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Taxes in Germany: All you need to know about taxes
A handy list of taxes in Germany, what they are, what you have to pay according to your taxable status and more
It’s known that taxes in Germany underpin much of its economy, thus providing a tax system that contributes greatly to its stability, public and health services, among other benefits of the country. In this article, we’ll detail some of the most important taxes for individuals in Germany, whether local or foreign, and we’ll also review taxes for legal entities. Not to mention some of the tax benefits of contributing to the German tax system.
Taxes for individuals or natural persons in Germany
Individuals in Germany are subject to various taxes. Some are direct, i.e. directly affecting the individual’s income or assets, while others are indirect and mainly affect the goods and services that are consumed. What are the main taxes payable by individuals in Germany?
Income tax (Einkommensteuer) in Germany
Income tax is one of the most important taxes for people living and working in Germany. This tax is levied on income earned from different sources, such as salaries, investments, rental income and other economic benefits. The income tax rate in Germany is progressive, which means that the rate increases as income increases. The current rates and brackets are
- Income up to €10,908 ($11,364.99) is tax exempt.
- €10,909 ($11,366.03) to €62,810 ($65,441.40): The rate varies between 14% and 42%.
- Income between €62,811 ($65,442.44) and €277,825 ($289,464.36): The rate is 42%.
- Income over €277,826 ($289,465.40): The maximum rate is 45%.
€50,000 ($52,094.73) per year would pay an effective rate of around 22% thanks to the progressive structure. This implies that, although the marginal rate is higher, the effective tax burden is reduced when distributed across the different tax brackets.
Solidarity tax (Solidaritätszuschlag) in Germany
The solidarity tax was implemented after German reunification to help finance the development of the eastern German states. Although it originally applied to all taxpayers, it’s now paid only by those with high incomes. The rate of this tax is
- 5.5% of income tax for persons with an income of more than €62,810 ($65,441.40) per year.
For example, if a person has to pay €10,000 ($10,418.95) in income tax, the solidarity tax will be an additional €550 ($573.04).
Church Tax (Kirchensteuer) in Germany
This tax is compulsory for those who’re registered as members of a church in Germany, mainly the Catholic Church and the Protestant Church. The rate of this tax varies depending on the state in which you live, but generally ranges between:
- 8 % and 9 % income tax.
For example, a person living in Bavaria and paying €10,000 ($10,418.95) income tax will have to pay an additional church tax of 8 %, which is equivalent to €800 ($833.52).
Value added tax (Mehrwertsteuer or Umsatzsteuer) in Germany
Value added tax (VAT) in Germany is levied on most goods and services traded within the country. It’s one of the most important indirect taxes and represents an important source of revenue for the government. The current VAT rates in Germany are:
- 19 % for most products and services.
- 7 % for essential products such as basic foodstuffs.
For example, when purchasing a mobile phone with a price of €500 ($520.95), the VAT added will be €95 ($98.98) (19 %), resulting in a final cost of €595 ($619.93).
Capital gains tax (Kapitalertragsteuer) in Germany
Individuals who earn income from investments, such as interest, dividends or the sale of assets, are subject to capital gains tax. The general rate of this tax in Germany is:
- 25 % on capital gains, with an additional 5.5 % solidarity tax.
For example, if a person makes a profit of €1,000 ($1,041.89) from his investments, he’ll have to pay €250 ($260.47) in capital gains tax, plus €5.5 ($5.73) in solidarity tax, resulting in a total of €255 ($265.68).
Property taxes (Grundsteuer) in Germany
Property tax in Germany is levied on those who own property in Germany. It’s a municipal tax, which means that the funds are used to finance local services. The basis for the calculation of this tax is the rateable value of the property and the rate varies according to the municipality where the property is located. In general, the rate ranges between:
- 0.26 % and 0.35 % of the rateable value.
For example, if the rateable value of a property is €100,000 ($104,189.46) and the local rate is 0.3%, the annual tax will be €300 ($312.57).
