Tax Facts - Germany

Gerard Associates Ltd. Financial Advisory Services does not provide individual tax advice, and nothing contained in this briefing should be construed as such. We make every effort to ensure the accuracy of the information but cannot be held responsible for any liability arising.

It is essential that all clients seek tax advice specific to their own personal circumstances with the relevant tax professional of the jurisdiction(s) in which you are liable to tax.

This has been prepared based on our understanding of current legislation and tax practice as at the date above. However, these are subject to change, and may result in income tax consequences different from those detailed below.

We cannot accept responsibility for its interpretation or any future changes to law.

Introduction

Taxation in Germany occurs at a national and municipal level. The Ministry of Finance controls the taxation regime and any individual moving to Germany must register with the local registration office.

Tax Year

1st January – 31st December.

Assessment Basis

German residents are taxed on their worldwide income under the concept of unlimited tax liability.  There is no self assessment in Germany, but while employment income is subject to a withholding tax deducted at source by the employer, individuals are still required to file a tax return and subsequently receive a tax assessment from the tax authorities. Married couples may choose between filing jointly (splitting tariff) or separately, although it is usually advantageous to file jointly.
Salary income is taxed in the year it is received.

Income Tax

Taxable income derives from seven income categories, including trade or business, employment, capital investment, rents and royalties. Any income not defined in tax law is not taxable. Net income is based on all gross earnings during the fiscal year, reduced by allowable expenses related to the income generated in each of the categories. For example, expenses related to generation of employment income may be deducted from such employment income. A full offset of losses between
income categories is available within certain restrictions.

Various general deductions for expenses may subsequently be applied including tuition fees, charitable donations and health and accident insurance premiums. Deductions can also be made for ‘extraordinary burdens’ from dependants. Further tax relief is available for taxpayers with children.  Net taxable income is then taxed at progressive rates over and above the tax free allowance at rates of between 14% and 45% (2010). The tax amount due is then subjected to a further 5.5% solidarity
surcharge, which was originally introduced to finance the reconstruction of east Germany after German reunification in 1990.

Income tax and the solidarity surcharge on employment income are withheld at source by the taxpayer’s employer; the amount withheld is determined by the details on an individual’s wage tax card issued by the local registration office.

Taxation of Investment Income

Interest and dividend income received from German or from non-German sources are taxable in respect of German residents.  As of January 2009 investment income, including dividends and interest as well as capital gains from the sale of shares and financial instruments, is taxed at a flat rate of 25% (26.38% inclusive of the 5.5% solidarity surcharge). An allowance of up to €801 per year, doubled for jointly assessed couples, is granted.

Premium Taxes

Life insurance is exempt from premium taxes in Germany.

Tax on Property Rental Income

Rents received, less allowable expenses, form part of an individual’s taxable income. Under tax treaty provisions rental income received from sources abroad is mostly exempt. Tax exemption with progression (income is taken into account in assessing the individual’s personal tax rate) will be applicable if sources are not located within the EU/EEA. If sources are located within the EU/EEA and under the applicable tax treaty provisions, the double taxation on rental income is avoided by way of a tax credit, and foreign rental losses can be offset against positive income from other domestic sources. Where sources are located outside of the EU/EEA, foreign rental losses can neither be offset against positive income from other domestic sources nor be used to reduce the tax rate on other income at the time. However, they can be utilised to offset future positive rental income from the same foreign sources.

Wealth Taxes

There are no wealth taxes in Germany.

Capital Gains Tax

The tax regime applicable to capital gains made on private transactions in Germany is dependent on the type of asset and the date it was acquired.  Prior to January 2009 capital gains tax was only applicable on transactions which were considered to be speculative. Accordingly, gains of over €600 per annum made on shares (provided that they were privately held and the individual held less than 1% of the company's total share capital at any time during the five years prior to the sale) acquired prior to January 2009 and sold within 12 months of acquisition were subject to income tax at progressive rates. Only 50% of any gain/loss on shares was taken into account and there was a small tax free threshold. Gains made on the sale of immoveable property not used for residential purposes within 10 years of purchase were subject to the same arrangement.

With effect from 1 January 2009 however, the entire capital gain (i.e. not only 50%) deriving from the sale of shares, warrants, bonds etc bought after 31st December 2008 is now taxed at a flat rate of 25% (plus solidarity surcharge of 5.5%) irrespective of the holding period. However, there is a  tax free amount of €801 for single filers which is doubled for married couples filing a joint return.

The taxation of capital gains resulting from the sale of immoveable property remains unchanged.  Inheritance and Gift Tax Inheritance and gift taxes apply to worldwide assets passing on death and during an individual’s lifetime, with a tax free allowance of up to €500,000 depending on the relationship to the deceased, as well as several reliefs and exemptions. The tax rate depends upon the value of the property and the relationship of parties involved and ranges from 7% to 50% on a progressive scale.

Regional and Municipal Taxes

German municipalities levy a land tax on properties on a yearly basis. The tax base is the assessed unitary value to which a multiplier is applied and varies from district to district. The resultant tax is generally very low.

