Berlin, Germany

Germany: Individual Taxation

Concept of Residence

In Germany residents pay income tax on their world-wide income (subject to any treaty exemption) whereas those deemed not to be resident are only liable to pay taxes on their German source income. Residence in Germany will normally exist if an individual has been in the country for more than 6 months (which may fell in two calendar years unless the purpose of the stay relates to an extended 'holiday' or convalescence, in which case the period will be extended to 12 months). Apart from straightforward physical residence, taxation can also be extended to one's world-wide income if it can be shown that one has a habitual place of abode' in Germany. This second test is to prevent foreign consultants, and other such people from performing ongoing work in Germany but nevertheless circumventing the normal definition and responsibilities of residence. The exact factors that would be considered in respect to residence and one's habitual place of abode would include:

  1. Physical Residence - In ascribing residence the German authorities would consider the objectivefacts relating to an individual such as the type of accommodation being enjoyed and the location of any family members. Therefore, if an individual had rented a flat for an eight-month period and had brought furniture from abroad it is quite possible that residence would be ascribed even if there were a genuine intention only to stay in Germany for 4 months (see S.8 abgabenordnung);
  2. Inferred Residence - An individual will be deemed to have a habitual place of abode (as indicated above) if for example, he habitually goes to Germany to carry out his work. The feet that the time physically spent in Germany could be well below 6 months is not the issue rather the ongoing nature of the transactions. Of course, it is possible to have treaty exemptions but this will depend on the nationality/residence of the person in question. It, of course, being possible to be legally resident in more than one country at a time (see S.9 abgabenordnung)

Taxable Income

Tax is charged on the annual disposable income from all sources (e.g. salary income, rental income). The tax year is the same as the calendar year. Employers pay salary after the deduction of social costs and income tax. All deductions are liable to be audited.

Calculation of Income Tax

Progressive rates of tax ranging from 0% to 45% are applied to the total taxable income, the rate being dependent on which band of income the total taxable income falls in a given fiscal year.

Taxable Income Bands – German National Income Tax Rates 2013

Income Levels (€) Percentage %
0 – 8,130.00 0%
8,131.00 – 52,881.00 14% to 42%
52,882.00 – 250,730.00 42%
250,731.00 + 45%

Self-Employed Tax Payers - Special Rules

Self-employed individuals are subject to the same tax rates as for general employees. However, it should be noted that partnerships, despite being fiscally transparent, are liable to Trade Tax DIVIDENDS: Dividends are received net of a deduction for tax. The applicable taxes from domestic sources will be corporate tax at 30% plus the standard withholding tax of 25%.

Both these sums will then be available as a tax credit against an individual's personal tax responsibilities. If the corporate and withholding taxes are greater than the aforementioned a refund will be granted. In respect to foreign dividend distributions the same system operates save that certain prescribed jurisdictions, normally those with significantly lower income tax levels than Germany, will not be afforded a credit against foreign tax payments

Church Tax

Members of recognized churches are subject to a 'Church Tax payable to the local State at rates varying between 8% and 9%. As stated these are tax deductible

Social Charges

German social security charges are compulsory deductions against gross salary for all employees/employers. The only exceptions are for sickness insurance for those earning high salaries. However, generally the owners of small companies and the self-employed are exempt. The benefits include the provision of unemployment benefit and; 'old age1

Capital Gains Tax

In most cases a short-term capital gain will be added to the income of an individual and taxed in the normal manner. Long-term gains are generally tax-free. For land and fixed structure buildings, ownership must be established for at least two years prior to realizing the gain whilst for other assets, including stocks and shares, the period is only six months.

Inheritance & Gift Taxes

In Germany, the standard civil law forced heirship principles apply, with tax levels increasing the more remote the relationship. However, it may be possible for non-residents with German assets to circumvent the above by having a foreign company own the said assets with any future sale being realised by a disposition of that company's shares. Shares in a foreign company generally being treated as 'movable' property under international law. Therefore, if the company emanates from a common law jurisdiction, where forced heirship is rare, an individual should be free to dispose of his assets as he or she pleases. For those physically resident in Germany there may be tax treaty concessions on foreign dispositions.

It should be noted that there could be different tax consequences in respect of an inherited sum, which is received after the grantors death, and a gift, which is received during his or her life. pensions and; health insurance and; invalidity insurance.

For more information on the German Tax System please contact one of our tax planning consultants.