany is the calendar year.
Returns are filed for each calendar year and reflect the financial statements for the business year ending in that calendar year. Assessments are issued once the tax office has reviewed the return.
In principle, returns are due by 31 May of the following year. However, there is a virtually automatic extension to 31 December for those filing with professional assistance. A further extension to 28/29 February is possible, if justified under the circumstances. Known late-filers and those with a record of other irregularities can be asked to submit their returns before these extension dates, though not before 31 May. For tax periods starting after 31 December 2017, the regular deadline will be 31 July following the tax year-end. For tax returns prepared by a professional tax adviser, the deadline will be extended to the last day of February of the subsequent year.
Monthly or quarterly returns for WHT from employee salaries, dividends, interest, royalties, and other payments, and for VAT must be submitted electronically. The same applies to the annual returns for corporation tax, trade tax, and VAT. There is also an electronic filing requirement for the financial statements supporting the return.
Payment of tax:
Taxes are payable in quarterly instalments during the year, with a final settlement when the assessment is issued. The quarterly instalments are based on the estimated ultimate liability. Usually, this is the total tax due shown by the last assessment issued, as adjusted by any rate changes. The corporation tax instalments are due on the tenth day of March, June, September, and December. For trade tax, the due dates are the 15th day of February, May, August, and November. Failure to pay by the due date followed by a three day grace period leads to a penalty of 1% per month.
Corporation and trade tax assessments bear interest on the net amount payable after deduction of all credits and previous payments. The rate is 0.5% per month simple interest, and the period runs from 1 April of the second year following the year of assessment until the date set for payment. The start of the interest period is independent of the actual date of assessment. It thus runs in retrospect on assessments issued later, for example following a tax audit.
Tax offices are able to issue binding rulings in respect of planned transactions, provided the taxpayer can show a particular interest in the tax consequences of the intended action. The fee varies between EUR 241 and EUR 109,736, depending upon the amount of tax involved (no fee is charged if the tax amount is less than EUR 10,000).
Advance pricing agreements (APAs):
A taxpayer can request the Central Tax Office to negotiate an APA on related-party transactions with a foreign tax authority on one's behalf. The vehicle is the mutual agreement procedure under the treaty, and the fee is a lump sum EUR 20,000 for each new agreement.
Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.