Property Taxes

In addition to the municipal tax above, a further tax may be applicable to ‘second residence’ properties, with the tax being based upon the annual rent. Rates vary from 5% to 16%. Various exemptions exist for third and any additional residences in city/municipal areas.

Stamp Duty/Property Transfer Tax

A tax is levied on the transfer of real estate based upon the purchase price, at a rate of 3.5% or 4.5% depending on the municipality.  No other stamp duty is applicable.

Sales Tax

Sales tax is generally added at a standard rate of 19% to the sale price of goods. Some sales are exempt and other goods are subject to sales tax at a lower rate of 7%.

Social Security Contributions

In general, all employees working in Germany are subject to social security contributions, which cover a range of state benefits including statutory pension funds, unemployment insurance, health insurance, and old age Medicare insurance. In aggregate an individual and their employer will be liable to total social security contributions of approximately 50%. The contributions are in general split evenly between employee and employer, with ceilings being applied to the amount of
contribution. However, employees are subject to additional health insurance contributions of 0.9%, and employees without children or children older than 23 need to contribute additional old age Medicare insurance of 0.25%.

In addition to the above, German employers need to make contributions to the Accident Prevention & Insurance Association. The contributions are determined on a case by case basis. German employers also make contributions to certain insurance funds which make maternity payments, payments in cases of illness of the employee as well as payments to the employee in cases of insolvency.

Other

An obligatory Church Tax is levied on various religious communities. The rate is 8% or 9% of the amount of income tax depending on the municipality where the tax is payable and is deductible from taxable income.

An individual with business activities may be subject to trade tax. The effective rate varies between 12% and 20% depending on the municipality, and a tax free amount of €24,000 is granted to individuals and partnerships

Taxation of Expatriates Living in Germany

The basis for taxation in Germany is determined by an individual’s residential status. Individuals who are residents of Germany are subject to ‘unlimited tax liability’, from the very first day of arrival in Germany, except insofar as a tax treaty assigns the right to impose tax on any income in favour of another country. An individual will be considered a resident of Germany with ‘unlimited tax liability’ under two circumstances:

• they take up residence in Germany by, for example, purchasing or renting a property for future indefinite use, or

• they have a habitual abode in Germany, i.e. a continuous presence in Germany for more than 6 months.

The German Income Tax Law offers very important deductions, which often apply to expatriates and which are unknown in other countries. These include income related expenses which are deductible from taxable income received by an employee, e.g. moving expenses, rent for a German apartment, expenses for returning to the home country, flights home under the ’double household regime‘ and telephone costs.

Inheritances and gifts are often taxable in both Germany and the expatriate’s home country. However, in some cases, national legislation allows taxes paid in one country to be deducted from the tax in the other country. Germany has an extensive network of tax treaties preventing double taxation on income signed with about 80 countries. Inheritance tax agreements are signed with a relatively small number of countries, such as Austria, Denmark, Greece, Sweden, Switzerland, and the USA. An inheritance agreement with France is currently in a discussion.

German social security contributions do not, in principle, apply to individuals who:

• are seconded to Germany for a limited period (3 to 5 years or, under some social security treaties, from 6 to 8 years), and

• work on behalf of a foreign (non-German) employer on their payroll or account, and

• have costs of the assignment charged to the host company (this is only possible with a cost-plus agreement to avoid German social security).

The decision as to whether the provisions for a secondment are met is made, on application, by the social security authorities in the home and/or in the host country.

Taxation of ‘Non-Residents’ Living in Germany

Individuals who are not resident in Germany will be subject to ‘limited tax liability’ only on such income from German sources that are listed in the German Income Tax Act. A non-resident taxpayer will have to file a return and receive an assessment only if their German income is not subject to withholding tax. Where income is subject to withholding tax, the income tax liability is normally settled through the withholding system and no returns or assessments are required.

The solidarity surcharge also applies to non-residents, but non-residents are not subject to church tax.

In the case of dividends sourced in Germany and payable to non-residents, withholding tax applies at the new rate of 25% with the 5.5% solidarity surcharge added thereon. However, in practice the tax due may be less owing to double taxation treaties.  Nevertheless, the German payer generally has to withhold tax at the higher rate of the two countries. Where the withholding tax has been deducted, the taxpayer may apply for a refund of the tax withheld in excess of the withholding tax applicable under the relevant double taxation treaty. Savings interest sourced in Germany and paid out to non-residents are not subject to withholding tax at source.

In the case of inheritance tax when neither the deceased person nor the donor are resident in Germany, only certain assets
situated in Germany are taxable, e.g. real estate and business assets.

Applications for more favourable treatment

Non-resident individuals who derive at least 90% of their taxable income from German sources, or where the non-German income does not exceed €8,004/€16,009, may apply for more favourable taxation in Germany in a manner similar to the taxation of German residents.

A non-resident spouse of a resident tax payer can upon application be treated as resident in Germany if this is more beneficial, provided that the resident tax payer is a citizen of an EU/EEA member state and the spouse lives in a member state.