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Tax in Germany

Taxation in Germany is the most complicated system in the world. Three quarters of world's taxation-literature refers to the German system. There are 118 laws, 185 forms and 96000 regulations (only one comment to taxation covers 2671 pages). The administration needs 3.7 billion Euro only for taking the income-tax.

Since tax laws change often, it is best to check the facts with a tax advisor or potential employer and not just rely on this page. Tax experts and enthusiasts, please update this page as needed.

Contents

1 Individual Taxation

1.1 Categories of the Individual
1.2 Wage Tax, Solidarity Tax, and Church Tax
1.3 Social Insurances
1.4 Individual Taxation Example
1.5 Freiberufler Taxation Example

2 Business Taxation

3 See also

Individual Taxation

Germany's individual tax rates are high, but not excessive, and there are quite a few reductions available. Salaries usually adjust for the tax rate. The tax rates are being progressively reduced also, so the highest marginal rate should be 42% in 2005. Germany differentiates taxation and social insurance, and the compulsory employee social insurance is quite expensive. Both are applied to your taxable income (after any deductions). We shall look at the different taxes and insurances in turn, and exactly how they are applied.

Categories of the Individual

In Germany, you can either be a resident for tax purposes, or a non-resident for tax purposes. If you have been present in Germany for over 183 days in the last year, you are generally considered to be a resident for tax purposes. The 183 day rule is not the only consideration for tax residence - see your embassy's website or talk to a tax consultant or accountant.

If you are a non-resident for tax purposes (eg. a short term contractor here), you will generally still be liable to pay tax on German sourced income. This rate may vary. Tax relief opportunities and double taxation agreements may alter this.

There are 6 tax classes that you may fall into, each one with varying rates.

Those single or separated, but not falling into either categories 2 or 3.
Single and separated, with a child, entitling them to a child's allowance.
Married, or widowed employees who are within the first year of a spouse's death.
Married employees both of whom receive income.
Married persons who would normally fall into category 4, but whose spouse is in tax class 3.
Employees who receive income from other employment on other, or several different tax cards.

On top of this, you may either be a salaried employee (as most people are) or a Freiberufler (free professional = contractor). For salaried employees, tax and social insurance are withheld by the employer. Contactors must pay the tax department their tax obligations regularly throughout the year.

Wage Tax, Solidarity Tax, and Church Tax

Wages are taxed in 3 separate linear progressive ranges. In 2004, the ranges are as follows for a tax class 1 resident individual:

Tax Free Allowance of €7,664.00
Linear progressive zone from 16% to 24% on taxable income from €7,665.00 up to €12,739.00
Linear progressive zone from 24% to 45% on taxable income from €12,740.00 up to €52,151.00
45% of all taxable income after €52,152.00

Solidarity tax is for the "re-unification of Germany" and is calculated at 5.5% of your wage tax.

Church tax is only relevent if you listed a religion on your tax form. It will be either 8 or 9% of your wage tax. Beware - It's difficult to stop paying church tax once you've begun.

Social Insurances

An individual in employment is liable for the following social insurances: Health insurance, pensions insurance, unemployment insurance, and health/nursing care insurance.

Health insurance is 6% - 7% of taxable income (before tax, minus deductions). Pensions insurance is 9.55% of taxable income. Unemployment insurance is 3.25% of taxable income, and Health/nursing care insurance is 0.85% of taxable income. In total, this is around 21% of your taxable income. These payments are not subject to tax relief or deductions. Your employer must also match your social insurance payments, and this is a tax-deductable business expense for them.

German pensions are currently not taxed when you receive them at retirement age. If you earn over a certain amount (~€62,000) you are able to take up private health insurance, which can be considerably cheaper.

If you are a Freiberufler, you are not obliged to take up any social insurance - but you are not eligible for its benefits, either. Everyone in Germany, however, is required by law to have health insurance.

Everyone is entitled to a ~€2,100.00 reduction in taxable income for social insurances. This reduction isn't taken into account when calculating social insurance, only tax.

Individual Taxation Example

You are offered an employee position at €35,000.00 per year.
You take deductions of €3000.00 for various deductable expenses (including insurance reduction of ~€2,100.00, your contribution being over)
You pay €7,041.65 in social insurances (34100 * 0.2065)
You are liable for €6,634.00 wage tax (based on €32,000.00)
You are liable for €364.87 solidarity tax (5.5% of €6,634.00)
You aren't liable for church tax.
You have a nett yearly income of €20959.00 (€1746.58/month, €401.68/week)
The company pays €7,041.65 in social insurances, matching your contribution.

With appropriate forms, you may be able to contribute to social security insurance or pension funds in your home country, up to a maximum period of 5 years.

These figures are yet to be confirmed by a professional.

Freiberufler Taxation Example

This will be calculated based on year-end calculations. Actual calculations will vary considerably, as you'll probably pay more tax while working and get a refund from the tax department later.

You take a 9 month contract at €350 per day (Let's say 190 working days), and then take a 3 month holiday.
€350 * 190 = €66500.00
You claim €5300 tax-free (second apartment, car/travel, other business expenses)
You pay €1200.00 for almost-comprehensive Germany-only yearly private health insurance, and claim it back tax free (under the ~€2100 insurance allowance)
You pay €18,155.00 in wage tax.
You pay €999 in solidarity tax.
You are left with €39646.00 + €5300 in the year.

It might be wise to take up some other insurance, also, such as permanent disability, life insurance, or pension insurance. You are allowed around €2100 in insurance deductions per year, so it's not a great loss to make the most of it. With the appropriate forms, you can contribute to social security funds in your home country.

These figures are yet to be confirmed by a professional.

Business Taxation

To be completed.

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