The most relevant topics about taxes to consider when moving to Germany
TAXES IN GERMANY
Once you've registered in Germany, you will be given a unique tax ID and are automatically obliged to pay German taxes on your income and assets, i.e., you become a German taxpayer. The employer automatically withholds some income taxes under German law. However, he cannot know all sources of income, and you have to file an annual tax declaration in order to notify the Finance Authorities about the totality of income worldwide.
Read below the 10 most important information on German taxation.
- German taxes refer to your global income
- Most relevant sources of taxable income
- German Income Tax Rates
- Who pays the tax?
- Taxable Income
- Annual tax declaration assessment & Paperwork
- Fund-based pension plans and trusts
- Stock options
- Tax Advice
German taxes refer to your global income
Generally speaking, the moment you become a taxpayer in Germany you have an unlimited tax liability and the entirety of your income is taxed regardless of whether it was acquired in Germany or elsewhere. The same principle is applied by many countries, i.e., the United States of America.
However, to support international trade and avoid tax evasion, Germany has entered into agreements on the avoidance of double taxation with more than 90 countries. Most of these treaties handle taxation of income and capital.
These treaties are relevant should you have income from sources outside Germany, i.e., pension funds in the US, stock options in Brazil, property in Qatar. Or similar.
Consequently, income from foreign source has to be calculated following German taxation rules (especially for business or rental income) and declared. It will have an impact on your tax amount, unless there is a treaty in place, and will always have an effect on the tax rate to be applied.
Most relevant sources of taxable income
- Income from employment
- Income from self-employment
- Income from the lease of property
- Income from Investments
German income tax rates
Germany applies staggering tax rates – nothing for lowest income and then rising to a maximum percentage of the income.
- Up to 9.168 EUR: No taxes
- 9.168 – 14.254 EUR: (980,14 * y + 1.400) * y
The marginal tax rate is between 1% and 6% (progression zone I).
Assume your income is 10.000, than y is 1/10.000 of (10.000 - 9.168 = 832) = 0,0832 and your tax would be (980,14 * 8,32% + 1.400) * 8,32% = 123,26 EUR and thus roughly 1,2%
- 14.255 EUR - 55.960 EUR: (216,16 * z + 2.397) * z + 965,58.
The marginal tax rate is between 6% and 26% (progression zone II).
Assume your income is 45.000 EUR, than z would be 1/10.000 of (45.000 – 14.254 = 30.746) = 3.0746 and your tax would be (216,16 * 3,0746 + 2.397) * 3.0746 + 965,58 = 10.378,79 EUR and thus roughly 23%
- 55.961 EUR – 265.326 EUR: 0,42 * x – 8.780,90.
The marginal tax rate is between 26% and 38% (proportional zone III).
Assume your income is 100.000 EUR than x is 100.000 EUR and your tax is 0,42 * 100.000 – 8.780,90 = 33.219,10 and thus roughly 33,2%
- 265.327 EUR and more: 0,45 * x – 16.740,68. Where x is again your taxable income.
The marginal tax rate is 38% and higher.
There are other taxes and levies which also refer to the taxable income but which are levied independently (i.e., social security tax and church tax).
Our partners for tax matters
BRL is an internationally-oriented partnership of attorneys, auditors and tax consultants with offices in Hamburg, Hannover, Berlin, Bochum, Dortmund and Frankfurt. Over the years they have built extensive knowledge on international taxation of individuals and business. They offer support to employers with regard to setting up a representation, branch or company with an immediate and significant size in Germany. They are experts for business tax optimization, M&A, as well as employment law.
Michael Sepandassa Tax Consulting is a small practice located in Hamburg offering support with tax declaration and filing of documentation for individuals coming from abroad. Their flexible structure enables them to offer affordable prices for regular income people. He is also a perfect match for small and medium enterprises conducting their first steps as legal entity in Germany.
Who pays the tax?
Generally speaking, you are the taxpayer. However, there are some taxes where someone else is paying on your behalf:
- Income tax on employment income: Here, it is the employer who pays on your behalf. The HR department will deduct an amount considering your specific circumstances in life, i.e., if you are married and have elected for joint taxation or if you have children. This calculation will already consider lump sums for tax deductions. The employer also deducts church tax and social security tax on behalf of you. However, the employer cannot know all your specific circumstances, and it is not unlikely that you are eligible for more than the lump sum deductions.
- Income from investments: If you bought shares via a German bank, the bank would automatically deduct capital taxes. Since your bank cannot know if you have more than one bank to handle your investments, it will not consider the lump sum for tax-free income. You would need to actively inform your bank that your capital income remains below the taxable value.
- VAT: No difference to other countries here – the Seller charges you the VAT and pays it to the authorities on behalf of you.
German tax law allows deduction of various expenses on your gross income – much more than other countries' tax law permits. Some of those deductions are already considered by the one paying the tax on your behalf, but a lot of them need to be declared via annual tax declaration.
