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Germany Tax Overview
Germany is known as the world’s fourth-largest economy and the largest economy in Europe. It is held out as a premier country for scientific exploration.
Its highly-skilled and gifted workforce is known for being inventive, especially in areas related to logical application and pharmaceuticals. Germany is also well-regarded as a civilized society with a stable government.
Here’s everything you need to know about personal taxes in Germany:
Generally, an individual is determined to be a resident of Germany if they reside in the country for over 183 days a year or if they have a home they can use or is available to them.
If a person is a tax resident in Germany, they must pay tax on all income earned, whether sourced in Germany or abroad. However, if a tax resident of Germany has their income taxed abroad and a double tax treaty exists between the two countries, a foreign tax credit may be claimed.
The tax rate on personal income in Germany varies from 0% to 45%.
- Income up to EUR 8,130 is taxed at 0%
- Income between EUR 8,130 and EUR 52,882 is taxed between 14% and 42%
- Income between EUR 52,882 and EUR 250,730 is taxed at 42%
- Income over EUR 250,730 is taxed at 45%
The German tax authorities also levy a 5.5% solidarity surcharge on all income.
Income sourced in Germany is taxed according to the personal income tax rates. Tax residents of Germany must also pay income tax on income sourced worldwide.
However, if there is a double tax treaty in place between Germany and the country where income is sourced, a foreign tax credit may be claimed for any taxes paid overseas.
Individuals who are not tax residents of Germany may only have income earned from German sources taxed at the personal income tax rates established.
Generally, a capital gains tax of 25% applies to all investment, interest, and dividend income. There are a few exceptions to this rule. In addition to the capital gains tax, a solidarity surcharge of 5.5% is applied.
Here’s everything you need to know about corporate taxes in Germany:
Germany taxes its corporate residents on their worldwide income. However, most double tax treaties with Germany exempt any income earned from a permanent establishment (PE). Non-residents with PE income or property income are taxed by an assessment on German-source income.
German business profits are subject to corporation and trade tax.
Corporations, cooperatives, funds and associations, public companies, and other private sector entities are all liable for corporate tax.
Corporation tax is levied at a uniform rate of 15% and subject to a solidarity surcharge of 5.5%. This addition results in a total tax rate of 15.825%.
In addition to the corporation tax, an additional trade tax is required. The base rate for the trade tax is 3.5%. An additional municipal tax is included depending on where the company is based. Municipality taxes vary from 8.75% to 20.3%.
Legal entities in Germany must pay an income tax based on taxable income. Such activities include income from operating activities, capital gains, and investment activities. Specific deductions for certain expenses are allowed when calculating taxable income.
The main source of tax incentives in Germany relates to the wide range of double tax treaties that the country has established with other countries. These treaties generally allow income earned abroad to be exempt from German taxes or to generate a foreign tax credit.
As a result of the coronavirus pandemic, Germany introduced a credit for certain salaries and wages related to R&D activities. This credit allows 25% of salary expenses to be deducted for corporate tax purposes, up to a maximum of EUR 1 million per year through 2026.
Value-added taxes, better known as VAT taxes, are a common form of consumption tax. The value-added portion is the difference between a company’s sales and its cost of purchasing services or goods from another business. Here’s what you need to know about VAT taxes in Germany:
Generally, all companies in Germany must register for VAT.
The current VAT tax rate is 19% in Germany. A lower rate of 7% exists for food, animals, books, and cultural activities.
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