Private Taxation
Since the tax law is subject to fluctuations, it is hard to give you a precise description of the rules. The following provisions should give you a very general overview. For detailed, up-to-date information, consult your attorney, public accountant or tax adviser.
Contents:
1.) Subject to Taxation 2.) Church Tax, 3.) Taxes on Captial Interest, 4.) Non-Workers (Students, Pensioners)
Computing the Taxable Income,
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gains
(earnings before professional deductions) |
Einnahmen
(Einkünfte vor Abzug von Betreibsausgaben) |
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earnings (= surplus of gains over
professional deductions) |
Einkünfte (= Überschuß der Einnahmen
über die Werbungskosten) |
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minus
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contribution to assistance for old-age
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Altersentlastungsbeitrag
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minus
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relief for single parents
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Entlastungsbeitrag für Alleinziehende
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= Gesamtbetrag der Einkünfte
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minus
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special expenses
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Sonderausgaben
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minus
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extraordinary expenses
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Außergewöhnliche Belastungen
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= income
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= Einkommen
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minus
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child benefits or exemptions
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Kindergeld oder Kinderfreibetrag
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= income to be taxed or taxable income
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= zu versteuerndes Einkommen
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Why is the tax law and taxation in Germany so very complicated? I have never been so confused in my life!
German tax law is as regular as the irregular verbs in the English language. It all comes down to the Germans’ attitude toward fiscal authority. It is considered a sport, better a cat and mouse game, to outwit the tax officer and reduce your taxes as much as possible. In addition, this corresponds with the difficulty in the tax law. The complexity is shown in two ways: The rule can easily have up to six exceptions which each may also have an exceptional condition. There is also the law itself, construed by implementing ordinances, Briefs of Federal Ministry of Finances, Directions of Regional Finance Offices, judgments of the fiscal courts, law teachers, …
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Do I not have to pay any value added or sales tax when I buy something? All I see is the price on the tag.
You can rest assured that you are paying value added tax. Under Germany’s price rules, taxes and services must be included in the price consumers see on the tag. If you see offers for a businessperson, you may run into bills with two or three sums listed as the “price.” You will see the net price, the gross price, and the turnover tax. All three amounts must be labeled clearly (§2 PAngV).
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What taxes do I have to pay as an individual from my income as an employee? How does it work?
You only have to pay income tax on earnings from your job and on interest from earnings due to income from capital (Kapitalertragssteuer). There is also a church tax (Kirchensteuer) but only if you are affiliated with one of the few established churches. The most common are Roman Catholic Church (römisch-katholisch; rk) or Protestant Church (evangelisch; ev). These churches are colloquially considered as the “state churches” or "public churhces". Please do not misunderstand this concept. There is no state or public church in Germany! Understand “public church” as a religious organization run by the government. Since the Middle Ages, German governments have closed contracts with the Catholic Church and later also Protestant Church. One of these concordats is about finances. The government has taken over the collecting of the church’s income via taxation. Your employer will withhold your taxes and forward them to fiscal authorities.
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1.) Subject to Taxation
As a general rule, you are taxed where you have your domicile. But the following questions will show how tricky this subject actually is. However, taxation depends on the actual mixture of your citizenship and the kind of income to be taxed. Whereas some countries (like the United States) have the principle of nationality (meaning every US citizen is obliged to submit a tax return – wherever they may live), Germany has the principle of residency, which means that if you live here, then you have to submit a return.
My company needs me to work in Germany periodically for operating purposes. My boss rented me an apartment as a reward for good work – even though I only come here every few months for a week at a time. Am I already subject to German tax liability?
You are, because you are a resident here. You have a residence "Wohnsitz” if you not only temporarily have an apartment here (rooms suitable for dwelling, §8 AO). Registration at the police is not required to qualify for having a German residence (BFH BStBl. 1986, 135). Looks like your reward is more a curse than a blessing. It would be better for your boss to provide you with a luxurious room in a hotel. If your boss rents you an apartment, you will be clear of taxation in Germany.
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Being a “snowbird”, I remain the summer half of the year in Germany and stay on the southern hemisphere during the wintertime. I just hate cold weather and snow gives me the creeps – except on postcards. Where will I be taxed?
There is nothing special about you. If you have an apartment in Germany, you will be subject to taxation.
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For tax purposes, is there any difference whether I’m married or single?
