Taxes in Germany

The tax system in Germany is a complex structure where conventional and unique taxes coexist. For those unfamiliar with local bureaucracy, navigating it can be challenging. Beyond standard income and corporate taxes, Germany imposes distinctive levies like the church tax and even a rain tax. This layered complexity arises not only from the country’s historical division but also from the strong authority of the federal states, or "Bundesländer."

In this article, we’ll explore the different types of taxes in Germany, the tax classes, and how they influence tax obligations. We’ll also define who qualifies as a tax resident and what that means for taxpayers.

Tax Residency in Germany

According to the German Tax Code (Abgabenordnung), an individual is considered a tax resident if they have a registered permanent residence within Germany. A person is also regarded as a tax resident if they spend more than 183 days per year in Germany. This condition applies even to those without permanent housing in the country if their activities, work, or other life circumstances result in them spending the majority of their time in Germany.

Tax residents are required to declare and pay taxes in Germany not only on income earned within the country but also on income from abroad. This requirement is based on the principle of worldwide income (Welteinkommensprinzip), whereby all income of a tax resident, regardless of its country of origin, is subject to taxation in Germany. Exceptions may apply to income from countries that have a double taxation avoidance agreement with Germany.

For tax payments and financial transactions, taxpayers are assigned a unique Tax Identification Number (Steuerliche Identifikationsnummer or Steuer-ID). This number is issued by the Federal Central Tax Office (Bundeszentralamt für Steuern, BZSt) and remains unchanged even if the individual’s residence, surname, or marital status changes.

Tax Exemptions in Germany

ВIn Germany, tax exemptions are available for certain individuals and types of income. As of 2024, the basic annual tax-free allowance (Grundfreibetrag) is €11,604 for a single person and €23,208 for married couples filing jointly. This amount is adjusted annually in line with inflation and the minimum cost of living.

Key groups and circumstances exempt from taxation include:

• Child benefits and allowances (Kindergeld und Kinderfreibetrag). Child benefits (Kindergeld) and tax allowances for children (Kinderfreibetrag) are exempt from taxation. Parents are entitled to either a tax allowance or child benefits, depending on which option provides a higher benefit.
• Income from special sources. Certain income, such as unemployment benefits (Arbeitslosengeld), child-rearing support (Elterngeld), scholarships, student grants, and social assistance payments, is not included in taxable income, as it is considered social support.
• Mini-jobs (Minijobs). Income from mini-jobs, where earnings do not exceed €520 per month, is not subject to income tax. Instead, the employer pays a fixed contribution to the tax authorities.
• Allowances and exemptions for people with disabilities. Individuals with disabilities may receive partial tax exemptions or allowances based on their disability category. They are also eligible for additional deductions, such as expenses for medical services and personal assistance.
• Income from certain charitable and public interest organizations. Non-profit organizations engaged in charitable, educational, or religious activities may qualify for tax relief or full exemption on income generated within the scope of their activities.

Tax Declaration

Filing a tax declaration in Germany is not mandatory for most individuals but is recommended, as it allows for potential tax refunds through deductions. If filing is mandatory, the deadline is July 31 of the year following the tax year (for example, the 2023 tax declaration is due by July 31, 2024). With the assistance of a tax advisor, the deadline is extended to the end of February of the second year after the tax year (for instance, until February 2025 for the 2023 declaration).

The declaration can be submitted on paper, but most taxpayers file electronically through the ELSTER system (Elektronische Steuererklärung), the official online portal of Germany's tax authorities. Commercial tax software (such as WISO Steuer or Taxfix), which integrates with ELSTER, can also be used to complete the declaration.

Required documents and information:

• Income information. Income statements, such as the Lohnsteuerbescheinigung (for employees), which details income amounts and withheld taxes paid by the employer.
• Deductible expenses. Work-related expenses (Werbungskosten), medical expenses, insurance, education costs, child care, and charitable donations can be included to reduce the taxable income.
• Investments and foreign income. Tax residents must declare all income, including investment income and income from abroad.

After submission, tax authorities review the information and may request additional documents if necessary. The review and refund process typically takes several weeks to several months. If approved, the tax authorities refund overpaid amounts to the specified bank account. In case of underpayment, the taxpayer receives a notification of the required additional payment.

Tax Classes in Germany (Steuerklassen)

Everyone who pays income tax according to the standard scheme is assigned a tax class in Germany. Tax classes affect the monthly tax amount withheld and can have either a positive or negative impact on the final tax payments.

