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Taxes in Germany—being a Federal Republic—are levied by the Federation (Bund), the States (Laender) as well as the Municipalities (Gemeinden). Many direct and indirect taxes exist, whereof income tax and VAT are the most relevant. The German word for tax is Steuer which origins from the Old High German word stiura meaning help. Moreover, Steuer means steering. [edit] Taxation principlesThe German Constitution (Grundgesetz) lays down the principles governing taxation in Germany:
The right to decide on taxes is subdivided:
So even if Germany is a federal state 95% of all taxes are imposed on a federal level. The income of these taxes is to be allocated to the Federation and the States as following (Art. 106 Grundgesetz):
Most of the revenue is earned by income tax and VAT. These taxes are used by the Federation an the States by quota. The Municipalities get a part of the income of the States. In addition there is a compensation between rich and poor States (Laenderfinanzausgleich, Art. 107 para. 2 Grundgesetz). [edit] Structural organisation of fiscal administrationGermany’s fiscal administration is divided into federal tax authorities and state tax authorities. The local tax offices (Finanzaemter) belong to the latter. They administer the “shared taxes” for the Federation and the States and process the tax returns. The number of tax offices in Germany totals around 650. As a result of discussions in 2006 and 2009 between Federation and States (Foederalismusreform) the Federation will further on also administer some taxes. The competent authority is the Federal Central Tax Office (FCTO) which is also competent authority for certain applications of tax refund from abroad. Since 2009 FCTO also allocates an identificationnumber for tax purposes to every taxable person. [edit] JurisdictionRegularly there is minimum one fiscal court in every State (only together Berlin and Brandenburg). Appeal instance is the Federal Fiscal Court in Munich. [edit] Fiscal CodeThe common rules applying to all taxes are contained in the fiscal code (Abgabenordnung - AO) as so-called general tax law. The fiscal code contains rules concerning the taxation procedure. The individual tax laws regulate in which case the tax is incurred. [edit] Tax revenue In 2007, German tax revenue totalled EUR 538.2 billion (see Monthly Report 7/2008 of the Federal Ministry of Finance, page 69[1]). Tax revenue is distributed to Germany’s three levels of government the Federation, the States and the Municipalities. The Federation, the States and the Municipalities are all jointly entitled to the most important types of tax (value-added tax and income tax), which for this reason are also known as “shared taxes”. Tax revenue is distributed proportionately using a formula prescribed in the Constitution. [edit] Income tax for residentsIndividuals who are resident in Germany or have their normal place of abode there have full income tax liability. All the income earned by these persons both at home and abroad is subject to German tax (principle of world income). [edit] Types of incomeFor the purposes of charging income tax in Germany, earnings are divided into seven different types of income. A distinction is made between:
If a taxpayer’s income does not fall into any of these categories, then it is not subject to income tax. This includes e.g. winnings at a game show. [edit] Withholding taxesTax on income from employed work and tax on capital income are both retained by being deducted at source (PAYE tax or wages tax, withholding tax), i.e. an amount of tax is retained directly by the employer or by the bank when the earnings are paid out. [edit] DeductionsGerman income tax law makes provision for a considerable number of taxpayer’s costs to be deducted from tax. This applies in particular to costs immediately related to earnings. Apart from this, other amounts are also deductible, such as e.g. certain insurance payments, costs incurred by sickness, costs for home help, maintenance payments, and more besides. In addition to the possibility of deducting costs from tax, there are also numerous allowances and lump-sum amounts which reduce taxable income. For instance, there is an allowance for capital earnings that is currently EUR 801 for unmarried persons and EUR 1,601 for married couples; and a lump sum of EUR 920 is deducted from income from employed work. [edit] Tax returnThe obligation to file an income tax return does not apply in all cases. Anyone exclusively earning income that is subject to withholding tax deducted at source does not have to file an income tax return: their tax debt is deemed settled on payment of the withholding tax. Despite this, any person having full tax liability may file a tax return voluntarily, taking into account the PAYE tax or capital yield tax already paid in advance. In certain circumstances, this may result in a tax refund. Married couples can apply for joint assessment and are