Inheritance and gift tax (Erbschaftsteuer and Schenkungsteuer) in Germany
This tax applies in the case of inheritances or gifts and its rate depends both on the value of the assets transferred and the relationship between the donor and the recipient. Fees can vary considerably depending on these factors:
- Between 7% and 50%, depending on the value of the inheritance or gift and the relationship between the parties.
For example, if a person receives an inheritance of €500,000 ($520,947.29) from a close relative, the rate can be around 15%, which means that the tax payable would be €75,000 ($78,142.09).
Motor vehicle tax (Kraftfahrzeugsteuer) in Germany
This tax is levied on all vehicles registered in Germany and varies according to factors such as vehicle type, engine capacity and CO2 emissions. It’s paid annually and its purpose is to encourage the use of more efficient and less polluting vehicles.
- €2 ($2.09) to €9 ($9.38) per 100 cc cylinder capacity, plus an additional fee based on CO2 emissions.
For example, a car with a displacement of 1,600 cc and low CO2 emissions could be taxed at around €70 ($72.93) per year.
Taxes for legal persons or companies in Germany
The German tax system is rigorous for business, applying various direct and indirect taxes, designed to sustain the national economy and finance public services. The following are the main taxes payable by legal entities or companies in Germany, with their respective rates and practical examples.
Corporate income tax (Körperschaftsteuer) in Germany
Corporate income tax is one of the fundamental corporate taxes in Germany and applies to both domestic companies and foreign subsidiaries operating in the country. The rate of this tax is:
- 15 % of the company’s net profits.
In addition, a 5.5% solidarity tax is added to the amount of the corporate tax. Thus, the total combined rate is approximately 15.825%.
For example, if a company has a net profit of €100,000 ($104,189.46), it’ll pay €15.82 ($16.48) of corporate income tax, including solidarity tax.
Trade tax (Gewerbesteuer) in Germany
The trade tax is unique to Germany and applies to most businesses, with the exception of self-employed professionals and certain small businesses. It’s a local levy, so rates vary from municipality to municipality, generally ranging from 7% to 17%.
To calculate the business tax, the company’s profits are multiplied by a base rate of 3,5 % and then adjusted according to the factor applied by each municipality.
For example, a company in Berlin with a taxable profit of €100,000 ($104,189.46) and a local rate of 14 % will pay approximately €4,900 ($5,105.28) in trade tax (100,000 * 3.5 % * 14).
Value added tax (Mehrwertsteuer or Umsatzsteuer) in Germany
Businesses selling goods or providing services in Germany must collect value added tax, also known as VAT, from their customers and subsequently remit it to the government. The current rates are:
- 19 % for most products and services.
- 7 % for essential products such as basic foodstuffs and books.
This tax doesn’t represent a cost for the company, as it’s passed on to the final consumer. However, the business is responsible for administering it and declaring the VAT charged and the VAT paid on its purchases.
Tax on financial activities (Kapitalertragsteuer) in Germany
This tax is levied on profits from capital investments of companies, such as dividends or interest. The standard rate is:
- 25 % on capital gains, with an additional 5.5 % solidarity tax.
If a company receives €10,000 ($10,418.95) in dividends, it’ll pay €2,550 ($2,656.83) in taxes (25% on €10,000 plus 5.5 % solidarity tax).
Property tax (Grundsteuer) in Germany
Companies owning property in Germany are subject to real estate tax. This tax is calculated by applying a local rate to the rateable value of the property. Municipalities set their own rates, usually ranging from 0.26% to 0.35%.
For example, a company with a property valued at €500,000 ($520,947.29) and a rate of 0.3% will pay €1,500 ($1,562.84) in annual taxes on this property.
Inheritance and gift tax (Erbschaftsteuer and Schenkungsteuer) in Germany
This tax applies in the case of transfer of business assets due to inheritance or gift. The rate depends on the value of the assets transferred and the relationship between the owner and the recipient:
- It varies between 7 % and 50 %, depending on factors such as the value of the assets and the relationship between the parties.
