Taxes for Expats in Germany

    Your complete guide to expat tax in Germany:

    Tax rates

    2017/2018 income tax rates

    Taxable Income Band EUR National Income Tax Rates
    0 - 8,820 0%
    0 - 17,640 0%*
    8,821 - 54,057 14 - 42% **
    17,641 - 108,114 14 - 42%*  **
    54,058 - 256,303 42%
    108,115 - 512,606 42%*
    256,304+ 45%
    512,607+ 45%*


    * Married couple filing a joint return

    ** Geometrically progressive rates start at 14% and rise to 42%.

    In addition to the income tax rates indicated above, the following taxes and surcharges are additionally levied on all types of income:

    • Solidarity surcharge: 5.5 percent of the income tax (this is to improve the economic situation and infrastructure in the five 'new' eastern states of Germany),

    • Church tax: 8.0 or 9.0 percent of the income tax – church tax is only levied if the taxpayer is a member of a church that is recognized for church tax purposes.  Rate depends on the federal state where the individual resides.

    There are no local or state income taxes levied in Germany.

    Returns for the preceding calendar year must be filed with the local tax office by 31 May. An extension until 31 December will be granted without application where a professional tax adviser prepares the return. A further extension may be available by special request. However, the tax authorities may request, on an individual basis, that the return be filed before these dates.

    If the tax return is not filed on time, the tax authorities may assess penalties. The penalties are at the discretion of the tax authorities but must not exceed 10 percent of the tax.

    Worldwide investment income is subject to German income tax at 25 percent plus solidarity surcharge plus church tax (where applicable). The tax is generally withheld at the source. The tax withheld is final unless one of the following applies.

    • The taxpayer's income tax rate is lower than 25 percent.
    • Not all investment income was subject to withholding (such as foreign investment income).
    • Church tax was not considered in the withholding although applicable.

    A standard annual deduction of EUR801/EUR1,602 (single/married) is offset against the taxable part of worldwide investment income. Investment income includes interest, dividends, and gains from the sale of shares purchased after 31 December 2008.

    Special rules are in place for mutual funds which do not fulfil the registration / publication requirements in Germany.

    Who pays

    Who pays tax in Germany?

    Individuals are subject to tax on their worldwide income if they meet either of the following conditions:

    • They have a domicile in Germany for their personal use.
    • They have a "customary place of abode" in Germany. This means that they are present in Germany for an uninterrupted period of 6 months that may fall in 2 calendar years.

    The citizenship of a taxpayer usually is not a consideration in determining residency. However, under the provisions of certain tax treaties entered into by Germany, citizenship may be one of the factors to consider if an expat taxpayer qualifies as a resident under the domestic laws of both Germany and the other treaty country.

    Individuals not resident in Germany are generally subject to tax on income derived from German sources only.

    Non-residents may elect to be treated as residents if either their income subject to German taxation amounts to 90% or more of their worldwide income or their income not subject to German taxation does not exceed the amount of EUR8,354 per calendar year. This provision allows non-residents to file German income tax returns like residents and to claim all deductions and allowances normally granted to residents only.

    The following categories of income are exempt from tax:

    • Certain payments from health or accident insurance.
    • certain social security benefits including unemployment benefits and maternity grants.
    • kindergarten fees if certain conditions are met.

    In case a secondary household is established in Germany for business purposes, the following payments are exempt under certain circumstances:

    • home trips
    • meal allowances up to certain amounts and subject to certain time limits
    • rent at the place of work (actual cost limited to EUR 1,000 per month).

    If certain other conditions are met, rental cost incurred for the employee, meal allowances and commuting expenses can be reimbursed tax-free, in general.

    How it works

    How is income taxed in Germany?

    German income tax law distinguishes among several categories of income, including income from employment, self-employment, investment, business and real estate. Income from each of the categories may be combined, and taxable income is then determined by subtracting special deductions. However, income from investment is generally taxed at source with a flat tax rate.

    Expatriate tax advice on employment income - Employed persons are subject to income tax on remuneration received from employment. Employment income includes the following:

    • Salaries, wages, bonuses, profit participations, and other remuneration and benefits granted for services rendered in a public office or in private employment
    • Pensions and other benefits received by a former employee, his or her surviving spouse, or descendants in consideration of services performed in the past

    Allowances paid to foreign employees working in Germany, including foreign-service allowances, cost-of-living allowances and housing allowances, are considered to be employment income and generally do not receive preferential tax treatment.

    Directors' fees - Remuneration received as a supervisory board member of a corporation is treated as income from self-employment. A member of a supervisory board is regarded as an entrepreneur and is generally subject to value-added tax at a rate of 19% on fees received.

    Investment income - The flat withholding tax on investment income is the final tax. In general, investment income taxed at source does not have to be declared in the German income tax return. However, if the investment income was not subject to the flat tax withholding at source (in particular, capital investment income from foreign sources), the total annual investment income must be declared in the tax return. Taxpayers with an average personal income tax rate below 25% can apply the lower tax rate to the investment income that is declared in the German income tax return.

    A net investment loss can be carried forward to be credited against future positive investment income. A special loss consideration rule applies to capital gains derived from the sale of shares.

    Income from rentals and leases of real property located in Germany is taxed by assessment.

