Germany Tax

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Germany Tax Laws and Regulations

Global expansion is a great way to grow your business and Germany offers many appealing opportunities. However, the tax laws can be complex and require time-consuming research. By using our PEO-service we will take care of the complicated legwork so that you can focus on your business goals in Germany.

Dealing with tax, payroll, and employment regulations for your staff from overseas is a tricky process. Germany is no exception, with fines, sanctions and other penalties applying for not complying with the complex and many-layered aspects of taxation.

We have made it our goal to keep track of the latest changes in the tax policies to always ensure complete compliance. To keep you informed and updated too, we created this guide which includes the basic facts regarding tax regulations in Germany.

Overview of Germany Taxes

  • Individual Income Tax - Progressive
  • VAT - 19%
  • Corporate Income Tax - 15% + 5.5% solidarity surcharge tax + trade tax (varies)
  • Employer & Employee Social Security Contributions - 20.3% (Employer), 19.93% (Employee)
  • Capital Gains and/or Withholding Taxes - Dividends (25%), Interest (25%), Royalties (0%)

Individual Tax Germany - Single, Married

In Germany, the individual’s ability to pay income tax depends both on their residency status, as well as the source of their income. All German residents are taxed on their worldwide income, regardless of their nationality. Non-residents, however, are only taxed on German-sourced income.

Income Tax in Germany is progressive, based on the amount of income that the individual receives, which applies for both residents and non-residents. For income in 2021, those rates are:

  • EUR 0 - 9,744: 0%
  • EUR 9,744 – 57,918: 14%
  • EUR 57,918 – 274,612: 42%
  • EUR 274,612 & above: 45%

There is no self-assessment, but an income tax return must be filed by the 31st of July of the following year. The tax office will issue a final assessment notice after the review of the income tax return. Married couples in Germany are must file joint tax returns.

Employees in the wage tax withholding system, however, are not required to file an annual income tax return unless they have income from more than one source amounting to more than €410.

Employees are also subject to the compulsory social security system contributions. The employer withholds the employee’s share from wage and salary payments, which contribute to pension, unemployment, health insurance, and care benefits.

Non-resident taxpayers are only obliged to file tax returns if their German income is not subject to tax withholding.

Individuals are also obliged to pay a 5.5% solidarity surcharge tax, which the German government had recently imposed in order to improve the economy and infrastructure for certain regions in need. However, in January 2021, the application of this tax was reduced and does not apply to the following:

  • Individuals filing separately that have an income tax burden of no more than EUR 16, 956/have a taxable income of approximately EUR 62,000.
  • Married couples filing jointly with an income tax burden of no more than EUR 33,912/have an income of approximately EUR 124,000.

Where the thresholds are exceeded, a sliding scale is used on this surcharge tax. The top 5.5% is only applied for individuals with a taxable income of EUR 96,850 and married couples with a joint income of EUR 193,700. The full rate, however, is applied on capital investment income and employment income that are both subject to lump sum tax rates.

German Individual Tax Rules

In Germany, the tax year is the calendar year. An individual’s liability to pay German individual income tax is determined by their residence status:

  • A tax resident – refers to an individual who has domiciled in Germany OR has spent more than six months, consecutively, in Germany. The taxpayer must also have full control of the property. They are assessable on their worldwide income.
  • A tax non-resident – refers to someone who has spent less than six consecutive months in Germany. They are assessable on their German-sourced income.

To file taxes, an individual must have a Steuer ID (Tax ID). This is your personal identification number and is used by the tax office to identify you.

For tax payments, the employer must withhold the appropriate amount from their employee’s gross wage payments each month and submit them to the appropriate tax office by the 10th of the following month.

VAT, Excise Duty, etc.

All individuals are obliged to pay VAT when purchasing goods and services in Germany.

The VAT rate in Germany is 19%, which applies to most goods and services. There is also a reduced rate of 7% which applies to foodstuffs, water supplies, certain medical equipment, certain transportation types, newspapers, books, medical care, hotel accommodation, etc.

