Taxation of Individuals in Germany

Personal tax liability in Germany

The German taxation system implies the taxation of both individuals and companies. While companies are required to pay the corporate tax, individuals are levied the personal income tax on the worldwide income they make. However, the personal income tax in Germany is levied as it follows:

• - to individuals domiciled in Germany,
• - to individuals living in Germany for 6 uninterrupted months within a 2-year time span.

Compared to other European countries, the citizenship of an individual does not affect his or her residency. For foreign individuals living in the country, exceptions are made only based on the tax treaties Germany has with the individual’s home country. Non-residents may choose to register as German taxpayers if 90% of their personal income is earned in the country, or if the amount they make in a calendar year exceeds 8,000 euros. Tax residency allows non-resident individuals to apply for tax returns in Germany.

The German personal income tax rates

Individuals are levied the German personal income tax depending on the income they make within a year. The taxable income band, as it is called, applies as it follows:

• - for up 8,130 euros, a 0% tax rate applies,
• - for incomes ranging between 8,131 and 52,882 euros, the tax rate ranges from 14% to 42%,
• - for incomes between 52,882 and 250,730 euros, the income tax rate is 42%,
• - for amounts above 250,731, the tax rate is 45%.

The German tax authorities also levy a 5.5% solidarity surcharge.

Personal incomes subject to taxation in Germany

The German Income Tax Act distinguishes between the following types of incomes with respect to the personal tax. German residents are applied the personal income tax on:

• - employment in Germany,
• - self-employment,
• - investments,
• - business incomes,
• - real estate.

The base the personal income tax is applied on is determined on a combination of several categories. However, incomes generated by investments are taxed at a flat rate. Business incomes are taxed at rates varying between 7% and 17.5% depending on the location. The tax authorities also apply a gift and inheritance tax, which is included in the personal income tax base.

For complete information about the calculation of the personal income tax base you may contact our law firm in Germany.