- Relocation Expenses: 100% of our fees, transport cost, flight cost to come here for visitation appointments as well as for the final move
- Commuting cost between home and work: 30 EUR Cent per km one way (whether or not you actually drive by car, public transport or bike)
- Home Office: partial warm rent or financing cost in case it is a room that can be separately locked off from the rest of the apartment, capped
- IT equipment necessary at home
- The full household cost in case you have to sustain two households for an interim period, i.e., your family remains in Argentina while you have to live in Hamburg in a small furnished apartment
- Work-related travel expenses: your employer usually will reimburse the cost, however, you are entitled to the full lump sum of tax deduction and that you have to apply for by way of annual tax declaration
- Statutory or private pension schemes: under certain conditions
- Contributions to Insurances: healthcare insurance, private liability insurances, accident insurances, occupational disability insurances or pension insurances. Under the condition that a foreign insurance plan fulfills the legal terms, its premiums are also deductible.
- Most certified donations (i.e., for which you’ve received a donation voucher) are also deductible.
- In case you pay alimony to a child or spouse living in Germany.
- Expenses connected to private homes are deductible up to certain limits, i.e., housekeeping, chimney sweeping, housemaids, gardening, snow clearing, maintenance and repair work (excl. material). The deduction is allowed for tenants or owners, for homes in Germany or abroad (EU or EEA).
Annual tax declaration assessment & paperwork
Like in many other countries residents in Germany must file an annual tax declaration. This comprises your different sources of diverse income and deductions. There is an official IT tool available online which facilitates your tax declaration (Elster) – however, with the many deductions even for a German speaker it is a fairly difficult task and we recommend to seeking support of our tax advisors for the initial declaration. If easy, you can merely copy last year’s data to this year’s and adjust the values.
The Tax Authorities then calculate your tax. In the aftermath of such, you will receive your annual tax assessment. You have a month’s time to hand in legal protest if you disagree. Again, it is hard to check if any values are wrongly considered, and support of a tax advisor would be helpful. The tax assessment is going to be sent to you, not to your tax advisor. Thus, once received you should immediately scan it and forward it to your advisor for review.
German tax authorities ask for extensive evidence and documentation, especially of expenses you claim for deduction. It is, therefore, necessary to keep all documents regardless whether they are of a German or foreign source. Lack of documentation will almost certainly result in a rejection of an expense to be deducted.
Fund-based pension plans and trusts
A lot of expatriates from English speaking countries have fund-based pension plans. While generally speaking German pension schemes are tax deductible, foreign schemes more likely are not. This depends on whether or not they fulfill the strict German legal requirements. Moreover, if the German employer pays a proportion of the contributions these payments will be considered taxable income. And…in case the investment funds are non-transparent (which in general they are) a penalizing tax regime will be applied amounting to at least 6% of the last published market price of the calendar year.
Likewise, the German tax regime for settlors or beneficiaries of trusts can lead to significant financial disadvantages. Trust income will be taxed unless subject to an agreement on the avoidance of double taxation. Depending on type tax rates can amount to 30% - 50% of the income you generate from your trusts.
The disadvantage should be calculated before agreeing on your income unless you want bad surprises by year end.
Stock options you hold of your employer and which are paid for by way of bonus payment or salary add-on by the employer will most likely also be subject to German tax. It is the added value in the period from purchase to execution that will be taxed. This becomes relevant in case of assignment to Germany which is overlapping with the vesting period. You may have to pay taxes in two or more countries. Often employers withhold the income tax on the full benefit, and you need to make sure you reclaim the unjustified tax by way of tax declaration.
The German Tax Regulations are very complex, also as a result of the many deductions allowed. Very specific regulations have been drafted to make sure the law is not abused. Tax Authorities have already tried to facilitate compiling the tax declaration by implementing an online tool called Elster. This software can be used at no cost and is continuously improved. However, still many people struggle with their tax declaration. On top, the program does come in German only. As a consequence, it is next to impossible to file your tax declaration on your own.
- The moment you have foreign income or significant income from investments or rental income, your only source of support are certified tax advisors. Our partner BRL is offering tax advice in English and the department of Ralf Hubert is specialized on international taxation for upper management level. They will also guide you through the aspects to consider before agreeing on the specifics of your employment contract. Likewise, they support your employer to identify the optimal solution for a representation in Germany. Alternatively, you can hire any tax advisor you do find via yellow pages. They do all charge the same fee since the fees are regulated by law.
- For medium management level and below we are working with the office of Lemmermann-Möller in Hamburg. They will help you identifying your taxable income and filing your annual tax declarations.
- A cheaper alternative is the local “Lohnsteuerhilfevereine” (Employment Income Tax Support clubs), an association of tax experts offering support for usual tax declaration for employment income only. The fees are regulated via a membership fee, usually staggered by level of income, but because the complexity is reduced, no certified tax advisor is necessary, and the service can be offered at considerably lower prices than from a fully certified tax advisor.