Taxes in Germany: Income tax, trade tax, sales tax & Co. explained

Taxes in Germany – Whether income tax, wage tax, real estate transfer tax or trade tax: There are many taxes in Germany. You can ask your tax advisor or build up knowledge yourself! So it’s understandable that many people find it difficult to keep track of them all. Here we present you the German tax forms and summarize them roughly. Which tax has to be paid under which circumstances – whether for individuals or companies – and much more you will learn here in a summary. We would like to give you an overview of the common taxes in Germany.

German taxes at a glance: Declaration and more

The German bureaucracy confronts many people with several questions, and the topic of taxes is no exception. We would like to bring you closer to the world of German taxes and introduce you to the common forms of taxation in Germany. Taxes are often an annoying matter, both as a private person and as a company, but if you can clear up and understand the confusion, you should no longer have a problem with taxes. But not for nothing there is the tax advisor in case of need, who can help, but may be very expensive. We owe our know-how to the experts at Lukinski, among others.

Source: Lukinski – Taxes in Germany

Income tax (ESt): tax for natural persons

Income tax – ESt for short – is usually levied on the income of natural persons, according to their ability to pay. The income is understood as the sum of all earned income within the meaning of the Income Tax Act (EStG) minus the sum of all deductions relevant under tax law (such as any allowances). Taxable individuals are divided into self-employed persons, who generally have to pay their income tax themselves, and employees, whose income tax is withheld by their employer in the form of wage tax and paid to the tax office on their behalf.

As a joint tax, this tax revenue is divided between the federal, state and local governments. The municipalities receive the rate applicable under federal law – currently 15 percent of wage tax and assessed income tax – while the remainder goes to the federal government and the states in equal shares. As a rule, all natural persons are liable to income tax and must pay tax on their income from self-employed and non-self-employed activities.

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How much is the income tax?

Income tax cannot be calculated as a lump sum. Depending on how high the individual annual income is, a different percentage of income tax is due. From an annual income of approx. € 9,400, the initial tax rate is “only” 14%. The top tax rate is around 42% from an annual income of around €57,000 (as of 2020) – but only for single people.

For people who are married, however, the rules are different. For married people, for example, the initial tax rate is 14% with a taxable income of up to approx. 18,800€.

Between 14 and 42 %, depending on income level

Payroll Tax (LSt):

Since wage tax is not a separate type of tax, but only a special form of levying income tax (§ 38 EStG) on income from employment, the Income Tax Act (EStG) is the legal basis for wage tax.

The taxable income forms the assessment basis for income tax. The tax liability is determined by the income tax scale (§ 32a EStG). This tariff assigns a tax amount to each level of taxable income. Thus, the tax scale is the core of the Income Tax Act.

To facilitate the deduction of income tax, 6 income tax classes have been created in which the different rates are incorporated. Wage tax is paid by your employer and deducted from your wages every month.

Trade tax (GewSt): For commercial enterprises

As a rule, trade tax is levied on the income of every German commercial enterprise and is thus based on the objective earning power of the respective company. Since limited liability companies, stock corporations and the like are always regarded as commercial enterprises by virtue of their legal form, trade tax is mandatory for corporations – regardless of the composition of the founding team.

As an object or property tax, trade tax is by its nature one of the real taxes. Effectively, it belongs to the municipal taxes and contributes significantly to their financial system. The municipalities are entitled to levy the tax and determine the tax rate applicable for a given year by resolution.

How much is the trade tax? – Formula & Calculation

The individual trade tax for your company is determined with the help of the tax rate, which is currently 3.5 percent (as of 2020). This means that you have to pay 3.5 percent of your trade income to the tax office. The trade income is made up of your profit minus the legally given tax-free amount (currently €24,500). This trade income multiplied by the statutory measurement figure results in the sum that you have to pay to the tax office as trade tax.

Formula for calculating: Trade income (profit minus tax-free amount) x statutory measurement figure (currently 3.5%)

Important dates: Prepayment

Trade tax is payable quarterly on 15 February, 15 May, 15 August and 15 November in equal instalments as an advance payment. These taxes are no longer deductible as a business expense beginning with the 2008 tax period, but may be credited as a lump sum against income tax payable. Dates for advance payment of business tax:

  • February 15
  • May 15
  • August 15
  • November 15

Value added tax (VAT): Tax for delivery & service

Sales tax is usually levied on all sales that a company generates in the domestic market for sales tax purposes. This includes all supplies of goods and services, as well as occasional ancillary transactions, which the company provides for consideration as part of its business activities. VAT amounts that a company has paid for supplies and services it has received and that can be substantiated can be claimed as input tax deductions and thus reduce the company’s VAT burden.

