Important Tax Information for foreign Employees and Businesses operating in Germany

If you are a foreign employee or business working in Munich, there are important things you need to be aware of. Whilst the German tax law system is similar to those of other Western countries, it is considered to be one of the most complex in the world. There are many obstacles, common misunderstandings and differences that you should familiarise yourself with if you intend on having any professional dealings in Germany.


TYPES OF TAX IN GERMANY

There are over thirty different types of tax payable in Germany, making it easy to see why the German tax system is so complex. It is important that you understand the various types of tax in Germany, which of those you are liable to pay and the payment methods for each.

Income Tax

Income tax is payable on all sources of income, including:

  • Income from employed and/or self-employed work
  • Income from business operations
  • Income from agriculture and forestry
  • Income from letting property
  • Capital income

Payment of income tax (Einkommensteuer) is the responsibility of each employee.

Wage Tax

All employees working in Germany are liable for PAYE wage tax, which is automatically deducted by an employer from each employee’s monthly gross income. Tax rates for PAYE tax are the same as income tax and the same thresholds apply. Unlike income tax, wage tax (Lohnsteuer) is withheld at the source and paid directly to the tax office by an employer.

Other Taxes

In addition to wage and income taxes, there are a range of other taxes that greatly effect both individuals and businesses working in Germany. These include:

  • Value added tax (Mehrwertsteuer) – applicable to both goods and services
  • Church tax (Kirchensteuer) – a tax of 8 – 9% which applies if you are a registered member of a church

Businesses are subject to various other taxes including corporate tax, trade tax and turnover tax. The rates vary depending on a number of factors including the size of the company, the place of business, the legal form of the company and the classification of the owner (e.g. entrepreneur, small business owner, self-employed professional).


WHEN DO YOU HAVE TO PAY TAX

Generally, you are considered to be a resident for tax paying purposes as soon as you move to Germany with the intention of working or operating a business within Germany for at least six months. This means you are required by law to declare all income to German taxation authorities. Employees are required to pay tax monthly through a Pay as You Earn (PAYE) system, whilst self-employed individuals are required to pay tax quarterly.


INCOME TAX RATES

Like other Western countries, income tax is paid throughout the course of each financial year with adjustments made at the end of each year to account for underpayments or overpayments. Germany is known for its high tax rates, particularly for individuals with high incomes. Having said that, the income tax rate on lower or average incomes is generally quite manageable and Germany offers generous leniency when it comes to deducting income-related expenses as well as personal allowances and private expenses.

German income tax applies to both employees and the self-employed. The same amounts, rates and thresholds apply.

Tax-free threshold

The tax-free threshold applies to:

  • Income from employed and/or self-employed work per annum
  • A taxable income less than €8.354 is tax-free for a single person
  • A taxable income less than €16.708 is tax-free for a married couple

Incomes over this amount attract tax rates that increase progressively from 14% to 42%.

Maximum income tax rate

The maximum income tax rate is 42% plus a solidarity surplus charge of 5.5% on income tax, creating a combined maximum rate of 47.5%. This rate applies to:

  • Incomes exceeding €250.731 for a single person
  • Incomes exceeding €501.462 for a married couple

The solidarity surcharge is in place in order to cover the costs of integrating the states of the former East Germany.


TAX DEDUCTIBLE EXPENSES

There are a number of tax deductable expenses for those working in Germany. The list is quite extensive and we recommend seeking the advice of a tax consultant or adviser when filing your tax return, to ensure that you are deducting everything that can be deducted.

Income related expenses –anything considered to be work-related can (under certain conditions) be deducted, however if the total amount exceeds €1.000, it must be proven to relate exclusively to your work. A standard deduction of €1.000 per annum applies to every employee automatically.

Income related expenses includes things such as:

  • Relocation expenses – i.e. anything you spent relocating to Germany. This includes all removal and transport costs, any cost involved in searching for a house in Germany and expenses relating to rental contracts, broker fees and childcare. However, you cannot claim these deductions if they have been reimbursed by your employer
  • Home office expenses – including rent and electricity costs as well as furniture and equipment
  • Commuting to and from work and any necessary taxi trips for business purposes
  • Books and magazines that relate directly to your profession
  • Professional memberships and union memberships fees
  • Phone and internet bills
  • Car expenses per driven Kilometer between Work and Home
  • Legal and tax advice
  • Training and education
  • Banking fees
  • Depreciations on IT equipment
  • Work clothes or uniforms that cannot be worn outside of work
  • Raising children or being a single parent

Personal deductions and private expenses – such as insurance, pension schemes, donations to charity, student loans and medical expenses.


WHEN TO FILE YOUR INCOME TAX RETURN

Income tax returns must be filed by the 31st of May each year. Should you use a tax consultant to help you file your tax return, this date is extended until 30 September.

Failure to file your income tax return by these dates may attract penalties and interest charges.


SOCIAL SECURITY

Germany has an incredibly comprehensive social security system which is classed as “public insurance” rather than tax. The idea is that you pay into this insurance system and receive something in return, being:

  • health insurance
  • old age care
  • unemployment benefits
  • pensions

Contributions are made towards each category and add up to quite a significant portion of your income. It is said German social security contributions are amongst the highest in Europe. German nationals benefit greatly from this system, however expats working in Germany may find they only benefit to a limited degree.

Who has to pay social security?

Social security contributions are only mandatory for employees. Self-employed individuals are required to have health insurance, but can decide for themselves how they want to arrange their pension and cover any periods of unemployment.

Expats working in Germany must make themselves aware on whether or not they are liable for German social security contributions.

Expats who cease working in Germany

Expats working in Germany who are liable for social security contributions can see their German pension contributions refunded after leaving the European Union in certain circumstances.


FOREIGN SOURCE INCOME

If you are an expat or business working in Germany, do not make the mistake of assuming that any foreign source income is not subject to German tax laws. Either you will be required to pay tax on foreign source income or it will affect your German income tax rate.


TAX REQUIREMENTS IN YOUR HOME COUNTRY

Germany has entered into tax treaties with over one hundred countries. These treaties are designed to prevent expats from paying double tax. However, it is important to ascertain whether or not you are still be required to file a tax return in your home country even if you are living and working in Germany. US citizens, for example, may be required by law to file a US tax return if they earn over a certain amount each year (FATCA „Foreign Account Tax Compliance Act“).

Please seek advice and ensure you are familiar with what is required of you from your native government.


SEEKING GUIDANCE

At Baaske Consultants we have a network of highly regarded and professional tax accountants we are happy to recommend. Given the complexity of German tax law, we highly recommend you seek advice from a German tax consultant when filing returns personally or for your business.
Please get in touch to find out more about how we can help you.


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