German Tax System – Brief Guide

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German Tax System - Brief Guide

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Last updated: 21 April 2020 / by Sam Williams

When you are planning your move to Germany, it can be exciting looking ahead and finding a new place to live and a new job. Getting to grips with the German tax system is a less thrilling prospect, but it is essential for your new life in Germany.

If you are not familiar already with the German tax system, it can seem daunting trying to wrap your head around the various aspects.

This handy guide runs through what you need to know about German taxes and what you will have to pay.

The Tax System: The Basics

In Germany, taxes are charged by three different sources:

  • Municipalities (Gemeinden)
  • Federal states (Bundesländer)
  • Federal government (Bundesregierung)

The administration of these taxes is divided between the Federal Central Tax Office, (Bundeszentralamt für Steuern), and the regional tax offices (Finanzämter) of which there are approximately 650.

The types of income which are taxable in Germany are:

  • Employment
  • Business or trade
  • Agriculture and forestry
  • Capital investment income
  • Royalty income
  • Independent personal services
  • Rental income (primarily immovable property but some moveable property too)
  • Other income such as alimony, annuities and private transactions

Your residency will also play a part in the taxation of your income.

To be considered automatically as a resident for tax purposes, you will need to have spent six consecutive months or more in Germany. This means your worldwide income will be taxed in Germany.

If you have spent less than six months in Germany, you will not be classed as “ordinarily resident” in the country and will only be taxed on your German income.

Even if neither of these applies, you can still be considered as a German resident for taxation if you earn 90% of your income in Germany, or you earn below a certain amount outside Germany in a calendar year.

Business travelers will not usually be considered as resident for tax purposes if they are in the country for less than six months. Occasional trips home are disregarded for calculating the length of the stay.

Getting a Tax ID

To work in Germany, you’ll need your tax ID. This is known as Identifikationsnummer or, more often, your Steuer ID. This number never changes and it will only be issued to you once. It is linked to the payment of your income tax and will be used by the tax office in all their communications with you.

A Steuer ID is a randomly generated number that is assigned to you and doesn’t contain any personal details.

By contrast, the second type of tax number holds all your details, including marital status, children, and religion. This tax ID, known as Steuernummer, not to be confused with a Steuer ID, is only needed by those who are self-employed or freelance. Unlike a Steuer ID, a Steuernummer can change if you move around Germany.

Your Stuernummer will be used in all communications in connection with your self-employment, including your tax return.

You get your Steuer ID when you complete your registration, known as Anmeldung, when you first move to Germany. This automatically generates your Steuer ID, which will be mailed to you within a few weeks.

To get a Steuernummer, you must apply to your local tax office (Finanzamt) directly. It won’t be supplied automatically.

Income Tax in Germany

If you’re working in Germany, you will be assessed for the purposes of paying income tax (einkommensteuer).

If you are employed, this is money that is deducted directly from your wages and paid to the German government.

This deduction is known as a withholding tax (lohnsteuer) and is comprised of not just income tax but also church tax, solidarity surcharge and national insurance. Other taxes can sometimes apply depending on the nature of your employment, such as a tax on benefits in kind (geldwerter vorteil).

For those who are self-employed, income tax will be calculated on your tax return and the payment will need to be made manually by you.

You will be able to earn a certain amount before income tax is deductible; in 2020 this was €9408 for a single person. Like many others in Europe, the German tax system is progressive, which means the more you earn, the higher the rate of tax you’ll pay.

Different Classes and Rates

Two main factors will determine how much you will pay in income tax, and what the total withholding tax will be.

The bands for income tax are subject to small changes annually, but for 2020, the following were in place:

  • Income of less than €9408 – 0% income tax
  • Income of €9408 – €57051 – 14-42% income tax
  • Income of €57051 – €270,500 – 42% income tax
  • Income of more than €270,500 – 45% income tax

These rates are slightly more generous for married people than single.

The rest of your lohnsteuer is calculated based on your tax class. There are six tax classes, as follows:

Class 1, applies if you are:

  • Single
  • Unmarried
  • In a registered civil partnership
  • Married/widowed/divorced and not in classes II, III or IV

Class 2, applies if you are:

  • A single parent entitled to receive single parent allowance

Class 3, applies if you are:

  • Married couples both living in Germany where only one is a wage-earner
  • Married couples both living in Germany where one spouse opts to be taxed under class V
  • Recently widowed

Class 4, applies if you are:

  • Cohabiting married workers who haven’t opted for class III or class V

Class 5, applies if you are:

  • Married and both working with one spouse a class III

Class 6, applies if you are:

  • An extra class which is optional for workers who earn an income from more than one employment

Social Security Contributions

Anyone who works full-time in Germany will need to pay social security contributions. These help to pay for all kinds of benefits for the sick, the unemployed and pensioners.