Description of different tax classes in Germany: 

• Class I is assigned to single individuals, including divorced and widowed persons. It also includes partners who are temporarily separated but do not have any other dependents. This class does not provide additional allowances or deductions and does not impact the final tax amount.
• Class II offers a single-parent allowance (Entlastungsbetrag für Alleinerziehende), which exempts an annual income of €4008 from taxes. To qualify, the child must live exclusively with one parent in a household without other adult members.
• Class III is designated for one spouse in a marriage if the other spouse has significantly lower income. The spouse with the higher income receives Class III, while the other spouse is assigned Class V.
• Class IV is the standard tax class for married couples in Germany with similar income levels.
• Class V applies to the spouse with lower income when their partner opts for Class III. As a result, the spouse in Class V faces a higher tax burden and fewer allowances. However, despite the higher deductions for Class V, the overall family tax balance is more equitable.
• Class VI is used for employees with additional jobs. This class lacks any tax-free allowances or deductions and is primarily a mechanism for the state to collect taxes on additional sources of income.

Married couples can utilize the "factor method" (Faktorverfahren) for individual income tax calculations in Germany. This method divides the tax burden proportionally based on each partner's income. For example, if one partner earns 70% of the total income and the other 30%, they will pay the overall tax in 70% and 30% portions, respectively.

Tax classes related to married couples automatically double the basic tax-free allowance to €23,208. The Class III/V combination allows for reduced taxation on higher salaries and increased taxation on lower ones.

However, when a couple files an annual tax return, the tax office recalculates their tax obligation using the "Ehegattensplitting" method. Here, the combined income is divided into two equal parts, and each half is taxed at the applicable rate. Due to progressive taxation system in Germany, the total tax amount may turn out to be higher than what the couple paid during the year. 

In this case, a discrepancy arises between the taxes paid and the actual annual tax liability, requiring the couple to cover the difference through an additional payment.

Income Taxes

Profit tax in Germany is a collective term for various taxes applied to corporate profits and individual incomes. The primary types of income-related taxes in Germany include Corporate Tax (Körperschaftsteuer) for legal entities, Income Tax (Einkommensteuer) for individuals, and Trade Tax (Gewerbesteuer) for commercial enterprises.

Corporation Tax (Körperschaftsteuer)

The basic corporate income tax rate in Germany is 15%. It applies to all legal entities, such as stock corporations (AG) and limited liability companies (GmbH). Exceptions are made for loss-making companies reporting a negative annual income.

Taxable income is determined based on the annual financial statements prepared in accordance with commercial law. However, tax law provides for certain adjustments that may lead to differences between commercial and taxable income. For instance, some expenses, such as fines or corporate tax contributions, are not deductible when calculating the taxable base.

Companies can carry losses forward to future periods (Verlustvortrag) or backward to the previous year (Verlustrücktrag). It can't reduce Germany's business tax rate, but can decrease their taxable base. The carryback of losses to the prior year is limited to one year, whereas the carryforward of losses to future periods is not time-restricted. However, the maximum amount of loss that can be carried back to the previous year is 1 million euros. Amounts exceeding 1 million euros can only be applied up to 60% of the taxable income that exceeds this threshold.

Income Tax (Einkommensteuer)

Personal income tax in Germany applies to individuals’ primary income, including that of sole proprietors and partners in partnerships. This includes income from self-employment, rental properties, capital gains, and other sources. The tax is progressive, with rates ranging from 14% up to a maximum of 45% for high earners.

As of 2024, Germany’s progressive income tax scale is structured as follows:

• Up to €11,604 — 0% (Basic tax-free allowance, or Grundfreibetrag).
• €11,605 to €62,809 — gradually rising from 14% to 42%, covering most average salaries with incremental increases as income grows.
• €62,810 to €277,825 — fixed at 42%, applying to high-income earners.
• Over €277,826 — a maximum rate of 45%.

Trade Tax (Gewerbesteuer)

Trade tax is mandatory for all commercial enterprises, regardless of their legal form. Both large corporations and sole proprietors must pay this tax if their activities are classified as commercial.

The basic trade tax rate is 3.5%, but it is multiplied by a local coefficient (Hebesatz), which is set by municipalities and can vary from 200% to 900%, depending on the region. For example, if a municipality sets the coefficient at 400%, the effective trade tax rate would be 14% (3.5% x 400%).

The tax does not apply to professions that are not classified as commercial, such as doctors, lawyers, and engineers. Sole proprietors are entitled to a €24,500 deduction from the taxable profit base for trade tax calculation.

Solidarity Surcharge

The Solidarity Surcharge was introduced during German reunification to fund measures aimed at integrating the country's economic systems. Initially, it was set at 5.5% of the income tax (Einkommensteuer) and corporate tax (Körperschaftsteuer) amounts. However, as of January 1, 2021, it was abolished for most taxpayers in favor of a basic tax-free threshold instead of a percentage.

If the annual income tax amount exceeds €16,956 for single individuals or €33,912 for married couples, a 5.5% surcharge is levied on the portion exceeding these thresholds. As of 2024, the solidarity surcharge thresholds were increased to €18,130 for single individuals and €36,260 for married couples.

Given that income tax amounts exceeding these limits are typically associated only with high-income entrepreneurs or corporations, 90% of the population is exempt from this surcharge.

Consumer Taxes and Fees

Consumer taxes and fees are levied on the purchase of goods and services, as well as on capital gains. These taxes serve as a tool for the government to regulate prices and consumption of certain goods, such as tobacco and alcohol products.

Value Added Tax (VAT, Mehrwertsteuer)

Germany, like other countries, imposes VAT at a standard rate of 19%. It applies to most goods and services, such as clothing, electronics, consulting services, legal services, cars, entertainment, and restaurant services.

The reduced VAT rate is 7% and applies to certain socially significant goods and services, such as food, prescription medicines, books, some medical devices, and public transportation services.

A zero VAT rate in Germany effectively exempts specific goods and services from taxation, mainly for exports and socially significant functions, including:

• Export of goods. All goods exported outside the EU are subject to a zero VAT rate.
• Financial services. Exempt transactions include securities trading, banking transactions, insurance services, and loans.
• Educational services. Courses and programs offered by public educational institutions or private institutions with official recognition are generally exempt from VAT.
• Social and medical services. Socially oriented services exempt from VAT include assistance for people with disabilities, elderly care, healthcare services, and housing for socially vulnerable groups.

Companies operating in Germany or with annual revenue over €22,000 must register for VAT. For cross-border electronic sales, the registration threshold is €10,000. Once registered, companies receive a VAT number (USt-IdNr), which must be included on all invoices. VAT reporting may be monthly, quarterly, or annual, depending on the company's annual revenue. Declarations are due by the 10th of the month following the reporting period.

Capital Gains Taxes (Kapitalertragsteuer/Abgeltungsteuer)

Capital gain tax in Germany was introduced in Germany in 2009 to simplify the taxation of capital income. It applies to income earned from assets such as stocks, bonds, dividends, interest on deposits, and capital gains from selling financial instruments. This includes income from investments outside Germany, reflecting the global income taxation principle for German tax residents.

Key aspects of the tax:

• Tax rate. The standard rate is 25%. For church members, a church tax is added, raising the total rate to 27–28%, depending on the region.
• Exemption threshold (Sparerpauschbetrag). Taxpayers are annually exempt from capital gains tax on €1000 for single individuals and €2000 for married couples. To apply for the exemption, a "Freistellungsauftrag" must be submitted to the bank or broker managing the capital. Without submitting this form, tax is applied to the entire amount.
• Recalculation option (Günstigerprüfung). Low-income taxpayers can request a recalculation of the capital gains tax at their personal tax rate if it is lower than 25%.
• Real estate special rules. If a property is sold within ten years of purchase, the profit from the sale is subject to capital gains tax. However, if the property was personally used by the owner, the tax may be waived.

Tobacco Tax (Tabaksteuer) and Alcohol Excise Tax (Alkoholsteuer)

Germany adheres to World Health Organization (WHO) and European Union recommendations to increase excise taxes on tobacco and alcohol. The primary goal of these recommendations is to boost government revenue and curb harmful consumption through price increases. WHO considers taxation one of the most effective ways to combat excessive alcohol and tobacco use. The tax calculation is based on a fixed rate and a percentage tied to the retail price:

• Cigarettes and tobacco. The tax consists of a fixed amount per unit (€0.09 per cigarette) and a percentage (14% of the retail price). The rate may vary slightly depending on the tobacco packaging.
• Electronic cigarettes and vapes. The tax is levied on the liquid, not the device, at a rate of €0.20 per milliliter. An increase is planned for 2025 to €0.26/ml and to €0.32/ml by 2026.

The tax is paid by tobacco product manufacturers and importers. However, rate increases directly affect consumer prices, as producers and importers often include the tax in the final price. The same applies to alcohol: while producers or importers pay the tax, they often pass it on to consumers in the product’s retail price.