Many! To name a few of the most important: tax-free exemptions are doubled, you have different tax classes to choose from, and you can file joint or separate returns. Your attorney or tax advisor can take care of these questions while computing your taxes. Really you are – as a rule -- not subject to taxation. However, it might be a good idea to subordinate yourself under German taxation. This will be possible if at least 90% of your income is “German” and any foreign income is not more than € 6,136.
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I am getting a stipend for my studies here. Do I have to pay taxes on that?
No. You are only subject to taxation if you receive income from such sources as employment, self-employment, trade or business, investments, rent (e.g. apartments, office spaces, cars). These are the most common cases that lead to taxation. A stipend is considered a grant from any private or public foundation.
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I am studying German Literature in Heidelberg. I live in a dorm. I have to do some sideline work to finance some expenses. Am I subject to taxation in Germany?
A room in a dormitory qualifies as an apartment under the law. German students who rent an apartment in their university towns normally have their official residences at home, due to family ties, even if they rent an apartment in their university towns. Foreign students may be treated differently. So expect to pay taxes if your income exceeds the tax-free limit.
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I have worked here for only six months. Why do I have to wait till the end of the year to collect my tax refund?
Taxation starts after surpassing a certain annual threshold. As of the fiscal year 2005, this is set at € 7,664 for individuals and for married couples € 14,304 (§32a I EStG). However, this threshold rises every year because Germany’s Federal Constitution Court (Bundesverfassungsgericht) ruled that families are to have precedence in tax relief. If any income tax was withheld from your salary, it will be refunded at the end of the year after you file your income tax return (Einkommenssteuererklärung).
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As a pensioner, do I have to pay taxes? And do I have to submit tax returns anyhow?
Generally, yes you have to pay taxes according to the normal rules. Tax law grants you ex officio reliefs. The same goes for tax returns, unless your Finanzamt exempts you. Supposing, you only have your old-age pension as an income, you might not even have to submit returns anymore. But your tax office will decide that. You will receive a brief on exemption ex officio.
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2.) Church Tax
What do I have to pay on church taxes?
If you belong to a state church, your income will be assessed for 8% or 9%, depending on the state (Bundesland) in which you live. Church tax will be assessed from the income tax to be paid. “State church” is a colloquial phrasing for those churches that have become a public entity. Although state and church are strictly legally separated since the middle ages, the government is allowed to levy a tax on behalf of the church. This tax does not belong to governmental income. It belongs exclusively to the church.
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I decided to leave such a church on the state tax system (not necessarily God). I see no reason to pay church tax. So how do I get out of it?
If you left the “state” church last year, cross out the box on religion (line 4 of the main form (Mantelbogen, form in A3 size) and enclose the certificate of your church departure. Take care that the tax office fixes only the church tax that has arisen in the period until the expiration of the leaving month (so in the federal states Baden-Wurttemberg, Bavaria, Lower Saxony, Rhineland-Palatinate and the Saarland) or with expiration of the current month (in the remaining federal states). The tax people often get this wrong.
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My husband and I belong to different denominations. Can I be sure that my denomination receives its share?
Since you belong to two different denominations, and have joint assessment, half of the total church tax will be forwarded to the relevant denomination.
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Living in Germany on my old-age pension from back home, will I have to pay a lot of taxes?
Generally, you are subject to normal taxation as anybody else, however law grants you a special “old-age allowance”. According to §24 a EStG you will receive a discount of up to € 1,900 if you have had your 64th birthday.
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3.) Taxes on Captial Interest
What is Kapitalertragssteuer?
Kapitalertragsteuer can be regarded as a tax on interest. The government collects taxes on the interest on earnings from capital. If you receive up to € 1,421 interest as an individual (€ 2,842 for married couples), then you owe no such tax. But you need to apply for this exemption by filling out the form “Freistellungsauftrag für Kapitalerträge” from your bank. These € 1,500 are called “Sparerfreibetrag” or Saver’s Tax-Free Amount (§20 IV EStG).
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I am fuming. I just received my bank statement. Somebody grabbed a couple of thousand Euro of some kind of “Zinsabschlagssteuer”. What is happening here?
Zinsabschlagssteuer is just another name for Kapitalertragssteuer. You are taxed on the income you receive from investments. By the way, investments include shares in a corporation, interest on savings accounts, and similar sources. It might be a grand good idea to sign a “Freistellungsauftrag” (exemption order for the bank). By signing such an exemption order, you tell the bank not to levy taxes up to the exempted interest income. The “Freistellungsauftrag” is a special form you can sign at any branch of your bank. There is of course the possibility of sharing the exempted amount if you have savings accounts at different banks.
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For starting basics on taxation also read:
