The German Tax System
What types of tax should I pay?
Each time we go to a supermarket or café, drop by at a gas station or receive a payroll, we are paying taxes. Taxation is the primary source of revenue for the state and enables the government to perform its duties. The German state is responsible for funding Kindergartens and schools, universities and hospitals, construction of roads, the salaries of teachers, police officers, firefighters, politicians and much more. Without tax revenues, the state could not fulfil such responsibilities.
Collecting revenue, however, is not the only reasons for taxation. There are, in fact, two other grounds for taxation. Through the taxation of harmful things, such as cigarettes, the state tries to improve behaviours. The cigarettes are expensive as a result of the tobacco tax; so that some give up smoking due to its high cost. Furthermore, social justice should be promoted through taxation: those who earn more must pay more taxes than people with less income.
What do I need to know?
When shopping, we pay sales tax ("Umsatzsteuer", colloquially also known as "Mehrwertsteuer"), so actually, we all pay taxes all the time. When the term "taxpayer" ("Steuerzahler") is mentioned, however, it generally has a more confined meaning and refers to people or firms earning an income, i.e. those who make money. Ultimately, everyone who has an income pays income tax ("Einkommenssteuer"). For employees, income tax means payroll tax ("Lohnsteuer"). Larger companies such as Limited Liability Companies (GmbH) or Public Limited Companies (AG) pay corporate income tax ("Körperschaftssteuer").
The other types of taxes which may incur depends on individual circumstances. For instance, dog owners pay dog tax ("Hundesteuer") for their pet, car and motor vehicle owners pay car tax ("KFZ-Steuer") and those who register a trade in Germany, must usually pay trade tax ("Gewerbesteuer"). You can find an overview of different types of tax on the website of the Federal Ministry of Finance ("Bundesfinanzministerium").
Those who register Germany as their primary place of residence and others who must pay taxes in Germany are issued a tax identification number ("Steueridentifikationsnummer"). A tax ID number is an 11-digit number specifically assigned to you, which will remain valid throughout your life. Newborns get their tax ID number shortly after birth. The tax ID number is designated to facilitate communication with the Tax Office. For instance, whenever you report something to the Tax Office or apply for a service, you need to provide your tax ID number. The same is the case for your tax return. Employers, the Employment Office or your health insurance may also ask for your tax ID number.
If you are registered in Germany, you must have received your tax ID number per mail. You can also find it on your annual income tax statement ("Lohnsteuerbescheinigung") or tax assessment note ("Steuerbescheid"). Otherwise, you can fill an online form to inquire about your tax ID number from the Federal Central Tax Office.
Income tax is the most significant tax collected in Germany. It makes up most of the state revenue and is paid by both employees and self-employed individuals, so it applies to almost everyone. There are seven different types of income for which you have to pay income tax in Germany. These are incomes generated through:
- self-employed work
- business entities' ventures
- agriculture and forestry
- capital assets
- Rent and Lease
- and other types of income mentioned in the income tax law, for instance, pensions.
There are also earnings on which you do not have to pay any income tax. These include parental allowance ("Elterngeld"), unemployment benefits’, BAföG and scholarships. The same applies if you have a mini-job or your income is below the so-called basic exemption level ("Grundfreibetrag"). The basic exemption level is adjusted annually and currently amounts to 9, 984 euro (As of 2022). If your income is below this amount, you do not have to pay income tax. Otherwise, however, anyone who resides in Germany and earns money must pay income tax.
Please note: If you have registered your place of residence in Germany, you must pay taxes. This applies to all of your income, including what you may earn abroad. However, there are so-called double taxation agreements ("Doppelbesteuerungsabkommen") between Germany and some other countries to protect taxpayers from double-taxation. You can find these double taxation agreements on the website of the Federal Ministry of Finance.
Payroll tax ("Lohnsteuer") is a particular form of income tax. If you are employed, you pay payroll tax. The payroll tax has a distinctive method of collection: it is automatically deducted from your salary by your employer and is then transferred to the responsible Tax Office. In this process, your tax exemptions and marital status are directly taken into account by assigning you into a tax bracket. Depending on whether you are married, single, widowed or a single parent, different amounts of tax apply to you. You can read more in our chapter "Tax Declaration".
People who work as employees are classified in payroll tax brackets ("Lohnsteuerklasse"). The tax brackets help your employer calculate your payroll tax. Your tax bracket indicates how much you get paid monthly (net) and how much goes directly to the Tax Office. In total, there are six tax brackets- and the Tax Office assigns you to one.
The tax bracket you are assigned to depend on several factors:
- Tax bracket I: Bracket I include single persons, i.e. all employees who are single or divorced, live separately or are widowed (exception: see Tax bracket III).
- Tax bracket II: Bracket II includes single parents who live with their child, are unmarried and entitled to child allowance ("Kinderfreibetrag") or child benefit ("Kindergeld"), and are not living in a household with another adult. You can use Tax Bracket II only if you have been sorted into this tax bracket in the previous year. Otherwise, you must apply to be moved to this bracket at the Tax Office using the form "Antrag auf Lohnsteuer-Ermäßigung".
- Tax bracket III: It applies to widowers (in the year of their spouses' death and the following year). Married couples choose this tax bracket if one of them does not work or earn significantly less. The partner with less/no income will then automatically be classified in tax bracket V.
- Tax bracket IV: Standard tax bracket for married couples/same-sex partnerships. If you get married, you will automatically be put into tax bracket IV- This pays off if spouses or partners earn about the same amount.
- Tax bracket V: Counterpart to tax bracket III: married/same-sex partnerships, if the partner has chosen tax bracket III.
- Tax bracket VI: If you have other side jobs besides your job, you will be assigned to this tax bracket.
If your circumstances alter, your tax bracket may also change. For instance, if you leave or divorce your spouse, your spouse passes away, you become a single parent, take on a side job besides your main job, or marry, your tax bracket will be adjusted accordingly.
If you are married, a special regulation applies to you: you are allowed to choose between the tax brackets and can thereby save taxes. That can be worthwhile, for instance, if one partner earns significantly more than the other. A tax consultant or a tax assistance association ("Lohnsteuerhilfeverein") can provide you with advice about the combination of brackets which is best for you. On the website of Lohnsteuerhilfeverein Vereinigte Lohnsteuerhilfe e.V., you can find a general overview of the system as well as a tax bracket calculator. The application form "request for change of tax bracket for spouses/partners" ("Antrag auf Steuerklassenwechsel bei Ehegatten/Lebenspartnern") is available online. You need to fill and hand it over to the Tax Office. Please note that you can usually change the tax bracket only once a year - by 30 November, at the latest.
Please keep in mind: Self-employed individuals pay income tax ("Einkommensteuer") instead of wage tax ("Lohnsteuer"); they are therefore not divided into wage tax brackets. However, if you are self-employed, the tax brackets may become relevant to you if your spouse works as an employee.
"Umsatzsteuer" or sales tax applies to everyone- as we all go shopping, get haircuts and buy train tickets. Sales tax is one of the essential sources of revenue for the state. The basic idea behind Sales Tax is that all goods and services which are sold must be taxed. In everyday language, sales tax is also called "Mehrwersteuer". Sales Tax amounts to 19% (or a reduced 7%) which is directly added to the price of the product or service and paid by the customer. We, therefore, do not notice that part of what we pay is, in fact, Sales Tax. The company (seller/service provider) then withholds the Sales Tax paid by the customer and transfer it to the Tax Office.
Please note: As a self-employed person, in principle, you have to pre-register your Sales Tax ("Umsatzsteuer-Voranmeldung") at the Tax Office until the 10th of each month. You can find out more about pre-registration in our chapters Starting up a Registered Business ("Gewerbe") and Starting up as Self-Employed ("Freiberufler").
The Corporation Tax becomes relevant if you start a business and choose "corporation" ("Kapitalgesellschaft") as the legal form. Corporations - for instance, stock corporations ("Aktienunternehmen") or Limited Liability Companies (GmbH)- are legal entities and do not pay income tax, but corporation tax ("Körperschaftssteuer"). Simply put, the corporation tax is the income tax ("Einkommensteuer") for legal entities. The corporation tax is calculated based on the revenue which the company as a legal entity has earned in a calendar year. You can find out more about Corporation Tax in our chapter Starting up a Registered Business ("Gewerbe").