Employers Social Security and statutory contributions

In Germany, both income tax and social security contributions are settled through the employee’s salary. Social security contributions are withheld from the employee’s salary monthly, which are then remitted to the tax office. Employers are also obliged to make their own contributions.

Both employer and employee social security contributions are as follows:

Employer’s Social Security Contributions 

- Health Insurance:  7.3%
- Additional Individual TK (health insurance) contribution rate:  0.6%
- Pension Insurance (RV): 9.3%
- Unemployment Insurance (AV): 1.2%
- Long-term Care Insurance (PV): 1.525%
- Additional Long-Term Care Insurance (for childless individuals): 0.25%
- Insolvency Charge: 0.12%
- Accident Insurance: Depends on industrial sector and the accident risk of the job

Employee’s Social Security Contributions 

- Health Insurance (KV) – General Contribution Rate: 7.3%
- Additional Individual TK (health insurance) contribution rate: 0.6%
- Pension Insurance (RV): 9.3%
- Unemployment Insurance (AV): 1.2%
- Care Insurance: 1.525%

The rate of the individual’s statutory contributions very much depend on the individual’s tax class. There are 6 tax classes in Germany, and each class has an effect on the individual’s tax rates. These include:

  1. Those single or separated, and do not fall into classes 2 or 3
  2. Single and separated, with a child, entitling them to a child’s allowance
  3. Married employees or widowed employees who are within the first year of their spouse’s death
  4. Married employees who both receive income
  5. Married persons who normally fall into category 4, but whose spouse is in class 3
  6. Employees who receive income from other employment that is on one or more different tax cards/numbers.

Germany Corporation Tax

Corporations in Germany are also taxed according to their residency. Resident companies in Germany are taxed on their worldwide income, whilst non-resident companies are taxed on their German-source income. However, most double tax treaties exempt income that is attributable to a foreign permanent establishment.

Corporation business profits are subject to two types of taxes:

  1. Corporation tax (Körperschaftsteuer) – Companies in Germany are liable to a uniform tax rate of 15% on corporation profits, as well as a solidarity surcharge tax of 5.5%.
  2. Trade tax (Gewerbesteuer) – Companies are also liable to pay a trade tax rate is a combination of a uniform tax rate of 3.5%, as well as a municipal tax rate, depending on where the permanent establishment of the business is located.

The tax period for corporations in Germany is the same as for income tax – the calendar year.

Companies are obliged to file tax returns for each calendar year and must reflect the financial statements for the business year that ended during the calendar year. Returns are due by the 31st of July of the following year. However, for tax returns prepared by a professional tax adviser, the deadline is the last day of February of the subsequent year.

Annual returns for corporation tax, trade tax and VAT must be submitted electronically, including the supporting financial statements. Monthly or quarterly returns for withholding tax from employee salaries, dividends, interest, royalties, other payments, and VAT must also be submitted this way.

Assessments are issued once the tax office has reviewed the tax returns.

Corporate taxes are payable in quarterly installments, which are due on the 10th day of March, June, September, and December. Trade tax payments are the 15th day of February, May, August, and November.

Capital Gains & Withholding Tax

In Germany, corporations and individuals are required to pay withholding taxes on the following:

  • Dividends: 25%
  • Interest: 25% (conditions apply)
  • Royalties: 15%

However, double taxation treaties apply, and conditions of the corporation’s or individual’s residency also apply.

Tax Deductions/Credits

In Germany, the following expenses are eligible for tax deductions and exemptions:

  • Depreciation and amortization
  • Start-up expenses
  • Bad debts
  • Charitable contributions
  • Fines and penalties
  • Taxes
  • Net operating losses
  • Payments to foreign affiliates

Stamp Duty

Stamp Duty tax in Germany is known as ‘Municipal Real Estate Tax’, which applies to purchases on immovable property, residential or commercial, ranging between 1.5-2.3%.

Avoid risks – and make the right move with Bradford Jacobs

Germany’s intensely complex tax regulations require expert advice and guidance for incoming foreign companies. Businesses cannot risk stumbling into mistakes over payroll and taxation. Interested in learning more about how we can help you with your payroll and tax issues? Contact us today