Social Contributions (Social Security Contributions)

In 2024, the total social contribution rate is approximately 38.1% of income, and it is split equally between the employee and employer. Each pays about 19.05% of the salary up to an established income limit. This contribution rate is added to, rather than included in, income tax. For instance, if the income tax rate is 20%, the total withholding will amount to 39% of income.

Social contributions include:

• Pension insurance (Rentenversicherung). The contribution rate for 2024 is 18.6% of income, up to a specific income limit of €90,600 per year in western regions and €89,400 in eastern regions.
• Unemployment insurance (Arbeitslosenversicherung). Contributions for unemployment insurance amount to 2.6% of income, shared between the employee and employer. These funds are used to provide unemployment benefits and support vocational retraining for those who have lost their jobs. The income limit subject to this contribution is also €90,600 in the west and €89,400 in the east.
• Health insurance (Krankenversicherung). The base rate for health insurance is 14.6% of income. However, health insurance funds may charge an additional premium, typically around 1–2%, which is also partially covered by the employer.
• Nursing care insurance (Pflegeversicherung). Nursing care insurance supports citizens requiring long-term care, such as the elderly or disabled. In 2024, the contribution rate is 3.05%. While Germany has no childlessness tax, childless individuals contribute an additional 0.25%. Thus, for those over 23 without children, the rate rises from 3.05% to 3.4%.

Self-employed individuals, pensioners, and students either pay only part of these contributions or are exempt from them. For example, the self-employed are exempt from unemployment insurance contributions, and pension and health insurance are optional. Pensioners are exempt from paying pension and unemployment contributions, while health and nursing care insurance are paid at a reduced rate.

Property and Inheritance Taxes

Property tax in Germany covers various asset types, including real estate, financial assets, and personal items like cars and jewelry. Beyond the standard real estate transfer tax, Germany also levies inheritance and gift taxes, which may even include a pet tax.

• German real estate tax (Grundsteuer). Paid annually, this tax is calculated at a base rate of 0.35%, multiplied by a coefficient set by local authorities. Rates vary by region and property type, generally ranging from 0.26% to 1% of the assessed property value.
• German real estate transfer tax (Grunderwerbsteuer). This tax rate varies by federal state, ranging from 3.5% to 6.5% of the property’s purchase price. For instance, Bavaria’s rate is 3.5%, while North Rhine-Westphalia is 6.5%.
• Dog tax (Hundesteuer). There is no uniform dog tax rate; it depends on local municipalities. For example, in Munich, the tax is €100 per year for one dog, increasing to €800 for certain "dangerous" breeds. In Berlin, the rate is €120 per year for the first dog and €180 for each additional dog. Exemptions apply to guide dogs, service dogs, shelter dogs (for a limited period), and herding dogs used for livestock protection.

Inheritance and gift tax (Erbschafts- und Schenkungssteuer) applies to recipients of inheritances or gifts and depends on their degree of kinship with the donor or deceased, as well as the value of the received property. Taxpayers are divided into three classes based on their relationship to the giver, with each class determining the tax-free amount for inheritance or gift:

• Class I:
  • Spouses and registered partners: Tax-free allowance up to €500,000.
  • Children (including adopted) and grandchildren (if their parents are deceased): Tax-free allowance up to €400,000.
  • Parents and grandparents: Tax-free allowance up to €100,000.
• Class II. Siblings, nieces and nephews, foster parents, relatives of the spouse: Tax-free allowance up to €20,000.
• Class III. All other individuals: Tax-free allowance up to €20,000.

For inheritance or gift amounts exceeding these thresholds, a tax levels in Germany is applied based on both the relationship class and the value of the inheritance or gift:

• Class I:
  • Up to €75,000: 7%.
  • €75,000 to €300,000: 11%.
  • €300,000 to €600,000: 15%.
  • €600,000 to €6,000,000: 19%.
  • €6,000,000 to €13,000,000: 23%.
  • €13,000,000 to €26,000,000: 27%.
  • Over €26,000,000: 30%.
• Class II:
  • Up to €75,000: 15%.
  • €75,000 to €300,000: 20%.
  • €300,000 to €600,000: 25%.
  • €600,000 to €6,000,000: 30%.
  • €6,000,000 to €13,000,000: 35%.
  • €13,000,000 to €26,000,000: 40%.
  • Over €26,000,000: 43%.
• Class III:
  • Up to €6,000,000: 30%.
  • Over €6,000,000: 50%.

Spouses and children may apply for a tax exemption on inherited residential property if they continue to live in the property after the deceased’s passing.

