Tax in Germany

Individuals are subject to tax on their worldwide income if they meet either of the following conditions:

• They have a domicile in Germany for their personal use
• They have a “customary place of abode” in Germany and do not stay only temporarily at this place or in this area. This means that if they are present in Germany for an uninterrupted period of at least 6 months that may fall in 2 calendar years, a customary place of abode is given in any case

The citizenship of a taxpayer usually is not a consideration in determining residency. However, under the provisions of certain tax treaties entered into by Germany, citizenship may be one of the factors to consider if a taxpayer qualifies as a resident under the domestic laws of both Germany and the other treaty country. Individuals not resident in Germany are generally subject to tax on income derived from German sources only.

Non-residents may elect to be treated as residents if either their income subject to German taxation amounts to 90% or more of their worldwide income or their income not subject to German taxation does not exceed the amount of €10,908 (2023) per calendar year. This provision allows non-residents to file German income tax returns like residents and to claim all deductions and allowances normally granted to residents only.

German income tax law distinguishes among several categories of income, including income from employment, self-employment, investment, business and real estate. Income from each of the categories may be combined, and taxable income is then determined by subtracting special deductions. However, income from investment is generally taxed at source with a flat tax rate.

Employment income - Employed persons are subject to income tax on remuneration received from employment. Employment income includes the following:

• Salaries, wages, bonuses, profit participations, and other remuneration and benefits granted for services rendered in a public office or in private employment
• Pensions and other benefits received by a former employee, his or her surviving spouse, or descendants in consideration of services performed in the past

Allowances paid to foreign employees working in Germany, including foreign-service allowances, cost-of-living allowances and housing allowances, are considered to be employment income and generally do not receive preferential tax treatment.

Self-employment and business income - Business income includes income from activities performed through a commercial entity or partnership, while self-employment income includes primarily income from professional services rendered (for example, as doctors, dentists, attorneys, architects, journalists and tax consultants).

In general, all income attributable to self-employment or business, including gains from the sale of property used in a business or profession, is subject to income tax.

Business income is subject both to income tax and trade tax. Trade tax rates vary, generally ranging from 7% to 18.5%, depending on the location. Trade tax is not levied on income from self-employment.

If a non-resident carries on a business through a permanent establishment in Germany, taxable income is computed in the same manner as for a resident individual and is taxed at the same income tax rates. However, the basic tax-free allowance in the amount of €10,908 (2023) is not considered.

Tax losses from one of the categories of income, except for losses from investment income and losses incurred on the sale of shares acquired after 31 December 2008, are offset against gains realised from one or more categories of income. Remaining tax losses up to €1 million (€2 million for married taxpayers filing jointly) may be carried forward indefinitely and are offset against gains realised in the following years. For losses exceeding the amount of€1 million (€2 million for married taxpayers filing jointly) only 60% of the remaining gains is offset. The difference of 40% is considered within the assessment for losses carried forward and can be used in the following years, subject to the above mentioned rules. For income tax purposes (but not trade tax purposes), losses may be carried back for two years, subject to certain limitations that ensure minimum taxation. The overall maximum loss carry back amount is €1 million (€2 million for married taxpayers filing jointly) annually. A taxpayer has a right to choose whether a loss is carried back or carried forward to the following years.

Directors’ fees - Remuneration received as a supervisory board member of a corporation is treated as income from self-employment. A member of a supervisory board is regarded as an entrepreneur and is generally subject to value-added tax at a rate of 19% on fees received.

Investment income - The flat withholding tax on investment income is generally the final tax. In general, investment income taxed at source does not have to be declared in the German income tax return. However, if the investment income was not subject to the flat tax withholding at source (in particular, capital investment income from foreign sources), the total annual investment income must be declared in the tax return. Taxpayers with an average personal income tax rate below 25% can apply the lower tax rate to the investment income that is declared in the German income tax return.

A net investment loss can be carried forward to be credited against future positive investment income. A special loss consideration rule applies to capital gains derived from the sale of shares.

Income from rentals and leases of real property located in Germany is taxed by assessment.

Taxation of employer-provided stock options - German tax law does not differentiate between qualified and non-qualified stock option plans.

In general, stock options provided by employers are non-tradable. In this case, the acceptable tax-filing position is taxation at the date of exercise.

In general, the amount equal to the difference between the fair market value of the stock at the date of exercise and any price paid by the employee (grant price and transaction cost) must be included as employment income. This amount is generally subject to tax at the ordinary personal progressive tax rates and may qualify for treaty relief.