taxed at a more favourable rate than unmarried persons. [edit] Tax rate The rate of income tax in Germany increases progressively, ranging from 0% to 45% (marginal tax rate). The so-called solidarity surcharge (Solidaritaetszuschlag) at a rate of 5.5% of income tax has to be paid on top of this (e.g. 25.00 % tax rate * 5.5 % solidarity surcharge = 26.375 % taxes in total). No income tax is charged on the basic allowance, which is EUR 7,834 (2009) for unmarried persons and EUR 15,668 (2009) for jointly assessed married couples. [edit] Tax allowance for childrenExpenditure on child support and on children’s vocational training is taken into account with a special tax allowance, with allowances for costs expended on child supervision, education and training, and with child benefit payments. [edit] Income tax for non-residentsIndividuals who are neither resident in Germany nor have their normal place of abode there are only liable to pay tax in Germany if they earn income there which has a close domestic (German) context. This includes in particular income from real estate in Germany or from a permanent establishment in Germany. [edit] Double taxation conventionsGermany has reached Tax treaty with about 90 countries to avoid double taxation. These agreements under public international law aim to avoid one and the same taxpayer being charged similar taxes more than once on the same income for the same period. The basic structure of the Double Taxation Conventions which Germany has signed follows the Model Tax Convention drawn up by the OECD. [edit] Business taxes As from 2008-01-01, Germany’s rate of corporation tax is 15%. Counting both the solidarity surcharge (5.5% of corporation tax) and trade tax (averaging 14% as from 2008-01-01), tax on corporations in Germany is less than 30%. [edit] Corporation taxCorporation tax is charged first and foremost on corporate enterprises, in particular public and private limited companies, as well as other corporations such as e.g. cooperatives, associations and foundations. Sole proprietorships and partnerships are not subject to corporation tax: profits earned by these set-ups are attributed to their individual partners and then taxed in the context of their personal income tax bills. Corporations domiciled or managed in Germany are deemed to have full corporation tax liability. This means that their domestic and foreign earnings are all taxable in Germany. [edit] ExemptionsSome corporate enterprises are exempted from corporation tax, e.g. charitable foundations, Church institutions, and sports clubs. [edit] Flat rate taxThe corporation tax charged at corporate level is 15% (flat rate tax). Solidarity surcharge as above income tax / tax rate. [edit] Assessment baseThe assessment base for the corporation tax charged is the revenue which the corporate enterprise has earned during the calendar year. Taxable profits are determined using the result posted in the annual accounts (balance sheet and Income statement) drawn up under the Commercial Code. What is deemed income under tax law sometimes diverges from the way earnings are determined under commercial law, in which case tax law provisions prevail. [edit] DividendsWhen dividends are paid to an individual person, capital yield tax at a rate of 25 % is charged. Since 2009-01-01 this tax is final for individuals who are resident in Germany. Solidarity surcharge as above income tax / tax rate. When dividends are paid to an enterprise with full corporation tax liability, the recipient business is largely exempted from paying tax on these revenues. In its tax assessment, merely 5% of the dividends are added to profits as non-deductible operating expenses. The same applies if a taxable corporate enterprise sells shares in another company. Deducting tax from dividends paid by a subsidiary with full tax liability to a foreign parent domiciled in the EU is waived on certain conditions: the parent company has to have a direct holding in the subsidiary of at least 15%. [edit] Integrated fiscal units (group taxation)Under German tax law, separate companies may be treated as integrated fiscal units for tax purposes (Organschaft). In an integrated fiscal unit, a legally independent company (the controlled company) agrees under a profit and loss pooling agreement to become dependent on another business (the controlling company) in financial, economic and organisational terms. The controlled company undertakes to pay over its entire profits to the controlling company. Another requirement is that the controlling company has to hold the majority of voting rights in the controlled company. In tax terms, recognition of a fiscal unit means that the income of the controlled company is allocated to the controlling company. This provides an opportunity to balance profits and losses within the integrated fiscal unit. [edit] Trade taxEntrepreneurs engaging in business operations are subject to trade tax as well as corporation tax. In contrast to corporation