    DTAs

    Taxes for expats in Germany: Double tax relief and tax treaties

    German income tax law provides that foreign taxes of expats, up to the amount of German income tax payable on foreign-source income taxable in Germany, may be credited against German income tax (foreign tax credit). This unilateral relief applies primarily to income from those countries with which Germany has not entered into a tax treaty.

    Tax treaty provisions override German income tax law, usually by excluding certain foreign-source income from German taxation. Germany has entered into double tax treaties with 92 countries, and is negotiating treaties with a further 10 countries.

    Social security

    Social security for expats in Germany

    The German social security system is not part of the German tax system.

    Legally tax and social security regulations are separated from each other. Social security issues are not handled by German tax authorities but by various public or semi-official organisations.

    Social security payments are collected by authorised health insurance organisations while taxes are collected by local tax offices.

    German social security contributions are high. Employer and employee have to pay contributions as a percentage of the gross wage:

     

    Employer’s contribution

    Employee’s contribution

    Health insurance

    7.3 %

    7.3 – 8.5 %

    Nursing care insurance

    1.275 %

    1.275 – 1.525 %

    Pension insurance

    9.35 %

    9.35 %

    Unemployment insurance

    1.5 %

    1.5 %

    Accident insurance

    approx. 1.25 %

     

    The total burden seems high since employer and employee both have to pay about 20% of the gross wage.

    However, contributions have to be paid based only on certain maximum amounts.  For 2017 these are:

     

    Maximum income base

    Per year

    Maximum income base

    Per month

    Health and nursing   care insurance

    € 52,200

    € 4,350

    Other parts of social security (West = old Federal States)

    € 76,200

    € 6,350

    Other parts of social security (East = New Federal States)

    € 68,400

    € 5,700

     

    This results in decreasing relative levy burdens on higher incomes. The higher the income is, the lower the relative levy burden is. Income over the above mentioned maximum amounts will not be subject to social security contributions. 

    IHT

    Do I have to pay inheritance and gift tax?

    A tax is imposed on transfers of property at death or by gift. Decedents and donors are considered transferors, and beneficiaries and donees are considered transferees.

    Expat tax rules state that transfers of worldwide net property are taxable if either the transferor or the transferee is resident in Germany at the time of the decedent's death or at the date of the gift. If neither the transferor nor the transferee is resident in Germany, the tax applies only to transfers of property located in Germany.

    To prevent double taxation, Germany has entered into estate tax treaties with Denmark, France, Greece, Sweden, Switzerland and the United States.

    Under German tax law each heir and each beneficiary is taxed individually (German inheritance tax). There is no estate tax in Germany. Inheritance tax rates in Germany vary depending on the degree of kinship and the amount or value received. Each heir or beneficiary is responsible for filing an individual inheritance tax return in Germany. 

    Finally on this point, do not assume that just because you've expatriated to live in Germany that your estate will not be liable to inheritance tax (IHT) in your old home nation, or any nation where you hold assets.  For example, those domiciled in Britain remain liable for IHT on their worldwide estate.

    If you are concerned about mitigating your IHT liability, we'd like to offer you a free initial consultation to determine whether we can help you.

    CGT

    Do I have to pay capital gains tax?

    Corporate entities are taxed on the disposal of real estate situated in Germany at a corporate tax rate of 15.825%. 

    Individuals (unless they are holding the real estate as a business asset), are taxed on the disposal of real estate situated in Germany in cases where the period between the date of acquisition and the date of disposal does not exceed 10 years. 

    The individual will be taxed at the individual income tax rate.

    In addition, German real estate transfer tax at a tax rate between 3.5% and 6.5% of the sales price of the real estate is levied.  The exact rate depends on the federal state where the real estate is located.

    There is no separate tax on capital gains in Germany, capital gains are subject to income tax as regular income however:

    • there is no capital gains tax on a property used as a private home
    • there is no capital gains tax on a  property held for more than 10 years

    Sales of securities - Gains on the sale of shares are not subject to tax if all of the following conditions are satisfied:

    • The shares were acquired before 1 January 2009
    • The vendor had a participation of less than 1% in the company.

    Losses incurred on the sale of shares acquired before 2009 could be deducted from taxable gains from the sale of shares and certain other assets, particularly real estate, until the end of 2013. If losses incurred on the disposal of shares before 2009 were not balanced by 31 December 2013, they cannot be offset against gains from the sale of shares, and they may only be offset against gains from the sale of certain other assets (for example, real estate) as of 2014.

    Gains derived from the sale of shares acquired after 31 December 2008 are subject to a 25% withholding tax regardless of the holding period. The gain is fully taxable.

    Sales of certain other assets - Gains derived from the disposal of certain other assets are not subject to tax in Germany if the individual holds them for more than one year. However, if the individual realises income on these assets in at least 1 calendar year, the tax-relevant period is extended to 10 years.

    Finally...

    We believe the above information is accurate, however tax rates and rules can change, and we are NOT tax experts.  Therefore, please do not rely exclusively on the information to determine your liability for tax.

    Speak to a local tax expert for personalised advice, or consult an international taxation consultancy.

    If you'd like our help to source someone to assist you, please get in touch and we will do all we can to help.

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