For high value business assets, such as machinery and property, tax could represent a significant cost, so it’s important to plan accordingly.
Tax benefits in Germany
Germany offers various tax incentives for individuals and companies, aimed at encouraging investment, innovation and the creation of new business opportunities. Here we highlight some of the most relevant tax benefits:
Incentives for research and development in Germany
To encourage innovation, Germany offers tax credits to companies that invest in research and development (R&D). This benefit is particularly useful for technology and science companies conducting research in Germany.
- Companies can deduct a significant percentage of R&D expenditure, with a limit of up to €1,000,000 ($1,041,894.58) per year.
Benefits for start-ups and small businesses in Germany
Small and medium-sized enterprises (SMEs) and start-ups can benefit from favourable tax regimes during their first years of activity. In addition to exemptions from some taxes, they’re granted access to funds and grants that help reduce the financial burden in the early years.
Incentives for business relocation in Germany
In order to attract foreign investment and new companies, the German government offers certain incentives for relocation. Companies establishing a headquarters or subsidiary in Germany can receive support in the acquisition of property and, in some cases, obtain reductions in local taxes.
Exemptions and deductions for trade tax in Germany
Some companies, especially those operating in priority sectors or in areas with high unemployment rates, are eligible for business tax deductions. These deductions are a way to support business growth in regions where private investment is needed.
Tax incentives for migrants and highly qualified professionals in Germany
Germany also facilitates the arrival of foreign talent through partial tax exemptions or tax deductions for those who move to the country and meet certain requirements. This incentive aims to attract highly qualified professionals, such as scientists, engineers and technology experts, to fill the demand in strategic sectors.
Frequently Asked Questions about taxes in Germany
Church tax is only compulsory for those persons who’re registered as members of a church in Germany, mainly the Catholic or Protestant Church. If someone identifies themselves as a member of one of these churches, they’ll be taxed at a rate of 8-9% on their income tax, depending on the state. Persons not affiliated with a church aren’t obliged to pay it. If someone wishes to stop paying this tax, they can formally de-register from the church at their local offices.
Self-employed or self-employed persons must file their tax return by 31 July of the following year. If supported by a tax advisor, the deadline is extended to the end of February of the following year. It’s important to remember that, as a self-employed person, you have to pay income tax, as well as other taxes such as VAT if your turnover exceeds €22,000 ($22,921.68) per year.
Germany follows the principle of “worldwide income”, which means that all income, whether generated domestically or abroad, must be declared. If there’s a double taxation treaty between Germany and the country where the income was generated, it’s possible that the same tax is not paid twice. In such cases, the tax paid abroad can be deducted in Germany. It’s advisable to consult a tax advisor to avoid double taxation problems and to ensure compliance with all tax obligations.
When buying a property in Germany, several additional taxes have to be taken into account, such as the real estate transfer tax (Grunderwerbsteuer), which varies between 3,5 % and 6,5 % of the purchase value, depending on the state. The property tax (Grundsteuer) must also be paid annually, the amount of which depends on the rateable value of the property and the applicable municipal rate. These taxes are necessary for those who acquire and hold property in the country.
The solidarity tax was implemented to finance the development of the eastern German states after reunification. Although originally paid by all taxpayers, since 2021, this tax applies only to high-income earners. It’s equivalent to 5.5% of income tax for those exceeding an annual income of €62,810 ($65,441.40). Those who don’t reach this threshold are exempted from paying this tax.
Failure to pay taxes on time in Germany can have serious consequences. The German tax office (Finanzamt) charges interest on late payments and can impose fines. If the delay persists, the Finanzamt can take legal measures, such as account or property seizures. It’s crucial to meet payment deadlines and, in case of difficulties, to inform the Finanzamt in order to try to agree on a payment plan. Ignoring tax obligations can result in severe penalties and legal complications.