The compulsory social security contributions deducted from your wages comprise of:

  • Pension insurance (9.3%)Rentenversicherung
  • Unemployment insurance (1.20%) – Arbeitslosenversicherung
  • Health insurance (7.65%) – Krankenversicherung
  • Long-term care (1.525%) – Pflegeversicherung

The above rates were applicable for 2020 and the contribution is matched by the employer equally.

If you later leave Germany and want to claim benefits in another EU country, you might need to prove that you paid social security contributions while in Germany. You can get this proof via the U1 form.

Solidarity Surcharge

The solidarity surcharge is a type of levy which is unique to Germany. It was introduced in 1991 to raise funds for the reunification costs and has remained in place ever since. It’s known as Solidaritätzuschlag in German, and is often abbreviated to Sol.

The solidarity surcharge is currently set at 5.5%, which is payable on all income tax above €972. It also applies to capital gains tax and corporation tax. Changes are about to take place on this tax; from 2021 it will only be charged to the top 10% of earners, either in part or in full.

Church Tax

This is another new concept for many, as it’s not a tax that exists in all countries. It’s rather unusual as you don’t strictly need to pay it and it’s easy to avoid completely.

When you register your address at your Anmeldung, you will be asked about your religion. If you describe yourself as Jewish, Protestant or Catholic you will automatically have to pay ‘church tax”. You won’t usually be informed this is the reason for the tax, and many foreigners who are new to Germany have no idea this is why they are charged.

Many people describe themselves as belonging to a certain religious group even though they don’t go to church, and don’t engage in any form of prayer or worship. Culturally it’s become popular to adopt the same religion passed down through your family even though you don’t actively practice it.

For this reason, many new arrivals to Germany will end up paying a religious tax, which shouldn’t really apply.

The amount is not inconsequential: church tax is 8% in Bavaria and Baden-Württemberg and 9% in all other parts of Germany.

Church tax is known as Kirchensteuer and will usually be abbreviated on your wage slip as KS, so it’s easy to see if it’s being deducted.

The levy dates to 1919 and the money collected is used for the preservation of churches, funding social projects and paying personnel (other than clerics as these are paid directly from the diocese).

You can still go to church even if you don’t pay church tax as no-one is excluded. However, more significant events such as weddings and baptisms may be different; the rules vary from one area to another.

If you don’t believe you should be paying church tax, you can avoid it from the start. When you go to the Bürgeramt for your Anmeldung, do not describe yourself as Jewish, Protestant or Catholic and the tax won’t be applied.

Tax Returns

If you are employed and have your tax deducted by your employer, and you don’t believe there has been an overpayment, you will not need to do a tax return unless you have other income.

However, there are several circumstances which mean you may be due a tax refund and would need to complete a tax return. The following are examples:

  • You earned less than the tax-free allowance in a year
  • You had a temporary or part-time job in Germany

  • Your classification was incorrect

  • You were providing financial support to dependents in your home country
  • You paid rent in your home country and in Germany
  • You had work-related expenditure ie/travel costs
  • You were taxed as a single person but are married

Any tax return to address an overpayment must be made within four years.

If you are self-employed, you must submit a tax return annually, which is calculated a year in arrears.

The deadline for the tax return is 31 December, but this can be extended by two months if you need the assistance of an accountant in completing your return.

Tax Deductions

In Germany, like many other countries, several permitted deductions can be made from a tax return.

The following types of expenses can be deducted when making a tax return:

  • Relocation expenses

  • Employment expenses not reimbursed from the employer
  • Charity contributions to German charities
  • Alimony to separate or divorced partners
  • Childcare costs
  • Church tax
  • School or education expenses
  • Social security contributions
  • Interest on mortgages for buy-to-let properties

It’s not uncommon for employed people to submit a tax return, even if they have no reason to believe they have overpaid. It’s viewed as an accurate way to check they are paying the right amount of tax.

If you don’t submit a return, miss the deadline, or fail to include all your income, you could be hit with a stiff penalty of up to €50,000.

Self-employed businesses may be required to pay VAT and corporation tax depending on the level of their earnings. This is in addition to the other deductions such as income tax, social security contributions, church tax and the solidarity surcharge.

Indirect taxes

The majority of the taxes you’ll notice paying in Germany will come through your work, but there are many other indirect taxes too. These include:

  • TV and radio license fee, payable whether you own one or not (Rundfunkbeitrag)

  • Dog tax (Hundesteuer)
  • Car tax (Kraftfahrzeugsteuer)
  • Inheritance and gift tax (Erbschaftsund Schenkungssteuer)
  • Property sales tax (Grunderwerbssteuer)
  • Capital gains tax (Abgeltungsteuer)
  • Real property tax (Grundsteuer)

Easier Than It Sounds!

Getting used to a new tax system is daunting, but it is much easier than it first sounds.

Once you have your Steuer ID, your employer will take care of a lot of the deductions and if you are self-employed, the system is not much different than any other country.

Don’t put off getting it all sorted out; it won’t take as long as you think, and then you can sit back and relax!

German Tax System - Brief Guide

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