What income tax do individuals and companies pay in Germany?

How is the German tax system organized?
How does taxation in Germany work for corporate taxpayers?

General information on the German tax system

Germany has a comprehensive taxation system that covers both individuals and legal entities. Income tax in the country varies depending on many factors such as tax category, income level and taxpayer status. Let's look at the main aspects of the tax system in Germany.

Tax classification

Taxes in Germany can be divided into three main categories:

Income taxes
Property taxes
Transaction and consumption taxes

Property taxes include real estate taxes (Grundsteuer), vehicle tax, and inheritance and gift tax. Transaction and consumption taxes include value added tax (VAT) and real estate purchase tax.

Profit tax

A key part of the tax system is the various types of income tax. Among them:

Income tax for individuals (EinkommensteuerandLohnsteuer)
Corporate tax (Corporate income tax)
Business activity tax (Gewerbesteuer)

Income tax

Income tax is mandatory for residents of the country, who must pay it on all global income, regardless of the country of origin. Tax residents are defined as those who stay in Germany for more than six months per year. While non-residents only pay tax on income earned in Germany.

Income tax is divided into two groups:

Lohnsteuer- wage earners
Einkommensteuer- for entrepreneurs, freelancers and other professionals with private practice

Tax residents may be exempt from income tax on income not exceeding the non-taxable minimum of €9,744 for single taxpayers and €18,816 for couples (as of 2021). All income exceeding these amounts is subject to taxation.

Progressive scale of taxation

The taxation system in Germany is based on a progressive scale. This means that higher incomes are taxed at higher interest rates. The rates can range from 14% to 45%, depending on the level of income. However, the maximum rates do not apply to the entire amount, but only to the part that exceeds the basic rate.

Calculation of income tax

To accurately determine the amount of income tax, it is recommended to use the tax calculator, which is available on the official website of the German Ministry of Finance. The taxation scale for residents is as follows:

Income less than 9,744 euros - 0% tax
Income from 9,744 to 14,754 euros - 14% to 24%
Income from €14,754 to €57,919 - 24% to 42%
Income from 57,919 to 274,613 euros - 42%
Income above €274,613 - 45%

Duties of employers

Employers are obliged to file tax returns for their employees with the tax authorities. Income tax is calculated on the basis of salary, tax class, possible deductions and additional contributions such as solidarity tax and church tax. Thus, the German tax system is designed to take into account all financial aspects and income levels of citizens and companies, ensuring a fair distribution of tax obligations.

Tax consultants and taxation

In Germany, there is a category of taxpayers who prefer to receive professional assistance from tax experts. These experts prepare tax returns and send them to the relevant federal authorities using approved electronic formats. Payment for tax liabilities must be made by the end of the tax year, which coincides with the calendar year.

Each taxpayer receives their return no later than December 31, while the deadline for making the payment is July 31 of the following year.

Corporate tax (Körperschaftsteuer)

Corporate tax, known in Germany asCorporate income tax, is levied on corporate profits, investment income and capital gains.

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This obligation applies to:

Cooperatives
Different types of corporations (AG, KGaA and GmbH)
Charitable foundations and associations
Public enterprises engaged in commercial activities

Tax residents and non-residents

Citizens and organizations recognized as tax residents of Germany must pay taxes on all income earned both inside and outside the state. This includes all organizations registered or operating in the country.

For example, if a company is headquartered in Germany, all of its income, including income from foreign markets, is subject to corporate tax. Non-residents who do not have a permanent office or representative office in Germany are only liable to pay taxes on the income they earn in the country.

Corporate tax rate

The corporate tax rate is15%. To this rate is added an additional solidarity charge, which is equal to5.5%of the total corporate tax, therefore the total tax rate is as follows15.825%. This additional levy was introduced after German reunification to assist the less developed eastern regions of Germany.

Corporate tax payment schedule

Corporate tax payments are made according to a quarterly schedule:

March 10.
June 10.
Sept. 10
Dec. 10

Taxpayers must submit their returns byJuly 31.of the year following the reporting year. This is usually done electronically with the annual financial reports to the tax authorities.

If the preparation of documents is carried out by a tax consultant, the taxpayer gets the opportunity to file a declaration with a longer deadline - until the last day of February of the following year.

Verification of tax returns

The German tax authorities carefully evaluate the filed returns and notify the taxpayer of the result, which indicates the amount of tax to be refunded or the amount to be paid.

Fishing tax (gewerbesteuer)

As for the business tax, known as thegewerbesteuerIt applies to all business owners who are engaged in commerce and earn profit. This tax represents an additional source of budget revenues and is an important part of the country's tax system.

Therefore, companies operating and generating profits in Germany must take into account both corporation tax and business tax, the amount of which depends on the size of the profits and the specifics of the business.

Conclusion

As we have already analyzed in this article, the German tax system has many nuances and peculiarities that both individuals and legal entities need to take into account. Understanding the structure of income taxes in the country allows you not only to avoid financial penalties, but also to effectively plan your budgets and investments.

For tax residents paying income tax, keep in mind that rates vary widely and the tax burden depends on the level of income you receive. As a German resident, it is important to know that you are taxed on all worldwide income, which requires special attention to financial planning. Having a non-taxable minimum and a progressive tax scale provides certain benefits, especially for low-wage earners.

Companies, in turn, are required to account for both corporate and field tax. The flat rate for corporate tax in15%with the addition of a solidarity surcharge makes the taxation process predictable, but it is also important to keep abreast of changes in legislation that may affect tax liabilities. Income tax on organizations is based on their financial results, which makes accounting and reporting important aspects of doing business.

Finally, it is also worth emphasizing the importance of interaction with tax consultants, especially for entrepreneurs and company owners. Their experience and knowledge will help not only in completing declarations, but also in optimizing tax liabilities legally.

Understanding the German income tax structure is therefore a key element for successful financial planning. Compliance with tax laws, utilizing all possible exemptions and consulting with specialists all have an impact on the potential success and development of your business, as well as on your financial stability.