If you have registered a trade (i.e. "Gewerbe"), you usually have to pay a Trade Tax. That is why the Trade Tax is quite essential for many self-employed individuals- only exceptions are the freelancers or "freiberufler", e.g., lawyers, doctors, journalists, graphic designers and artists. In other words, anyone who works as "freiberufler" does not have to pay a Trade Tax. The Trade Tax is the most significant source of income for the municipalities. It is, in fact, a kind of compensation which companies pay municipalities, so that, for instance, municipalities can build or repair roads, create parking spaces, and provide the infrastructure from which businesses can benefit. You can learn more about Trade Tax in our chapter Starting up a Registered Business ("Gewerbe").
The Church Tax refers to the tax which various religious communities collect from their members. It is the primary source of income for the major Christian churches in Germany. You have to pay Church Tax if you reside in Germany and are a member of a religious community that is allowed to raise Church Tax. Your nationality is not relevant.
A religious community must have the status of a public sector entity ("Körperschaft des öffentlischen Rechts") to levy Church Tax. In Germany, not only the Catholic and Protestant churches have this special status, but so do many other religions and communities of conviction, such as free churches, Jewish communities, the Jehovah's Witnesses, the Salvation Army or Orthodox churches.
Some of these churches or religious communities, however, collect the Church Tax directly or do not charge any Church Tax at all. In all other cases, the Tax Office is responsible for managing the church tax. The church tax in Bavaria and Baden-Württemberg amounts to eight per cent. In all other federal states, it equals nine per cent of each member's annual income tax.
If you live abroad for some time and give up your place of residence in Germany, you no longer have to pay Church Tax. However, if your place of residence remains registered in Germany, your Church Tax liability will continue. If you leave your religious community or earn less than €9000 per year, you will no longer have to pay Church Tax.
Furthermore, you can deduct the Church Tax as an additional expense ("Sonderaugabe") from your taxable income.
Only communities of conviction which are recognised by a federal state as a public sector entity ("Körperschaft des öffentlischen Rechts") are allowed to levy Church Tax. This general rule applies to some Muslim communities in Germany - however, none of them demands a tax from their members. Other Muslim communities do not have the status of a public sector entity and therefore are not allowed to levy taxes. As a result, Muslims do not have to pay a Church Tax in Germany.
If you want to export or import goods from or to Germany, you need to contact the Customs Office ("Zollamt"). Before importing or exporting goods, it is vital to understand precisely what restrictions apply and what types of tax you must pay on the products you trade. Check the Federal Government's website, www.amtlich-einfach.de for more information. The requirements which apply to you depend on the types of goods and the countries involved, i.e. non-EU countries or EU member states.
- In principle, the transportation of goods, i.e. the import and export within the European Union, is free. However, certain products, such as plants, antiques, weapons, chemicals or medicines, are subject to strict rules which you must inquire from the Customs Offices ("Zollamt"). In addition, you must observe the tax regulations, such as applying for a Sales Tax ID number ("Umsatzsteueridentifikationsnummer") and the Sales Tax pre-registration ("Umsatzsteuervoranmeldung") at the Tax Office.
- If you want to import or export goods from a non-EU country, you must contact the Customs Office and apply for a so-called EORI number. You need to get in touch with relevant authorities, depending on the types of products you want to trade and the country from which they come. To learn more about the regulations and restrictions in place, you should consult Customs Office, Chambers of Commerce ("Handelskammer") or Chambers of Crafts ("Handwerkskammer"). Goods like weapons, ammunition, some chemicals and medicines cannot be simply imported into Germany. To export certain products such as weapons or narcotics from Germany, one needs an export authorisation ("Ausfuhrgenehmigung").
You have to make sure that you pay your taxes and accurately inform the Tax Office about your income. You can learn how to do so by reading our chapters Tax Declaration, Starting up as Self-Employed ("Freiberufler"), and Starting up a Registered Business ("Gewerbe"). Tax evasion is not a trivial offence, but a criminal act - tax evaders face fines and, in severe cases, imprisonment of up to 10 years in Germany.