tax, trade tax is charged by the local authorities, who are entitled to the entire amount. The percent rate for levying trade tax is fixed by each local authority separately within the range of rates prescribed by the central government. As from 2008-01-01, the rate averages 14% of profits subject to trade tax. [edit] Assessment procedureThe business entity has to file the trade tax return with the tax office, like its other tax returns. Taking any allowances into account, the tax office calculates the trade earnings and then gives the applicable figure for a trade tax assessment to the local authority collecting the tax. The underlying profit base, as well as the book-tax differences for the local trade tax jurisdictions, may differ from that used for the corporation tax. On the basis of the collecting rate (Hebesatz) in force in its area, the local authority calculates the trade tax payable. [edit] Unincorporated enterprisesOne-man businesses and members of a partnership may deduct a large portion of trade tax from their personal income tax bill. [edit] Incorporated enterprisesAs from 2008-01-01, corporate entities may no longer deduct trade tax from their taxable profits. [edit] Value-added taxAs a matter of principle, all goods and services performed in Germany by a business entity are subject to value-added tax. This German VAT is part of the European Union Value Added Tax system. [edit] ExemptionsCertain goods and services are exempted from value-added tax by law; this applies for German and foreign businesses alike. For example, the following are exempted from German value-added tax:
[edit] Tax rateThe rate of value-added tax rate generally in force in Germany is 19%. A reduced tax rate of 7% applies e.g. on sales of certain foods, books and magazines, flowers and transports. [edit] Payment of the taxWithin 10 days of the end of each calendar quarter, the business entity has to send the tax office an advance return in which it has to give its own computation of the tax for the preceding calendar quarter. The amount payable is the value-added tax it has invoiced, minus any amounts of deductible input tax. Deductible input tax is the value-added tax which the entrepreneur has been charged by other business entities. The amount thus calculated has to be paid to the tax office by way of an advance. Larger businesses have to file the advance return every month. For entrepreneurs who have only just taken up professional or commercial operations, the monthly reporting period likewise applies during the first calendar year and in the year after that. At the end of the calendar year, the entrepreneur has to file an annual tax return in which it has again calculated the tax. [edit] Small undertakingsEntrepreneurs whose turnover (plus the value-added tax on it) has not exceeded EUR 17,500 in the preceding calendar year and is not expected to exceed EUR 50,000 in the current year (small enterprises), do not need to pay value-added tax. However, these small enterprises are not allowed to deduct the input tax they have been billed. [edit] Real property taxThe Municipalities levy a real property tax. Taxable is the real property. The tax rates varie because they depend on the decision of the local parliament. The tax is payable every quarter. [edit] Real property transfer tax ("Grunderwerbsteuer")Taxable is the transfer of real property. The vendee and the vendor are common debtors of the tax. In general the vendee has to pay the tax. The tax rate is defined by the single States. In general the tax rate is 3.5 %. Berlin and Hamburg use a tax rate of 4.5 %. [edit] Inheritance and gift taxInheritance tax and gift tax are regulated in one law. Taxable is either a transfer by reason of death or a gift amongst livings. There are depreciations e.g. for family houses, families as well and for entrepreneurs (up to 100 %). The tax rate is from 7 % up to 50 %. [edit] Capital gains taxIn Germany there is no special capital gains tax. Only under certain conditions gains from private disposal may be taxed. Since 2009-01-01 Germany levies a final tax (Abgeltungsteuer) that may take effect like a capital gains tax for resident persons e.g. disposal of shares. [edit] Net worth taxThere is no net worth tax. [edit] Payroll taxThere is no payroll tax. [edit] Financial crisisThe federal government is taking various steps to ensure that the economy survives the economic downturn and that jobs are preserved (e.g.a short-time work program). The federal government distributes additional funds to the States. The States should make the funds available to the Municipalities. Taxes related are to mention the enhancement of existing depreciations e.g. for certain private housekeeping expenses and for small and medium sized enterprises. A declining depreciation for movable assets has been reintroduced for two years. [edit] References
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[edit] External links
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