Sales tax = value added tax

From an economic point of view, the own turnover tax thus represents a general consumption tax, but in Germany it ultimately functions as a transfer tax and is ultimately charged to the end consumer. Because it is passed on, sales tax is typically classified as an indirect tax. Currently, the standard German VAT rate is 19 percent – 7 percent on reduced goods – and is one of the main sources of revenue for financing the federal budget.

Important dates: Prepayment

  • On the 10th of the following month (submission to the tax office)

How much is the sales tax?

The value added tax in Germany is a community tax. The standard tax rate in Germany is currently (as of 2021) 19 percent. For certain transactions, however, there is also a tax exemption or a reduced tax rate of currently 7 percent.

Value added tax Germany (normal tax rate): 19%.

Real estate transfer tax (GrESt): Purchase of property or land

Whenever a property or share of a property is purchased, land transfer tax is incurred in Germany. The tax is levied on the basis of the Land Transfer Tax Act (GrEStG). The amount of the land transfer tax is determined by the federal states. It is therefore a state tax. The respective federal state can therefore decide for itself whether to pass on the tax levied to its municipalities.

After you have bought your property, the purchase still has to be notarised. The purchase contract states who has to pay the real estate transfer tax: Buyer or Seller. Without this additional agreement, it is the case that according to the law (§13 No. 2 GrEStG), the previous owner and the purchaser are initially liable for the tax, i.e. both together, buyer and seller.

After notarisation, the notary sends the signed purchase contract to the responsible tax office, which then writes to the party to be charged with the real estate transfer tax notice. The tax is due one month after notification of the tax assessment. However, the tax office may set a longer payment deadline if necessary (see Real Estate Transfer Tax Act (GrEStG) §15 Due date of the tax).

How much is the land transfer tax?

The real estate transfer tax is determined by the individual states and is therefore not uniform. Currently (as of 09/2020), the real estate transfer tax is between 3.5 and 6.5 %. In Saxony, for example, the real estate transfer tax is 3.5%, whereas in North Rhine-Westphalia it is 6.5%.

Between 3.5 % and 6.5 %, depending on the federal state

Corporation tax (KSt): For legal entities

Corporate income tax is usually levied on the income or profit of legal entities domiciled in Germany and is thus complementary to income tax (ESt), which is usually levied on individuals. Taxable persons typically include corporations, associations, cooperatives and foundations. A limitation of corporate income tax comes into play, for example, if the management and headquarters of the legal entity are located abroad. Political entities, federal companies, state banks and social security funds, professional associations and some others are fully exempt from the obligation to pay corporate income tax.

As a corporate tax, corporate income tax counts as a community tax and is levied by both the federal government and the states. The amount of the levy is based on the taxable income, which is the result of the profit less special expenses and extraordinary burdens, and is currently 15 percent plus the solidarity surcharge (SolZ), resulting in an overall burden of 15.825 percent. Corporate income tax is payable quarterly on March 10, June 10, September 10 and December 10 in equal instalments as an advance payment and is offset against the actual tax liability at the end of each financial year.

Important dates: Prepayment

Dates for advance payment of corporate income tax:

  • March 10
  • June 10
  • September 10
  • December 10

How much is the corporate income tax?

Corporate income tax is a business tax for legal entities and is currently 15%, in some cases plus a solidarity surcharge, resulting in a total of 15.825%.

Corporate income tax: 15

Capital gains tax (KapESt): Tax on profit distribution

Tax law provides that (in addition to the income tax of any natural person with shareholder status) capital gains tax is levied on all natural persons resident in Germany who benefit from a distribution of profits. As a result, the recipient – but not the corporation – is burdened. The capital gains tax burdens both the profit income of shareholders of a GmbH and the distribution of dividends to shareholders of a stock corporation.

For the sake of simplicity, 25 percent of the dividend is withheld directly by the AG for share holders, similar to the way regular employers withhold wage tax (LSt) for their taxable employees. Capital gains tax – abbreviated to KESt, KapESt, KapErtSt or KapSt – is a special form of income tax levied here: Once the tax burden has been withheld, the income tax is deemed to have been paid and the income does not have to be declared in more detail – at least insofar as no other type of income applies or the special tax rate applies.

If, on the other hand, the registered office of a shareholder is abroad, the so-called withholding tax comes into effect and the provisions of the double taxation agreement (DTA) of the respective country must be taken into account. The final withholding tax is also levied on shares held as private assets within Germany.

How much is the capital gains tax?

The capital gains tax is also known as the final withholding tax and is levied on generated investment income. Since 2009, this has been levied at a uniform tax rate of 25%. If applicable, church tax is also levied.

Capital gains tax: 25

Source: Lukinski – Taxes in Germany