In some circumstances the taxable benefit may qualify for relief and special tax exemption. This is a complex area of taxation and professional advice should be sought.

The grant of non-tradable options is considered to be an additional incentive for future services. Consequently, such grant is considered to be compensation for services rendered during the period between the grant date and the date of vesting. Tradable options may result in taxation either at time of grant or exercise depending on the details of the stock option plan. In both cases, for expatriates, a certain portion might not be taxable in Germany and may qualify for treaty relief.

Real estate - Gains derived from the disposal of real estate held not more than 10 years are included in taxable income and taxed at the ordinary rates, unless the property was exclusively used by the taxpayer in the year of sale and the two preceding years.

Sales of securities - Gains on the sale of shares were not subject to tax before 1 January 2018 if the participation in the company was less than 1%. Capital gains on shares that were acquired before 1 January 2009 are not subject to tax to the extent that the rise in value happened before 31 December 2017, and they are tax-exempt in an amount of up to EUR100,000.

Losses incurred on the sale of shares acquired before 2009 could be deducted from taxable gains from the sale of shares and certain other assets, particularly real estate, until the end of 2013. If losses incurred on the disposal of shares before 2009 were not balanced by 31 December 2013, they cannot be offset against gains from the sale of shares, and they may only be offset against gains from the sale of certain other assets (for example, real estate) as of 2014.

Gains derived from the sale of shares acquired after 31 December 2008 are subject to a 25% withholding tax, regardless of the holding period. The gain is fully taxable.

Sales of certain other assets - Gains derived from the disposal of certain other assets are not subject to tax in Germany if the individual holds them for more than one year. However, if the individual realises income on these assets in at least 1 calendar year, the tax-relevant period is extended to 10 years.

Tax-free amount - Capital gains are tax-free if the total gains in the calendar year amount to less than EUR600.

A tax is imposed on transfers of property at death or by gift. Decedents and donors are considered transferors, and beneficiaries and donees are considered transferees.

Transfers of worldwide net property are taxable if either the transferor or the transferee is resident in Germany at the time of the decedent’s death or at the date of the gift. If neither the transferor nor the transferee is resident in Germany, the tax applies only to transfers of property located in Germany.

To prevent double taxation, Germany has entered into estate tax treaties with Denmark, France, Greece, Sweden, Switzerland and the United States.

Social security taxes comprise the following 5 elements:

• Old-age pension
• Unemployment insurance
• Health insurance
• Nursing care insurance
• Accident insurance

Old-age pension, unemployment insurance, health insurance and nursing care insurance contributions are required for all employees, unless they are otherwise exempt under EU regulations or a social security totalization agreement. The same rule applies to accident insurance contributions, which are required to be paid by the employer only.

Sales of securities - Gains on the sale of shares were not subject to tax before 1 January 2018 if the participation in the company was less than 1%. Capital gains on shares that were acquired before 1 January 2009 are not subject to tax to the extent that the rise in value happened before 31 December 2017, and they are tax-exempt in an amount of up to €100,000.

Losses incurred on the sale of shares acquired before 2009 could be deducted from taxable gains from the sale of shares and certain other assets, particularly real estate, until the end of 2013. If losses incurred on the disposal of shares before 2009 were not balanced by 31 December 2013, they cannot be offset against gains from the sale of shares, and they may only be offset against gains from the sale of certain other assets (for example, real estate) as of 2014.

Gains derived from the sale of shares acquired after 31 December 2008 are subject to a 25% withholding tax, regardless of the holding period. The gain is fully taxable.

Sales of certain other assets - Gains derived from the disposal of certain other assets are not subject to tax in Germany if the individual holds them for more than one year. However, if the individual realises income on these assets in at least 1 calendar year, the tax-relevant period is extended to 10 years.

Tax-free amount - Capital gains are tax-free if the total gains in the calendar year amount to less than €600.

German income tax law provides that foreign taxes, up to the amount of German income tax payable on foreign-source income taxable in Germany, may be credited against German income tax (foreign tax credit). This unilateral relief applies primarily to income from those countries with which Germany has not entered into a tax treaty.

Tax treaty provisions override German income tax law, usually by excluding certain foreign-source income from German taxation. Germany has entered into double tax treaties with 91 countries and is negotiating treaties with a further 18 countries.