Energy and Environmental Taxes

Germany prioritizes financial disincentives for using non-eco-friendly resources, aiming to increase the adoption of alternative energy sources and reduce reliance on hydrocarbons in daily life. Under this program, these taxes, mostly excise-based, have fixed rates and generally do not apply to those already using eco-friendly resources, like electric vehicles and "green" energy. Key taxes include:

• Energy tax or fuel tax in Germany (Energiesteuer). An excise tax on energy sources (gasoline, diesel, heating oil, natural gas) with differentiated rates based on fuel type and usage. Motor fuel is taxed at higher rates, while social institutions receive reduced rates. This tax directly impacts fuel prices and is reflected in heating and electricity bills for end consumers.
• Electricity tax (Stromsteuer). An excise duty on electricity consumption in Germany. The rate is fixed, requiring end consumers to pay €1.5 per kilowatt-hour used. However, energy-intensive manufacturing industries benefit from a reduced rate, down to the EU minimum of €0.05 per kilowatt-hour.
• Motor vehicle tax (Kfz-Steuer). Tax on cars in Germany applies to vehicles based on their CO₂ emissions. The rate is approximately €2 for every 100 cc for gasoline engines and €9.5 per 100 cc for diesel engines. For vehicles with CO₂ emissions exceeding 95 g/km, the tax increases progressively from €2 to €4 per gram of emissions. Discounts are available for disabled individuals and agricultural vehicles, while electric vehicles are exempt from the tax until 2030.

Rain tax (Niederschlagswassergebühr) is charged for the drainage of rainwater from private properties into the public sewage system. The tax applies only to built-up or impervious surfaces (such as roofs, paved yards, and parking areas) where water cannot absorb into the ground and must instead enter the drainage system. 

The rate varies by region and depends on the area of impermeable surfaces, averaging between €0.7 and €1.9 per square meter annually. For a typical private property, such as a house, the tax can range from €150 to €200 per year, depending on the level of construction and surface coverage.

Despite seeming unconventional, this tax encourages property owners to minimize impermeable surfaces and install rainwater collection systems. Authorities intend for this to reduce the strain on the sewage system and lower maintenance costs. The rainwater fee is typically included in the overall bill for water supply and sewage services.

Specific Taxes and Fees

In addition to core taxes, Germany also has specific levies that don’t fit traditional categories but are worth mentioning. Here are some of these unique fees:

• Church tax in Germany (Kirchensteuer). This mandatory German religious tax that applies to registered members of certain religious communities in Germany, such as Catholic, Protestant, and Jewish congregations. The rate is 8% of income tax in Bavaria and Baden-Württemberg, and 9% in other federal states. To avoid the church tax, one can formally leave the church through the Kirchenaustritt process, which costs up to €35 depending on the region.
• Tax on television and radio broadcasting (Rundfunkbeitrag). In 2024, the broadcasting tax is €18.4 per month per household, regardless of the number of residents, devices, or actual usage. Those receiving social benefits, like Bürgergeld, and individuals with certain disabilities are exempt from this tax. Owners of a second residence can also apply for exemption on that property if their primary residence is already registered and paying the fee.
• Luxury tax (Vergnügungssteuer). This local tax applies to entertainment events and venues. For most cities, slot machines are taxed at a rate between 10% and 20% of revenue. As of 2024, Bonn increased the tax on cash-prize slot machines to 20% of profits. For other entertainment, such as nightclubs and dance events, the rate can either be fixed or depend on the number of participants.

Tax Return in Germany

In Germany, many citizens and residents can receive a partial tax refund by filing a tax return (Steuererklärung). Thanks to a system of deductions and allowances, most people, especially employees, can offset some expenses and reduce their taxable income. The refund is processed through the tax return, which is mandatory for those who:

• Have additional income, such as from rental properties or investments.
• Changed employers or received unemployment benefits during the year.
• Received parental leave payments (Elterngeld) or sick pay (Krankengeld).

However, many who are not required to file still choose to do so to receive a tax refund. On average, the refund for those who file a tax return is between €1000 and €1200. Key deductible expenses include:

• Work-related expenses. Transportation costs (e.g., commuting expenses), costs for work materials, and training expenses.
• Medical and insurance expenses. Costs for medical treatments, medications, and insurance premiums.
• Housing expenses. Rent, particularly if dual accommodation is necessary due to work in a different city.
• Educational expenses. Expenses for education, professional training, and further qualification courses.
• Charitable donations. Certain donations and charitable contributions are also tax-deductible.

After processing the tax return, the tax office issues a "Steuerbescheid" document confirming the tax calculations and refund amount in Germany. This document serves as the final confirmation, specifying the exact amount to be refunded to your account.